Opinion: Valuation of Houses in Multiple Occupation

A crumbling inner city terraced house occupied by tenants living in extreme poverty, paying exorbitant rents?

Or if you’re a bit older maybe a student infested slum as portrayed in ‘The Young Ones’ (not the Cliff Richard Film)?

Whilst I’m sure both still exist, I’d like to think based at least in part on my own experience that their numbers are diminishing, being replaced with something that is not a HMO as we would traditionally know it.

Indeed the valuation of HMO’s has now become very specialised, and whilst BB&J Commercial regularly look at them for bank lending valuations, it is essential that we keep on top of changing regulations as to what constitutes a HMO. In fact the regulations are changing yet again this October, in quite a significant way that could potentially have a significantly adverse effect on the value of some units.

The current definition of a HMO is of a property occupied by five or more people, forming two or more separate households and comprising three or more storeys.

The new definition removes the reference to three storeys, so now there may be a whole new raft of properties of only single or two storey height that will need licensing.

Additionally, and perhaps of greater significance is the change of minimum room sizes, and no rooms of less than 4.64 square metres will be allowed for use for sleeping.

Whilst for social reasons any drive to increasing housing standards is to be encouraged, this could have significant implications in terms of value. Bear in mind that from a business perspective a HMO is the same as any other property investment in that it is purely a vehicle to produce an income stream.

Let’s take a (very) simple example. It’s not exactly the same approach we take to valuation, but it illustrates the point.

Say number 10 Acacia Avenue is a 3 storey 7 bedroom HMO let to students on a 48 week academic  year. Each room lets at £100 per week, so 7x £100 = £700 per week, or £33600 per annum. If we apply a return (yield) of say 8%, this gives us a value for the property in round figures of £400,000.

Now let’s fast forward to 1st October 2018. Assume two bedrooms on the top floor are less than 4.64 square metres so can no longer be let out. The impact on value is thus:

5x£100 = £500 per week, or £24,000per annum ie a value of £290,000.

So that’s a reduction of £110,000, or just over 25% straight away.

I think there is the distinct possibility of this becoming a reality, leaving banks that have lent on such units with a potential shortfall. There is a significant responsibility on surveyors involved in HMO work to have a full knowledge of such implications and failure to take issues into account will leave them exposed to potential claims of professional negligence. The regulations, the local market and sustainable rents are all issues that surveyors should have knowledge of.

Finally, the market itself for HMO’s is significantly changing. The demands of tenants are now different. Students expect better quality converted accommodation, quite often with en-suite shower rooms in order to keep up what’s on offer in the huge growth sector of modern purpose built student flats. This is leading to the demise of the old student ‘digs’ in many places, despite local weekly rents being £100 per week plus.

Demand for HMO’s is also growing from the professional sector, who work away in the week and need somewhere comfortable to sleep Monday to Thursday nights. This is particularly the case where there are high-tech employers who attract young professionals, so cities like Derby are in need of this type of accommodation.

As a result the quality of HMO accommodation is rising in many places. This in turn leads to higher rent levels. Just recently I looked at an older poor quality HMO being turned into one with less bedrooms but all en-suite. The rental income stream and value were significantly higher, despite fewer bedrooms. It is becoming apparent that the market in many places will no longer put up with inferior HMO accommodation. This in turn is leading to the rise of another concept which is somewhat new to the UK: the Build to Rent sector, though that is maybe an article for another time.

Suffice to say, if you are a bank lender, an investor, or a surveyor, take care when it comes to looking at the value of HMO’s. It’s easy to get caught out.

These opinions are mine only and should not be taken as offering formal professional advice. If you do need specific valuation advice on HMO property please contact m.richardson@bbandj.co.uk