One of the most important and exciting new sectors in the UK property market, Housing of Multiple Occupancy (HMO), is evolving into a mainstream property investment model, according to a new report from specialist commercial lender Shawbrook Bank.
A combination of financial pressures for those who have yet to get on the housing ladder, plus a shift in how people want to live in the early stages of their professional careers mean this type of property has grown hugely in popularity for renters. The report states that ‘…with a generation of young professionals focused more on renting, due in part to house prices but also due to the desirability of higher levels of disposable income, shared accommodation is highly appealing for this demographic for both financial and social reasons.’
Karen Bennett from Shawbrook Bank says that “landlords talk about creating a community of young professionals who actually want to co-habitate because it’s more sociable and enjoyable.”
The report quotes a Spareroom.co.uk survey of 10,000 tenants in shared accommodation which shows more than 70 per cent are aged under 30 years, while more than half are not in a relationship.
The market for HMOs has been increasingly popular among landlords too, with yields beating other types of buy-to-let investments. David Whittaker of Mortgages for Business said, “Our Complex Buy-to-Let Index has been tracking gross rental yields across a variety of property types for the
past five years. In that time HMOs have consistently outperformed both vanilla buy-to-lets and blocks of flats owned on a single freehold title yielding an average of 10% per annum compared to 6% and 7% respectively.”
Three types of HMO landlord are identified – the ‘accidental’ HMO landlord who rents out a spare room in their home, regular buy-to-let landlords who have bought a large property and then decided to it is well-suited to HMO letting, and ‘active’ HMO investors who look specifically for properties suitable for HMO letting, and who are prepared to reconfigure whole properties if necessary.
The report also highlights that growing competition among HMO landlord is forcing many to go the extra mile in order to set themselves apart from other HMOs on the market. As Emma Cox from Shawbrook Bank highlights, “These enhancements take the shape of very high quality finishes, wireless access, flat screen TVs in communal areas and entrance ways etc – anything that gives them an edge in attracting the desired tenant profile”.
Among the future challenges the market for HMO may face, the report highlights the risk of oversupply in some areas as more landlords attempt to access the higher yields on offer, suggesting that in some areas HMOs are already being returned to single let status by investors unable to fill the full HMO capacity. Local and national government are also seen as a threat to investor profits. As Jim Moulton from Shawbrook Bank has highlighted, “One of the biggest is potential council tax changes in the future. Some of the councils are quite switched on about this and they’re implementing it. They are making changes such as council tax per room rather than for the dwelling as a whole. This will take a huge dent out of landlord’s profits”.
Local authorities are also looking into licensing schemes for HMOs in some areas, which is another thing potential HMO investors need to check.
Taking all of the potential challenges into account, the report concludes: ‘Demand for this asset class is on a consistent upward trend… With the supply/demand challenges across the UK housing landscape and the resulting importance of the Private Rented Sector, HMO property is and will remain an essential and affordable source.’