CHARTERED surveyors in the West Midlands saw a rise in the number of transactions of commercial properties being sold with Permitted Development Rights (PDR) to be converted into residential properties during the second quarter of this year.

UK-wide, a net balance of 49% of respondents said the activity was having a "moderate" impact on commercial market activity, while almost one in five (net balance of 18%) said it was having a "substantial" impact, according to the RICS (Royal Institution of Chartered Surveyors) UK Commercial Market Survey, Q2 2014.

The picture across the country, however, was more polarised, with respondents in the north being less affected by PDR transactions (net balance of 49% saying it was having "no effect" on the market, compared with 32% of respondents in the south saying it was "substantial").

Further compounding shortage issues, overall availability of commercial property declined at its fastest rate since the commercial market series began in 1998 (net balance of 33% more surveyors reporting shortages), with sharp declines in office and industrial space availability and the lack of supply to the commercial market pushing investors away from prime location investments and towards B grade investments.

In London and the South, particularly, respondents reported that growing demand and the resulting drop in yields was encouraging investors to look for opportunities beyond prime locations.

In the West Midlands, a net balance of 74% of respondents indicated that investors were looking to add "secondary or tertiary" assets in their portfolios, while in the South, 62% signalled a growing appetite for secondary space.

Looking ahead, expectations for rent levels over the course of 2014 revealed a net balance of 33% more surveyors expecting rent levels to increase throughout the year. Respondents forecast rents would rise by 5.5% in the industrial sector, 4.3% in the offices sector and 2.8% across retail space.

Ian Pitt, RICS West Midlands commercial spokesman and head of office at Bruton Knowles in Birmingham, said: “The impact of the changes to Permitted Development Rights to allow offices to be converted to residential is only now starting to have an effect on the commercial property market.

"Since the changes came into effect in May, 2013, very few office buildings have been converted but, as the economy has continued to recover, so too has the housing market, creating extra demand for residential properties. Developers and investors have recognised this and are now beginning to snap up office buildings with Permitted Development Rights for conversion to residential.

“With the London and South East residential market overheated, savvy investors are now looking further north for investment opportunities, with the West Midlands high on their list of target locations.

"While this is good news for the investment and residential markets, surveyors are understandably concerned that it could compound the increasing shortage of grade B office space across the region.”

Simon Rubinsohn, RICS chief economist, said: “The latest results provide clear evidence that the economic recovery is broadening out across the country, with rising employment increasing the demand for space in all sectors of the market. As a result, the balance of power is now shifting back to landlords, with rent expectations turning increasingly positive.”

“Meanwhile, the pressure in the office sector is being exacerbated, particularly in popular locations, by the gradual conversion of some secondary space into residential.

"While making a much-needed contribution to the substantial shortfall of homes, there are understandable concerns that this could be creating a related problem for businesses looking expand their footprint as economic confidence grows.”