Resilient HMOs in the UK property market

In the face of an ongoing housing shortage, demand remains strong for decent and fairly managed Houses in Multiple Occupation (HMOs). Our latest landlord survey shows continuing confidence in this property type, with some landlords expanding their portfolios and treating them as a full-time career. London and the South East are the hotspots for our HMO landlords, followed by the East Midlands.

Managing HMOs has its challenges. However, under 30% of landlords who participated in our latest landlord survey owned an HMO property or portfolio. Seventy-two per cent of these landlords owned HMO properties through a limited company. Half said they did not have another job and relied on their property or portfolio as their sole source of income.

Self-managing landlords need to take care. There are pitfalls for the unwary, and knowing your local market well is essential. Undoubtedly, anyone invested in this type of property needs to do their homework first. Some councils, keen to control the supply of HMOs tightly, are introducing additional licensing schemes for smaller HMOs (defined as when at least three unrelated tenants live in the home). A large HMO – a house occupied by five or more unrelated people – must always have a licence unless an exemption can be sought, no matter where it is. However, these additional schemes are often implemented in selected parts of a town or city.

Councils can also control HMO stock through implementing an Article 4 Direction. While planning permission is always required when changing a single dwelling house to a seven+ bed HMO, it’s not normally required for an HMO for up to six people. However, Article 4 Direction removes permitted development rights in particular locations. This means that would-be HMO landlords in those areas must also apply for planning permission for a change of use for smaller HMOs. Applications are only granted if the accommodation meets a high standard.

They may be subject to tests such as the ‘sandwich’ test, where permission would not normally be granted, and a new HMO would mean an existing residential property would be sandwiched by adjoining HMOs on both sides. When permission is granted, the property may also require licensing, even if it houses fewer than five occupants.

Clearly, regularly checking when and where an Article 4 Direction is applied is essential due diligence for would-be HMO landlords. This includes any plans by councils to implement or change a direction. Following the local elections, we may see more councils introducing licensing regimes and Article 4 Directions, and we’ll be keeping a close eye on the situation.

Despite some of these and other complexities of managing a portfolio, our survey found that nearly half of the properties were self-managed by landlords – a third of which owned portfolios with over 20 properties. Only 19% of HMO landlords relied on property management companies, with a quarter using estate agents.

The reason for this more DIY approach could be that the most popular size of HMO portfolio was the smallest, between 4 and 10 properties, with 34% falling into that category. Thirty-one per cent of the HMOs were part of portfolios of 20 or more properties, while 22% were in portfolios of 11-20 properties.

Other positive news in the sector is that decreasing utility bills means higher net rental, making it easier to borrow a significant amount against the property’s value. In addition, council tax banding for individual rooms in shared houses has been reversed, meaning HMOs will be classed as single dwellings as before.

As our landlords attest in our survey, there are many positives in the HMO sector, which is proving to be ever-resilient. It will be interesting to see what the next Government does, if anything, about this market. But, as long as investors do their research thoroughly before making the leap, HMOs can give great returns.

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