Real Estate –

The rise of HMOs in the UK rental market

Over the last 10-15 years, the UK private rental and HMO sectors have grown strongly. We examine the reasons why.

Published

20th April 2021

Author

Anusha Peries

Category

Real Estate Finance Commercial Banking

Over the last 10 to 15 years, the UK private rental and HMO (houses in multiple occupation) sectors have grown strongly. The main reason is affordability issues arising from house price growth considerably outperforming wage growth. The average house price is now £250,000, so a first-time buyer needs a deposit of around £37,500 (15%) to acquire a suitable mortgage, whilst average salaries are only at £30,800. The deposit required in London is considerably more as the average house price here has reached over £500,000.

For many people not on the property ladder, rental is the only option. There is also some commentary which would suggest that there is even a growing apathy to house ownership among 21–35 year-olds, especially in the capital.

In 2018, the Government estimated that there were around 4.7 million people within the private rented sector in England and around 497,000 HMOs in England and Wales.

The appeal of HMOs to investors

HMOs have also been rapidly growing in popularity among investors.

For landlords, gross yields are higher than a standard buy-to-let property and, while they demand a level of expertise in terms of managing tenants, the buildings and the plethora of legal obligations, the financial yields – on the whole – add up.

Local authorities are also keen on HMOs because they are a tool through which councils can control HMO density and housing stock in a certain area. Councils can – and almost always do – require property owners to seek permission to convert a single dwelling house into a small HMO.

Addressing the housing shortage

The Government recognises that there is a chronic housing shortage, with a target of 345,000 new homes needed to be built each year to meet demand.

However, as the Government’s own target has never been achieved (and is unlikely to be), there is an essential need for HMO and PRS housing which both investors and local authorities recognise, given that councils have lost much of their housing portfolios and depend heavily on private landlords.

As a consequence, licensed HMOs are required to comply with tighter regulations to ensure they meet minimum safety and quality standards, thereby improving the quality of rental housing stock.

It would seem that the changing reputation of HMOs for renters, and the potential increased gains for investors mean that it’s a growing sector which looks set to develop further while there remains a shortfall of properties at affordable prices for first-time buyers.

Disclaimer: all information within this article was correct at the time of publication.

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