When it comes to our homes, the flight to quality has always been evident but this has become especially apparent following a period in history when we all spent more time than ever within our own four walls.
This has led to a raft of home improvements, innovative spaces opened up for home offices and a general focus on better utilising the rooms we have and/or how to add to existing footprints in a variety of ways. And I’m talking about rental properties as well as residential ones.
Tenants are demanding more from their homes and good landlords are recognising this as they strive to maximise yields and inspire longevity for their tenants through improving the quality of the accommodation on offer. When looking at rents and yield within the industry, we often focus on the entire property, but with a growing student population and more young professionals heading back to their offices and an urban life, a sizeable proportion of these are living as sharers in a house in multiple occupation (HMO).
HMOs remain an interesting proposition for professional landlords as they tend to offer access to higher yields but, on the flip side, they also come with higher costs, meaning there are a number of key considerations for landlords to take into account, both positive and negative.
I’m focusing on HMOs following a deep dive by Paragon Bank into how HMO landlords have identified this flight to quality and how such properties have moved up the value chain due to tenants demanding better amenities. Within the survey, 48% of HMO landlords experienced growing demand for high end HMOs, with 45% suggesting that demand from young professionals was up over the past year. Just under a quarter (23%) also said that HMOs were appealing to older, affluent tenants.
The majority of 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.
The investment case for HMOs remains compelling. 47% of landlords with an HMO agreed that they offered better rental yields than other residential rental property. Some 40% outlined that 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 over 10%, while 64% reported yields of 8% or over. However, landlords were also suggested to spend a high proportion of their rental income on maintenance with nearly two thirds, (63%) spending over 10% of rental income on annual property maintenance.
Finally, an interesting set of data to finish on highlighted that over four in ten HMO landlords (43%) plan to buy an additional HMO property in the next six months. There was roughly an equal split (22% vs 21%) in the proportion of landlords who plan to buy an existing HMO against those who are looking to buy another type of property to convert.
This is certainly an area of the buy-to-let market which intermediaries need to be keeping a close eye on. Whilst the availability, accessibility and rates attached to HMOs have improved in recent times, it remains a complex financing option for even the most experienced of landlords. Meaning there are opportunities for advisers to add even greater value to their landlord clients and be in a position to tap into the growing number of opportunities as they arise.
Cat Armstrong is mortgage club director at Dynamo
