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Resilient HMOs in the UK property market – July 2024
Rob Stanton – Sales & distribution director, Landbay
Amid the ongoing housing shortage, there is sustained demand for well-maintained and properly managed Houses in Multiple Occupation (HMOs). Our recent survey of landlords reveals continued confidence in this type of property, with some expanding their portfolios and treating HMO management as a full-time career. The hotspots for our HMO landlords are London and the South East, followed by the East Midlands.
Managing HMOs comes with its challenges. However, 30% of the landlords surveyed owned an HMO property or portfolio. Of these, 72% owned their HMO properties through a limited company. Half of these landlords relied solely on their property income without having another job.
Self-managing landlords need to be cautious. There are many pitfalls for the unwary, and having a thorough understanding of the local market is crucial. Prospective investors must do their homework. Some councils, eager to control HMO supply, are introducing additional licensing schemes for smaller HMOs (defined as properties where at least three unrelated tenants live together). Large HMOs, defined as houses occupied by five or more unrelated people, always require a licence unless an exemption is granted, regardless of location. However, these additional schemes often target specific parts of a town or city.
Councils can also regulate HMO stock through an Article 4 Direction. While planning permission is always needed to convert a single dwelling into a seven-plus-bed HMO, it is usually not required for HMOs accommodating up to six people. However, Article 4 Direction removes these permitted development rights in certain areas. This means that potential HMO landlords in these locations must also apply for planning permission for smaller HMOs. Approvals are only given if the accommodation meets high standards.
Landlords might face tests such as the ‘sandwich’ test, where permission is usually denied if creating a new HMO would result in an existing residential property being flanked by HMOs on both sides. When permission is granted, the property might also need licensing, even if it houses fewer than five occupants.
Regularly checking for the application of Article 4 Directions is essential due diligence for prospective HMO landlords. This includes monitoring council plans to implement or amend these directions. Following recent local elections, we may see more councils introducing licensing regimes and Article 4 Directions, and we will keep a close watch on these developments.
Despite the complexities of managing a portfolio, our survey found that nearly half of the properties were self-managed by landlords. Among these, a third owned portfolios with over 20 properties. Only 19% of HMO landlords used property management companies, while a quarter employed estate agents.
The preference for a DIY approach is likely linked to the popularity of smaller HMO portfolios. The most common portfolio size was between 4 and 10 properties, accounting for 34% of the total. Portfolios of 20 or more properties made up 31%, while those with 11-20 properties comprised 22%.
Other positive news in the sector includes decreasing utility bills, which lead to higher net rentals and make it easier to borrow significantly against the property’s value. Additionally, council tax banding for individual rooms in shared houses has been reversed, meaning HMOs will once again be classed as single dwellings.
As our survey indicates, the HMO sector remains resilient and has many positive aspects. It will be interesting to see how the Labour government addresses this market, if at all. However, as long as investors conduct thorough research before committing, HMOs can yield excellent returns.
Explore our full range of HMO products here.