Grant Hendry, director of sales at Foundation Home Loans, explores how HMO licensing, stock availability and cost varies from region to region and why a number of great HMO opportunities remain available to landlords in the current market.
The modern mortgage market is awash with complexity from a borrower, intermediary and lending standpoint. This is further exacerbated by additional financial pressures being felt by households across the UK – both owner occupied and rental – and some lingering uncertainty over the impact of recent events on interest rates and house prices.
Inevitably, increased living costs are leading to some people having reconsider their immediate homeownership aspirations and the demands of their current accommodation. For landlords, many have gone back to basics in terms of delving deeper into their yield, void and cost calculations. When it comes to yield, houses in multiple occupation (HMOs) have historically topped these charts and proved an attractive option for the more hands-on landlords who have the knowledge and experience to manage differing tenant and property demands.
This yield equation was evident in the most recent BVA BDRC Landlord Panel research for Q4 2022 which outlined that HMO properties went back to the top spot of the rental yield table. These were reported to be offering the strongest yield by property type, at 6.4% for the quarter, followed by multi-unit blocks at 6.2%.
Furthermore, the research also suggests that the proportion of gross rental income spent on maintenance and running costs of HMOs hit a low in Q4 at 26% from the high of 29% experienced in both Q1 and Q3. For the full picture, the proportion of gross rental income spent on maintenance and running costs of HMOs was recorded at 28% in Q2 2022 and 24% in Q4 2021.
Demand remains strong amongst landlords and tenants, meaning that this remains an area of lending in which we at Foundation Home Loans continue to see strong levels of business. Although, there are also an argument to be made that this is more down to our approach – we are one of only a few lenders which don’t load ICRs on such property types – rather than currently being the industry norm.
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With such strong yields, albeit with additional costs actuated, this means that the HMO market is flourishing right? Right?
It seems that location is critical for this particular market.
As outlined in recent market analysis by Sirius Property Finance, while a raft of regulations have led to increased tenant welfare, these have also contributed to a decline in HMO numbers.
Taking a trip back in time for a moment, October 2018 saw the UK government extend the mandatory licensing of HMOs to cover the vast majority of properties containing five or more people from two or more separate households. Previously, only properties with three or more storeys containing five or more people from two or more households required an HMO licence.
There can be no argument that improving the safety and living standards for tenants is a huge step in the right direction. However, this has also placed increased pressure on landlords with some opting to offload their HMO properties rather than dealing with the added costs.
As highlighted in the aforementioned Sirius analysis, this has led to the overall number of HMOs falling by -2.4% in the past year, but this drop is dwarfed by some incredible regional declines. The East Midlands was suggested to have recorded an annual HMO stock decline of -26.1%, the North East has seen HMO stock levels drop by 15.8%, while in the South East numbers are down -6.7%. However, these falls are not universal across all regions. Indeed, the likes of the West Midlands (16.9%) and Yorkshire & Humber (11.2%) recorded impressive annual stock growth over the past year.
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These figures demonstrate how HMO licensing, stock availability and cost varies from region to region and, as with any property investment, it’s vital that landlords do their due diligence before entering into this arena. However, a number of great HMO opportunities do remain available for those landlords who are looking to maximise yields and capitalise on rising levels of tenant demand.
There are also plenty of attractive options from an HMO product perspective. Especially from those lenders who are highly experienced in this type of lending, who are finely attuned to the needs of such landlords and have the underwriting capabilities to match their ever-changing needs.
By GRANT HENDRY
Source: Financial Reporter