Undergraduates have moved into areas of Britain’s big cities ripping the heart out of our communities and leaving devastation’ (The Independent 2004). This seems slightly unfair but there is no mistaking that a conflict exists between students and local residents due to the studentification of neighbourhoods throughout the country.
The problem is students need a place to live and there simply isn’t enough purpose built accommodation to house them. Regardless, living in a house of multiple occupation (HMO) is part of the student experience and always will be. For the past 35 years, private landlords have been capitalising on what feels to be an ever increasing need for student bedrooms. They have been converting former family homes into HMOs and unintentionally created areas that many refer to as student ‘ghettos’.
There are two significant issues with these ‘ghettos’. Firstly, the areas lack any sense of community spirit, they are transient and without a sense of ownership. There’s an average of six students to a house causing parking chaos, untidy streets and anti-social behaviour. Secondly, there is a housing shortage and it is perceived by many that these areas should be returned to family occupation.
Under the General Permitted Development Order property owners can convert a C3 family house into a C4 HMO without planning permission and vice versa. In 2010 the government stepped in, delegating power to local authorities, allowing them to enforce – by their own discretion – an Article 4 Direction. The Article 4 direction prevents a change of use without planning consent.
Since then, many local authorities have implemented Article 4 zones. Cities with a significant student presence, such as Manchester, have utilised the power very quickly, with a host of towns and cities following suit, including smaller university destinations such as Falmouth.
But for student investors, what has been the impact?
If you are acquiring student houses in multiple towns and cities, understanding the restraints imposed by the Article 4 direction can create confusion. This is because there are no set Article 4 guidelines or a standardised approach to managing dense student populations. As a result, all local authorities are implementing the Article 4 direction differently, with some enforcing it more strictly than others. It is also important to understand that local authorities are using Article 4 to achieve different outcomes. Some may wish to completely eliminate students from a particular area; others are trying to create a more balanced community, whereas some simply want to exercise an element of control.
Crystallisation of HMO numbers
Generally speaking, investors have stopped buying C3 properties in the hope of achieving C4 status within Article 4 zones because the risk is perceived to be too great. As a result, we have witnessed a crystallisation of HMO numbers. The issue for investors is the lack of opportunities to add value. These opportunities are restricted to operating HMOs requiring refurbishment or those that provide an opportunity to extend.
Value of C4 properties
C4 values are strengthening because of the shift in supply and demand; whilst the requirement for HMO accommodation is increasing, the number of new C4 properties coming to the market is constrained by Article 4. Conversely C3 values in these areas have generally plateaued. Market competition for C3 properties has diminished significantly since investor appetite has waned, creating a widening gap between the value of a house with C3 use and the value of a house with C4 use.
We have seen examples whereby C4 houses are now achieving in excess of 50% more value than an identical C3 house. For investors therefore, investments are becoming more expensive and yields are hardening.
HMOs remain popular amongst students despite the constant growth of the purpose built sector and the amenities they offer. Rents have therefore continued to grow and will do into the future as a result of continued demand by students, against the stunted growth of HMOs in light of Article 4.
We are witnessing a growing debate: portfolio ‘discount’ vs portfolio ‘premiums’. If an investor is acquiring 15 HMOs, should they be benefitting from a discount for their bulk acquisition? This is standard investment; many would argue they should.
The problem is, it’s not so simple with HMO investments anymore. Article 4 has added spice to the argument. If the value of C4 houses is increasing (as we have already established they are), and opportunities to create more C4 houses are limited, then perhaps an investor should pay a premium for a portfolio offering operational HMOs. It would make sense because the ability to create a portfolio of 15 C4 houses has grown ever more difficult.
The government set out to give local authorities more power to control the studentification of their towns and cities and we have seen many implement the Article 4 direction since its introduction. The rationale behind its use differs among local authorities, so it is impossible to say if Article 4 can be judged a success at a local level.
However, it is fair to say that most were hoping to achieve a better demographic balance and revive a sense of community in areas that had become transient and home to a large population of students. In reality many of these areas, dubbed student ‘ghettos’ still exist. Streets with abandoned homes during academic holidays, where there are no Christmas lights at Christmas time and homes with overgrown gardens and over-spilling bins are plentiful. Permanent residents in these areas probably feel little has been achieved. If anything, owner occupiers could feel disheartened by the value of their C3 dwelling in contrast to C4 properties close by.
For investors, it may be more difficult to seek good opportunities now than it once was, but their stock is on the rise. Whilst these investors may have benefited from Article 4, I’m not convinced local communities really have.
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