The residential property market occupies a special place in the consciousness of the British public.
Bricks and mortar, and by extension home ownership, have long been seen as an aspiration for all.
However, with systemic problems on the supply side and no sign of demand falling, prices have become unattainable for many, even with a slight softening in some parts of the country in the past year. This has culminated in a growing private rented sector – an increasingly professional sector – with the move for many from ‘dinner party’ landlords to the establishment of limited companies.
Landlords are business people, and businesses will naturally gravitate towards higher profits. Standard buy-to-let properties may have lost a little of their shine following the government’s reforms to the sector, but savvy landlords with the right expertise will spot the societal trends.
The recent tax and regulatory changes have forced these professional landlords to review their portfolios and consider other ways of boosting rental income. Consequently, houses in multiple occupation (HMO) is an option many are considering, given the greater profit potential, in what is an increasingly competitive market.
Broadly speaking, you might expect to see a yield of less than 2 per cent in London or perhaps up to 5 per cent outside of the capital. However, a landlord will expect to see an HMO deliver high single-digit growth and even double figures in some regions.
Equally, many tenants, unable to afford self-contained one-bedroom flats, are looking for multi-share rental options as a way to cut costs while they save for a place of their own.
The English Housing Survey 2015-2016 reported that 46 per cent of 25 to 34-year-olds are renting, almost double that of 10 years ago. Over the same period there was a corresponding decrease in the proportion of people in this age group in the owner-occupied sector.
Following significant changes to tax and in the sector referenced above, the government has announced further changes to the HMO space to broaden the licensing requirement, which address smaller HMOs and bedroom sizes, as it attempts to improve standards in the private rented sector and ‘rebalance’ the relationship between landlords and tenants.
The previous definition of an HMO was set out in the Housing Act 2004 and came into force in mid-2006, which is the first time there was any specific definition of an HMO in planning legislation.
Under the old legislation, a property was considered an HMO if an entire house or flat is let to three or more tenants who form two or more households, and share a kitchen, bathroom or toilet, comprising three or more storeys.
From October, properties will be subject to mandatory licensing if they meet the following criteria:
- It is occupied by five or more persons;
- It is occupied by persons living in two or more separate households; and meets the standard test under section 254(2) of the Act;
- The self-contained flat test under section 254(3) of the Act but is not a purpose-built flat situated in a block comprising three or more self-contained flats; or
- The converted building test under section 254(4) of the Act.
Futhermore, and perhaps most critically, the three-storey rule no longer applies, so HMOs meeting the above criteria will be licensable for one, two, three or more storeys.