As new rules come into force for landlords letting out Houses in Multiple Occupation (HMOs), the focus is on the move to professionalism, says Peter Foulds MRICS, chief valuer and head of risk at Allied Surveyors and Valuers.
There is no doubt that landlords, particularly the amateur and accidental landlords are feeling the pinch. Many have exited the market and new entrants are fewer as the stamp duty hike for investors is proving an effective barrier to entry.
HMRC’s phasing out of mortgage interest relief has meant that many landlords who have not explored limited company opportunities are, in reality, sleep walking into a negative return position.
The capital value to rent ratio, especially in the South had led to many investors seeking more adventurous opportunities. In the last few years, we have seen a flight to the North as investors chase yields. This has played a part in underpinning capital values but this model is heavily reliant on the diligence of local managing agents. Different areas have different challenges: managing a portfolio 100 miles away is very different to managing one in your home town.
Migration to HMOs
We have also seen investor migration to Houses in Multiple Occupation (HMO) investment opportunities. However, the HMO market can catch the unwary and further legislative changes this year will challenge the robustness of the investment class even further.
When interest rates rise, despite the ‘like of like’ provisions for existing mortgages, the PRA changes will result in some portfolio landlords struggling to remortgage away from their existing lender to take advantage of more favourable rates elsewhere.
Meanwhile, however well presented the HMO, the mantra ‘location/location/location’ is particularly relevant.
The most successful HMO operators are actively involved in their portfolios and are aware as soon as an issue presents itself, such as a non-paying tenant or a repair issue. More importantly they will also be aware of issues such as a new build student block coming on line, which will impact on the student supply chain.
Article 4 areas, which restrict the change of use from C3 to C4 (small HMO), continue to grow across the country. The number of landlords who are unaware of the requirements until they want to refinance alarms me. They then face the question of whether the property has a certificate of lawful use or relevant planning consent.
Similarly, the complexities of licensing – Mandatory, Additional and Selective – come as a very nasty surprise to many investors. Currently, Mandatory licensing applies to properties of three storeys and over with five or more occupants; Additional licencing is required for any HMO in an area designated by the local authority; and Selective licencing applies to any buy-to-let property (not just HMOs).
So, for example, from August 2018, most of Nottingham will be subject to a Selective licensing scheme and it will apply to the whole of the private rented sector. This will require landlords to supply full certification and to pay £780 per property to obtain a five-year licence. Compliance will be checked by the random selection of properties for inspection. So landlords face £780 for the licence plus the potential cost of obtaining insurance to cover for the provision of alternative accommodation for the tenant.
The October changes to Mandatory licensing will remove the three-storey rule, thus any property with five or more unrelated occupiers will require a licence. Thus, owners of previously unlicensed houses will have to pay a licence fee and potentially costs to upgrade the accommodation in order to achieve a licence.
Minimum room sizes
Alongside that change is the imposition of minimum room sizes meaning it will be illegal to let a room that is less than 6.51 m2 for single occupancy. This increases to 10.22 m2 for double occupancy.
Even this, however, could be trumped by individual local authorities who often require significantly larger rooms than that specified in the new minimum room sizes. This will result in some rooms in HMOs having to be taken out of use, with the consequential loss in rental income and capital value.
Furthermore, depending on the overall size of the bedroom accommodation, local authorities will also require a separate communal ‘living room’ to be provided.
The final consideration is that of the Minimum Energy Efficiency Standards (MEES), which are now in force, and give real meaning to Energy Performance Certificates (EPCs). Some landlords assert they are exempt because their lettings are on a room by room basis but this is certainly open to challenge.
Depending on circumstances, there should be an EPC for the building if a landlord requires to gain possession at the end of the term of the assured shorthold tenancy (AST). Moreover, if the EPC rating is an F or G then the tenant will be able to claim the landlord’s notice is invalid, remain at the property and demand upgrading to at least an E rating.
More than ever, let property has to be considered an opportunity for a professional business approach and not merely an investment. And the HMO asset class is certainly not one for the faint hearted – be that investors or lenders!
Source: Mortgage Finance Gazette