HMOs grow in value as tenants demand better amenities

Houses in Multiple Occupation (HMO) are moving up the value chain as tenants demand better amenities, research by Paragon Bank has revealed.

A survey of HMO landlords found that tenants today expect en suite bathrooms, larger rooms, high-speed broadband and quality furnishings.

An HMO is a property consisting of at least three people who are not from one household and share facilities, such as a central living space or kitchen.

HMO landlords identify a flight to quality as a trend characterising the past year, with 48% saying they’d seen growing demand for high-end HMOs and 45% saying demand from young professionals was up over the past year.

HMOs were appealing to older, affluent tenants

Just under a quarter, 23%, of landlords also said HMOs were appealing to older, affluent tenants.

Most landlords said demand for higher speed broadband had increased over the past year (56%), while a significant proportion of tenants were seeking larger rooms (39%), en suite bathrooms (53%) and better-quality furnishings (39%).

Elsewhere, 35% of landlords said tenants were asking for office facilities to enable home working.

Richard Rowntree, Paragon’s managing director of mortgages, said: “HMOs used to be dogged by a reputation for poor quality housing, but that perception is shifting as landlords upgrade stock and meet the changing demand from tenants.

“Tenants will no longer accept poor quality; they want broadband, bathrooms and better-quality furnishings.”

‘Strong growth in demand from landlords’

He added: “We saw strong growth in demand from landlords to acquire HMOs during the pandemic.

“This may reflect the wider shortage in rental property with tenants who are opting for a room in a shared home because one or two-bedroom properties are in short supply.

“Tenants also like the flexibility and social nature of HMOs, particularly if they are renting with friends.”

Better yields but higher costs

The investment case for HMOs is compelling, with 47% of landlords with an HMO agreeing that they offered better rental yields than other residential rental property.

Some 40% said HMOs offered better financial protection from voids, while 53% said there was no material difference in capital gain between single units and HMOs, making income the deciding factor.

The largest proportion of HMO landlords, 42%, reported net yields of more than 10%, while 64% reported yields of 8% or more.

At 72%, the majority said maintenance, insurance and utilities accounted for less than 25% of their gross rental income across their portfolios.

However, landlords also spend a high proportion of their rental income on the maintenance of the HMO.

Nearly two-thirds, 63%, of landlords spend more than 10% of rental income on annual property maintenance.

Tenant type

Nearly half, 46%, of tenants fell into the young single bracket, with 47% students and 41% white collar, clerical or professional workers.

Elsewhere, 27% of tenants were manual workers, with 15% represented by older singles.

Smaller groups included Universal Credit claimants (9%), families with children (4%) and migrant workers (4%).

One in five tenancies were in place for two years, but by far the most tenancies were for one year. Just 2% of tenancies lasted longer than five years.

Buy, sell or hold

Given shifts in tenant demand and the higher yields on offer, HMO landlords are more likely to purchase additional stock than sell, according to the bank’s research.

More than four in 10 HMO landlords, 43%, said they planned to buy an additional HMO property in the next six months.

There is roughly an equal split (22% vs 21%) in the proportion of landlords who plan to buy an existing HMO against those that will buy another type of property and convert.

In terms of those looking to trim properties, 4% said they planned to sell all their HMOs and exit the sector, with 8% intending to reduce their HMO holdings in the next 12 months.

Energy issues

Rapidly rising energy costs stood out as the frontrunner when HMO landlords were asked what their biggest challenge had been over the past 12 months.

Some 64% of those surveyed said higher energy bills had been a concern, reflecting the fact that 62% of tenancies in HMOs are inclusive of all bills including energy, broadband and council tax.

A further 14% include utility bills only – gas, electricity, water and council tax.

While one in five landlords said they had no plans to pass higher energy bills to their tenants, more than half do plan to increase rents to cover the higher cost of living. Some 19% have already raised their tenants’ rents.

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