Fears rise that conversions will lead to dearth of London office space

London is expected to lose millions of square feet of offices because of government plans to further relax the planning rules, despite a dearth of space and rents hitting pre-2007 highs.

Whitehall introduced its office-to-residential conversion policy in May 2013 with the aim of increasing the supply of housing, but some local authorities with strategically important business districts, particularly in London, were granted areas of exemptions.

But Whitehall plans to extend the scheme by scrapping councils' exemption areas from 2016 onwards.

A consultation period closes this month on the proposal, which was included in a set of changes to the planning rules that were released by the Department for Communities and Local Government in July.

The amount of available office space across the UK is falling at a record rate, partly as a result of the policy's introduction, according to figures published in July.

More than 800,000 square feet of offices has been lost since the policy was introduced in the central London borough of Westminster alone, according to research by estate agent Colliers seen exclusively by the Financial Times. Another 1.8m sq ft of offices in Westminster are awaiting conversion to homes.

By contrast just 250,000 sq ft of Westminster offices lie empty, with a further 180,000 sq ft due to come on to the market by the end of the year, Colliers said.

New office space is under construction in cheaper parts of the borough such as Victoria. But office vacancy rates in the West End are at their lowest levels since 2001, while rents have hit their pre-2007 highs once more, Colliers said. The City of London also has the lowest vacancy rates for 13 years.

As a result, rents for the highest-quality offices in popular locations such as Mayfair and St James's have reached £110-130 per sq ft, according to Colliers - matching the record highs of the pre-2007 market.

Paul Smith, of Colliers, said: "There will inevitably be further large areas of West End offices removed from the market in due course."

The policy is adding to pressure on "an office [supply] pipeline that is already struggling to keep up with demand", Mr Smith said.

Robert Davis, deputy leader of Conservative-controlled Westminster council, said that "loss of office floor space is now a serious issue" in the area.

Westminster has some of the highest house prices in the country, making it particularly profitable for developers to convert buildings into residential use. As a result, Mr Davis said, the only beneficiaries from the removal of the exemption would be "the purchasers of expensive prime residential properties".

"Office space in central London is so crucial to the prosperity of London and the UK as a whole," he said. "The government recognised these important issues in allowing the central parts of Westminster to opt out."

Tory-controlled Kensington and Chelsea council is also struggling to balance extremely high house prices with the need to cling on to its office-based economy.

When the conversion rules were introduced last year the government granted Kensington and Chelsea a full-borough exemption in recognition of its "perfectly viable and very popular" offices, a council spokesman said.

"The value of residential property here means the pressure to change to residential use is enormous," he said. "It is nonsensical to change the [exemption] policy suddenly after such a short space of time. We would lose a very large amount of business floor space and many thousands of jobs."

Islington council also wanted a full-borough exemption but faced opposition from the Department for Communities and Local Government; Islington wants to introduce a partial exemption instead.

Islington has lost 484,000 sq ft of office space to date, which the Labour-controlled council says would accommodate 3,500 employees.

James Murray, the council's executive member for housing and development, said the plan to abolish exemptions would make the situation worse.

"There are growing concerns that this policy is slowing economic growth in London by reducing the supply of available office space," he said.

Housing and planning minister Brandon Lewis said that office-to-residential conversions "help to deliver much-needed new homes across London where there is an acute need", offering "competitively priced properties, accessible to hard-working people".

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