The HMO market is looking much cheerier this festive season following a government announcement that individual rooms in shared houses will no longer be banded separately for council tax.
The National Residential Landlords Association (NRLA) led a brilliant campaign for this amendment after many landlords complained about the negative implications of separate banding. We are really pleased that the government listened.
Previously, tenants in houses in multiple occupation (HMOs) that were single banded were liable for as much as £1,000 a year each in council tax. It was widely reported that the Valuation Office Agency was approaching landlords of large properties and demanding multiple council tax payments.
Unable to absorb rising council tax bills, landlords were often forced to pass costs on to tenants, sometimes making rent unaffordable. This often meant that landlords faced expensive void periods or the prospect of slashing their yields to have any hope of remaining competitive.
Under the new change, the individual banding will be reversed, meaning HMOs will be classed as a single dwelling as before. The NRLA estimates that the average HMO tenant will save up to £1,000 a year as a result – glad tidings indeed for both landlord and tenant.
In other cheering signs for HMO investors, utility bills are slowly but surely coming down. HMO rents are usually inclusive of bills. Along with most lenders, we assess an HMO’s value on the gross rental, less an approximation of bills. Lower bills will mean higher net rental which could mean it’s easier to borrow a greater amount against the property’s value. This is good news for HMO investors looking to raise finance against their property.
But HMOs are not all plain sailing. That mantra, ‘location, location, location,’ is highly apt for this market. This is because different rules can apply to different places. A large HMO – defined as a home occupied by five or more unrelated people – must always have a licence unless an exemption can be sought, no matter where it is.
But some councils, keen to tightly control the supply of HMOs, are introducing additional licensing schemes for smaller HMOs (defined as when at least three unrelated tenants live there). These schemes are often in selected parts of a town or city.
A council usually introduces additional licensing where a council thinks that a perceived over-supply of shared housing is harming neighbourhoods or if landlords have previously been operating small unlicensed properties poorly. This is typically in student areas.
Another method of controlling HMO stock is for councils to implement what is called an Article 4 Direction which removes permitted development rights. The Direction means that would-be HMO landlords must apply for planning permission for a change of use even for smaller HMOs that don’t normally require permission. When permission is granted, the property may also require licensing even if it’s housing fewer than five occupants. But clearly timing –when an Article 4 Direction is applied – and location – are essential.
In addition, HMO portfolios can be time-consuming. Brokers may want to advise those clients currently managing a small portfolio of private buy-to-lets themselves, but who want to convert them to HMOs, to appoint a professional managing agent.
Despite some challenges, HMOs look set to be an increasingly attractive asset class, especially now the government has committed to single property council tax banding. With housing remaining scarce, there will be demand for well-run, decent and fairly managed house-shares.
Landlords looking to expand their portfolios can do well in the HMO market, but they must thoroughly do their research before making the leap.
Alex Witham is regional account manager at Landbay
