WHAT IS AN HMO AND WHY ARE THEY IMPORTANT?

Houses of Multiple Occupancy (HMO's) are most typically just regular houses that instead of housing a family will house a group of unrelated people who likely don't know each other but are all looking for a bedroom to rent.

To accommodate multiple people, as opposed to a family, there are often structural changes made to the property to create more bedrooms and less living space. For example in a typical terraced house the sitting room may have been converted to an additional bedroom meaning that on the ground floor there is a bedroom and a kitchen which will contain a small seating area serving as a social area/sitting room.

The motivation to create more bedrooms is simply that each bedroom generates rent for the owner and so the more bedrooms the better. Or so the standard (and in our opinion incorrect) narrative goes.

Landlords started creating HMO's long before policymakers had a chance to set the table meaning that over the last few decades many landlords have been able to make the most of this commercial conversion opportunity which has led to a huge number of low quality HMO's with landlords doing the bare minimum in terms of tenant satisfaction, maintenance, management or safety. This heritage has led to HMO's bad reputation as the second class citizen of the private renter sector.

On balance the bad reputation has been very well earned but as HMOs are such a critical part of solving the housing crisis it's essential that landlords put in the work to earn a better reputation for the sector.

In addition policy makers must refresh their views towards HMO's as increasingly tough legislation is encouraging landlords to sell up thereby decreasing rental supply and contributing to further rental price inflation.

That said we think that much (80%) of the new legislation imposed on landlords is positive as it forces landlords to level up and provide the quality of homes that people deserve.

Legislation is a positive step with fines and other such threats being important tools. However its remarkable how many landlords are still willing to play a game of cat-and-mouse with the law and usually come out on top as planning and licensing are busy departments. Sadly, for now, a strategy of  "keeping your head below the parapet" does remain relatively credible.

Of course this won't last but it does mean that the playing field isn't level yet. As new, diligent and conscientious landlords end up paying far higher costs and running a less profitable book than those that duck and dive.

It's not constructive to focus on the negative and more important to focus on what the future of HMO's looks like and also understand how critical the HMO sector really is as a key tool to help fight the housing crisis.

The future of the sector:

We are optimistic about both the short and long term future of this space hence our meaningful investment into the sector.

There are multiple macroeconomic tailwinds at work making the multiple occupancy living model preferable. Currently a single persons rent accounts for around 35% of their income. Inflation and cost-of-living crisis both in reality and in sentiment will encourage more people towards the better economics of renting a room as opposed to a flat or house.

With energy bills being so much higher and front-of-mind for the entire population like never before there is even more of a flight-to-safety towards a property offering that is ‘bills inclusive’ which is how the vast majority of HMO’s work. (many people that would have previously rented a one bedroom flat will now look for a bills-inclusive room in an HMO)

Interest rate increases and uncertainty are meaning less people are able to, and willing to buy which encourages renting and specifically living in an HMO which leaves more room to save than if they were to take on a full rental property. Those who are saving to buy, can do so faster by living in an HMO in the short term. Raising rates are also encouraging more young people to stay at home with their parents which isn’t always preferable. So an HMO room offers another option that is perhaps more affordable and allows more independence and privacy making it a solid middle ground.

Policy and government intervention brings increased licensing standards and ownership-complexity that is forcing better standards within the space and pushing incapable landlords out of the game. The tide of quality is rising as is the reputation of HMO’s. (The day of the amateur-landlord is fundamentally over) This rapidly improving reputation is bolstering growth and with more high quality owners and operators entering the market the supply of excellent HMO rooms will grow meaning the prices will remain affordable while also forcing lower quality operators to up their game if they wish to maintain occupancy levels and profitability.

The ‘Housing Crisis’ means demand for property is outstripping supply so a thriving HMO sector is a critical part of the private rented sector. It’s totally logical that more people living under the same roof safely and comfortably is a good idea for the population, city and individual.

The HMO space also supports labour force flexibility and allows people to move for work with real ease. More and more large companies are likely to partner with professional HMO brands to ensure that their workforce have priority access to homes as an attractive and practical employee benefit.

Tenant preferences are changing with more demand for subscription style all-inclusive living rapidly growing. Demand for flexibility is growing as is the expectation of high quality homes paired with excellent customer service. Customer service and tenant satisfaction are very new concepts within the HMO sector and so by simply employing this basic commercial principal there is still a large competitive advantage to be be gained by operators. More are learning this.

Increasing numbers of large corporations are moving into residential property ownership and becoming large landlords and operators. (John Lewis, Lloyds and many more) This will encourage both better standards and the concept of ‘living brands’ whereby people will increasingly look to live in a branded house as it brings with it certain brand standards. We think that this will trickle down to the smaller landlords who will also try to build a brand and stick to a brand promise and set of service standards if they wish to remain competitive.

The population is becoming less obsessed with ownership. Partly through necessity as affordability has never been so bad and also because the the baby-boomer generation’s narrative of ownership being essential was a result of their generations very specific experience. Phenomenal increases in their asset values. This property value trend seems likely to slow meaning that people are less scared of not owning (less FOMO) and increasingly valuing the flexibility and lack of emotional burden that comes with renting.

Institutions are beginning to wake up to the HMO sector which has historically been too chaotic and murky for much serous institutional grade investment. Disciplined smaller operators are now creating portfolios of HMO assets which make excellent investments and are professionally enough run and of a significant scale (£25-50 million asset value) to enable institutional acquisition and operation.

We see this institutional interest as a major factor in the longer term future of the space. A major positive for tenants (quality, brand, service) and long-term incentive for landlords to build and operate professionally with the carrot of an exit to such an institution.

In summary. Professionally run HMO’s are profitable for owners, good for tenants, corporations, cities and helpful to the economy as a whole.