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Investing in the UK HMO (House of Multiple Occupancy) market has long been an attractive option for investors.
With solid rental returns and capital appreciation, many property investors have seen great success using this strategy to build their portfolio. However, recent trends indicate that there may be a shift underway in the UK HMO housing market.
What is driving these changes? Are we headed towards a decline or is it simply part of a larger cycle?
In this blog post, we will unpack what factors are influencing the HMO housing market today and how you can protect your investments going forward.
What is a House of Multiple Occupation (HMO)?
A House of Multiple Occupation (HMO) is a property that houses multiple tenants in a single dwelling. These can take the form of studio apartments, HMO flats, or HMO houses and bed-sits.
These properties are generally rented out for short to medium term tenancies and cater to a wide range of tenant requirements, from young professionals and students to migrant workers and those looking for affordable accommodation.
Why is a HMO a popular investment?
HMOs have become increasingly popular for investors due to the higher levels of return they can bring compared to other forms of property investment.
According to UK Insurance Net the average rental yield on this type of property is 12-15%.
HMOs offer affordable accommodation to low-income families and individuals, such as students. This can help to ease the pressures of the current housing shortage.
HMOs are more labour intensive and require more maintenance, however investors benefit from higher monthly rents, reduced void periods and capital appreciation. HMOs can also be purchased for a lower initial cost compared to other types of property, which is why many investors find them attractive.
The current state of the HMO market in the UK?
Although HMOs remain an attractive option for investors, recent trends suggest that the HMO market may be slowing down.
The UK HMO Market has been in decline since 2018 and is expected to continue to do so due to a number of factors such as increased regulation, rising rental prices, falling house prices and changes in taxation.
In addition, HMO landlords are facing increasing competition from traditional buy-to-let investors who have been gradually drawn to HMOs as an alternative. This increased competition has put pressure on HMO returns and is making it harder for HMO investors to make a return.
Estimates say that there are around 21,000 fewer HMOs available across the country than two years ago.
Factors that have led to this decline
The Institute of Chartered Accountants in England and Wales said recently, the sector is declining due to rising mortgages and rents, which landlords are forced to pass onto tenants.
The report said that changes to tax relief, the loss of ‘wear and tear’ expenses, and other legislative factors are part of the trend. Other factors include:
- the higher costs associated with running a property
- limited availability of suitable properties
- increasing financial and legal risks
- difficulty in finding reliable and trustworthy tenants
- negative public opinion of landlords
- security of rental income becoming more complex to guarantee
- increasing competition from other landlords and investors
- low profitability due to rising costs and falling rents
As a result many HMO landlords are exiting the market due to budgetary and time constraints.
Additionally, many local authorities have exercised their powers to enforce stricter licensing regimes for HMOs.
At the same time, Article 4 directions mean that planning permission is required to convert any existing dwelling to one in which three or more unrelated tenants occupy the property.
However, no planning permission is needed to convert a HMO back to a single-tenancy dwelling.
The government has implemented new rules that require that a House of Multiple Occupancy (HMO) applies for a licence for all properties that house five or more people who are not members of the same family.
Before this rule, licences were only required for houses that had three floors or more that housed five or more people who are not the same members of a family.
Jonathan Samuels, CEO of Octane Capital, commented: “It’s only right that all efforts should be made to ensure the safety and wellbeing of the nation’s tenants and that everyone is afforded the right to a basic standard of living. The changes to HMO licensing have certainly looked to ensure this, but as a result, we have seen a decline in the level of operational HMOs across the rental market, particularly within London.
“This essentially means that those reliant on the rental sector now have even less choice when it comes to finding suitable, safe accommodation, but that’s not to say it can’t be found.”
How this will impact landlords and investors
The HMO market is likely to remain in decline for the foreseeable future, with landlords and investors increasingly feeling the pressure.
Landlords need to review their HMO portfolios and consider where they can make changes to ensure that their businesses stay viable. This may include increasing rental rates or reducing void periods by finding longer-term tenants.
Investors should also take time to research HMOs and assess the risks associated with this type of investment. It is important to remember that HMOs can be very profitable investments, but they require more work and are more expensive to maintain than other forms of property investment.
Ultimately, HMO landlords and investors need to be aware of the changes in the HMO market and keep up to date with new regulations and trends. This will help them make informed decisions about their HMO investments.
What can be done to mitigate these effects
To mitigate the effects of HMO market decline, HMO landlords and investors should consider increasing their knowledge of HMOs by taking courses or attending seminars.
Additionally, landlords can benefit from seeking advice from experienced HMO professionals. This can help them understand the complexities of HMOs in more detail and make better informed decisions about their HMO investments.
Landlords should also ensure that they are aware of the latest regulations and HMO licensing requirements. This will help them stay compliant with HMO regulations and minimise any potential legal issues.
Landlords and investors should also review their portfolios regularly to identify areas for improvement or areas that may require more attention. This can help them ensure their HMO investments are both profitable and compliant with HMO regulations.
Our predictions for the future of the HMO property market in the UK
Due to the current HMO market trends, it is likely that HMOs will remain in decline in the short to medium term.
However, we believe HMO landlords and investors can mitigate this trend by increasing their knowledge of HMOs, understanding regulations and HMO licensing requirements, seeking advice from HMO professionals, and regularly reviewing their HMO portfolios.
Jonathan Samuels continued, “While any attempts to raise living standards for the nation’s tenants should be welcomed, it’s imperative that we also incentivise investors to remain within the sector.
“Failing to do so will only see the level of available rental properties continue to fall, driving the cost of renting ever higher in the process, at the expense of the nation’s renters.”
In the longer term, HMOs could become an attractive investment once again if HMO landlords and investors are able to successfully manage the potential risks associated with them. With prudent management and the right approach, HMOs can remain a viable form of property investment in the UK.
Touchstone Education’s Paul Smith said, “The changes to the regulation have made HMOs less appealing to some investors, however with the population surplus and only limited new homes being built, it is crucial that landlords still provide properties and that affordable housing is available. HMOs still provide great opportunities for property investors alongside other property strategies.”
To make the first steps on your property journey, read this free Wealth Through Property e-book.
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