There is an increasing trend for landlords choosing to grow their residential property portfolios by taking on HMOs (House of Multiple Occupation) rather than traditional lets, which is actually rather unsurprising.
Following the 2008 crash, many investors who’d traditionally focused on more productive property sectors, like retail and homebuilding, flocked to the student accommodation sector in droves.
In retrospect, the reason is easy to understand. As conventional property price growth faltered due to borrowing restrictions, lower employment, lower incomes and reduced demand, the various statutory bodies responsible for housing our huge and growing student populations soldiered on with public spending budgets set in stone and guaranteed occupant uptake. It proved to be a solid, predictable haven for investors in uncertain times.
There are certain parallels with today’s market. London residential property price growth seems to be levelling-off in many areas. However, the differentials between residential prices in London (and the South East) and the rest of the country remain acute. In many of the populous provincial cities, price growth remains strong.
And what do the larger provincial cities have in common? Very high student populations, albeit on low fixed incomes, willing to share accommodation.
A recent landlord survey by a mortgage provider revealed that around 40% of landlords are planning to offload terraced properties from their portfolios, while only eight per cent of HMO landlords are planning to sell. Meanwhile, over 20% of landlords are seeking to add an HMO to their property portfolio. It’s not difficult to understand why they are considering this option.
HMO properties generate a higher yield. In April-June this year, an average HMO yield was 6.3%, as opposed to the market average of 5.5%.
The highest average yields among landlords was reported in the North West at 5.9%, with cities such as Manchester, Liverpool, Preston and Bolton offering great returns at relatively lower price points than the pricier south of the country. Manchester’s various universities alone reportedly have 140,000 students in attendance, most of whom have accommodation needs to be catered for.
Of course, there’s always been a downside to having students and young professionals as tenants. They tend to be less responsible than their more mature counterparts, which can cause occasional maintenance and redecoration issues. On the positive side, if one member of an HMO household group decides to leave, the remaining group make up the full rent and have a keen incentive to find a new joint tenant, quickly; usually though their own network of friends and, importantly, at their expense.
Many landlords consider this an acceptable trade-off. With some extra care in the tenant selection process and sound property management in place, the benefits are self-evident.
A step into the HMO sector is seen by many as a way of bringing balance to their portfolios. These properties are more time-consuming to manage because there are minimum room size rules and licensing requirements to attend to and lots of elements come into play. That said, generally speaking, HMO properties are easy and inexpensive to fill with a ready market from a mix of students, trainee professionals and young people with job mobility.
For landlords suffering from price and income stagnation, HMOs in the provincial cities can make excellent investment sense. A great deal of overseas money (particularly from China) is being invested in a forest of towering new rental blocks in Manchester, in particular, as the London rental boom weakens and demand for good-value city centre living hereabouts accelerates. There are cranes in every direction you look.
Cities including Birmingham, Leeds, Liverpool, Newcastle, Sheffield, Nottingham all fit the bill for HMO landlords looking for a way to make their next profitable move. The trend for the size of a typical household in the UK is declining, whilst at the same time, the population is increasing, leading to an increase in demand for HMOs and opportunities for buy to let landlords
With the right systems and processes in place, there is no doubt that HMOs can make an excellent investment option, offering a yield that can’t be achieved with a traditional let. Do your research and speak to property experts to avoid any surprises further down the line.
James Clarke is head of the property team at law firm SAS Daniels and specialises in advising landlords from across the UK.