Exploring Different Types of HMO Properties in the UK

Introduction

In the UK the concept of Housing Multiple Occupancies (HMOs) was first introduced in 1985, referring to the residences occupied by multiple people who are not related or from a single household. The UK is one of the most preferred higher education hubs in the world and thus there has been a consistent rise in domestic and international student enrollments over the years. Hence a massive number of students prefer to stay in HMOs due to the flexibility of living arrangements these properties offer.

“Student mental health is hugely improved if they engage with other students through cooking, socializing, playing, and generally living together in a respectful community,” said Alan Percey, Head of Counselling at the University of Oxford. However, the ongoing student housing crisis has birthed chaos among various student groups enrolled in higher education in the UK.

As a result, different types of student accommodation options have emerged to offer a ray of hope to the student population. Apart from purpose-built student accommodation (PBSA) and university-owned accommodations, the privately rented sector is witnessing surges in HMOs.

Student Accommodation Scenario: HMOs in the UK

So, what are HMO properties? A house in multiple occupancy (HMO) is described as a property under the Housing Act 2004 that is rented by three or more people who belong to more than one household. They share common facilities including a bathroom, kitchen, or common sitting areas, hence deriving the name of a “house share”. These accommodations fall under Sections 254 and 257 HMOs. Furthermore, these properties need to strictly adhere to guidelines under the Housing Health And Safety Rating System (HHSRS).

• Section 254 HMOs: The types of tenants under this section include a house of people from more than one household who share basic amenities inside the flat itself. This could also be a small building with some flats that are converted into self-contained flats (may or may not share amenities).
• Section 257 HMOs: There are five or more occupants under this section where the whole building or a part of the building is converted from a block of flats into self-contained flats. Furthermore, the property qualifies under this type of HMO if less than two-thirds of the flats are owner-occupied.

In recent years, purpose-built student accommodation has been falling short due to the ever-increasing disparity between student applicants and the supply of beds. In light of such happenings, students are resorting to HMOs in an attempt to have quality accommodation and enrich their university experience. It is also important to note that HMO landlords in the UK must have an HMO licence and adhere to the laid-out licensing requirements according to their local city council. Read our blog which explains HMO licensing requirements in detail to know more.

A Traverse Tour to Explore Types Of HMO Properties in the UK

According to the amber student housing report Q1 2023, there are currently more than 8,70,000 HMO properties in the UK with an estimated market valuation of €26 billion as of 2023. This number is expected to rise in the coming years owing to the introduction of modern amenities and higher-quality student accommodations in the private rented sector. Currently, London is home to almost 24% of the HMOs in the UK (extracted from The Intermediary).

There are several tenant types that property owners can consider while renting out HMOs including students, working professionals, or asylum seekers (especially after the Russia-Ukraine war). Nonetheless, this blog aims to focus on only student HMOs which is one of the leading groups that real estate investors prefer to invest in. These could be mainly categorized into three types of properties:

Shared Accommodation HMOs (Section 254 HMO)

Shared accommodation HMOs or HMO shared houses are described as the renting out of whole properties for a group of sharers, such as students. Each tenant under this type of accommodation usually has a private bedroom but shared kitchen spaces, bathroom facilities, and/or dining facilities.

• The HMO comprises three or more tenants who belong to more than one household. The joint tenancy agreement mentions all the names of the tenants individually.
• The legal possession of the house lies in the hands of all the tenants which allows them to move in and out of the property at the same time. These are popular among students enrolled in the same course or a close-knit group of friends living together but in different courses.
• The HMO shared house accommodation aims to possess several characteristics of a single-family household where the property is shared among the members of the family.

Bedsit-type shared house/HMO bedsit

Another type of HMO property is the bedsit-type shared houses simply known as HMO bedsit. These are independent non-contained bedsit lettings where the tenants do not have an identifying bond to one another.

• These types of properties would usually have individual cooking facilities within each bedsit, although this may also be shared in some small houses. The kitchen or bathroom facilities would usually be shared (usually no common living room space).
• Each tenant would have their tenancy agreement and students can exercise their right of vacating the property at any time by providing a notice period. Hence, this type of affordable accommodation offers flexibility and also exhibits a sense of privacy.

Self-contained Flats/Studio Accommodation (Section 257 HMOs)

Under this section of HMOs, the property contains self-contained flats or studio accommodations where the tenants have individual kitchens and bathrooms.

• The provision of Section 257 HMOs differs in terms of legal bindings if a part of the building is converted into self-contained flats, it would fall under the HMO Section 254 of the Housing Act 2004 and mandatorily maintain the Housing Health and Safety Rating System (HHSRS).
• There are certain minimum room size requirements applicable for such housing which the property owner needs to comply with.

Can HMOs Become a High-Yield Asset Class in the Coming Years?

As of 2023, HMOs represent a highly disorganized sector of the student accommodation market. This is why these properties have not been able to draw private equities or big-ticket investments to date. Such private investments or public-private partnerships are required to turn any real estate into a mature asset class (for instance, a PBSA or a BTR). However, these properties have several advantages when the market is being affected by housing or rental crises.

• HMOs are smaller and do what is required to be standardized. They can be built anywhere because the space requirement is low (especially for smaller properties). Hence, a larger number of students can be accommodated in a single house-shared HMO according to the occupancy limit of the licence.
• Amenities can be included or excluded according to the rent and space availability of the HMO. Due to lower rents, property managers do not have to include amenities within the bill and can also be located comparatively further away from the university, hence resulting in increased travel costs.

On the other hand, with the absence of standardization in certain regions, the HMOs might face difficulties with some buildings being in poor condition. With HMO licencing requirements getting more stringent, this might be the best time to incorporate HMOs within the organised sector of student accommodation.

HMOs are required to renovate themselves to be able to achieve the set standards of the licence. So, being able to raise investment from the market might help in the refurbishments. This is the main reason why, soon enough, HMOs (like BTRs) might be absorbed into the organized student accommodation sector so that it can raise private investments from asset management firms (AMFs) and utilize the highest yield potential which comes with a regulated asset class.

The Final Destination: The Future of HMO Properties in the UK

In 2023, the possibility of turning a blind eye to the student housing crisis is undoubtedly impossible. Although major accommodations in the UK have been observed to withdraw a few Types of HMO properties due to licensing complications, increasing mortgages, and other factors, the market for HMOs is expected to boom in the coming decade with rising demand for more flexible and affordable rental properties.

With new revisions of the Rental Reform Bill (Revised 2023), the owners of HMO properties can enjoy more stability by incorporating longer-term tenancies and notice periods for tenants. Furthermore, as the HMO sector becomes more organised in the coming years, it may be able to draw investors into the market.

By stringent adherence to HMO licensing requirements, these properties have the potential to revolutionize higher yield for investors through potentially higher property values. Hence, investing in HMOs can transpire to be a great chance to reap the benefits of high yield, and consequently aid the expansion of the student housing market in 2023 and beyond.

Furthermore to maintain the higher occupancies and maximize the rental income from your student property list with amber today!

‍