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High-quality accommodation, a growing supply of tenants and returns of 9% plus – the reality for investors bears no relation to this sector’s reputation

 If anyone mentions Rigsby and Rising Damp in the same breath as the Houses in Multiple Occupation (HMO) sector again, I will scream. That was 40 years ago. It may be an image of the HMO sector but it’s not the reality.

People who see HMOs this way are missing an investment opportunity in the HMO market, which is worth about £20 billion.

Perhaps it’s because of the popularity of private purpose-built student accommodation that is certainly attracting shedloads of money and headlines. And they’ve taken their eye off the Cinderella portfolios that don’t get the column inches but are doing very nicely.

Even so, it’s difficult to understand why HMO portfolios are still largely in the hands of small-scale local and regional landlords based in university cities, and not being snapped up by property companies, corporates and private equity. Nobody has yet grasped the HMO market regionally or nationally and made it their own.

But there are now opportunities to put together portfolios, acquire existing portfolios and have them managed on a large-scale with easy-to-collect all-inclusive rents.

Why it makes sense to invest in student HMOs

Permanent and growing demand

Let’s start with some facts. There are 1.75m full-time students in the UK and around 400,000 rent in the HMO market, mainly in their second and third years at university. Culturally, it’s a British thing – international students are likely to stay in halls – so it’s possible that overseas investors haven’t understood the product.

HMOs are cheaper than purpose-built accommodation for tenants, with regional rents at around £70-£120 per week and some landlords are offering inclusive rents and shorter tenancies so students don’t have to pay over the summer when they’re not there. This financial saving to the student is substantial, which is why I think HMOs are here to stay. In fact rental growth in the HMO sector has been equal to or greater than the purpose-built sector.

What’s more, the demand for accommodation is likely to grow. The government has removed the cap on the number of students universities can take. It’s projected there will be another 60,000 students per annum.

The flight to quality

Because of the growth of shiny, new purpose-built halls, there has been a reduction in HMOs, resulting in what I call a flight to quality in the remaining HMO market: the fringe locations have suffered but the prime areas are doing well. HMOs have been forced to compete in quality with the purpose-built blocks and have raised their game.

One factor is mandatory HMO licensing, which was implemented in 2006. Landlords were up in arms about it at the time, but actually it’s been one of the best pieces of housing legislation because it has genuinely raised standards. They are now forced to take their responsibilities seriously for things like fire safety and space standards.

Because the licence is mandatory and it’s a criminal, not civil, offence if you don’t have one, landlords cannot ignore their responsibilities: the result is that we now have an HMO universe that’s generally of better quality housing stock and is well managed.

Limitation on future supply

There’s also a limit on HMO supply thanks to Article 4 Directions that councils can implement to prevent ‘studentification’. This legal instrument allows local authorities to prevent new student residences from being granted planning permission in certain zones. And councils have certainly been exercising their rights, turning down applications to create more HMOs. What it means is that few new HMOs are going to be created.

Good returns

Returns are good. Typically 9% plus yield gross outside London, which puts HMOs 3-5% above typical buy to let and better than private purpose-built.

What’s the downside?

I want to give a balanced view, and there are negatives about the HMO sector in that it is management intensive and heavily regulated. This is off-putting to some investors. But nevertheless, with HMO management services that can be rolled out across large portfolios on offer, HMOs represent a hitherto unfashionable opportunity in a vibrant, decent sector that’s going to be around for a long time. Rising damp? Not any more…

View properties for sale by our Residential Investment team.


Notes to editor

Andrew joined Allsop from Chestertons in 2002  to head up the Allsop Leeds office. He is also Non-executive Chairman of the firm’s residential property management subsidiary, Allsop Letting and Management.

He has 30 years’ experience in all aspects of the residential investment and development markets.  Has advised on a variety of major investment transactions including take-overs and stock exchange reporting. Day to day work includes the valuation of a variety of residential property and portfolios for loan security, tax, litigation and accounts purposes. Andrew also advises a number of student accommodation Funds on portfolio value.

 

Contact

You can contact Andrew for advice at andrew.wells@allsop.co.uk or call him on +44 (0)113 236 6670.

The posts on this blog are provided ‘as is’ with no warranties and confer no rights. The opinions expressed are the author’s own and do not necessarily represent those of their employer.