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Shared Living: The Evolution of HMO’s

Richard Bowser reports

In the last year or so we have featured a number of property entrepreneurs in this magazine who have been setting new trends in their local area for shared accommodation. Many property landlords and investors have been encouraged to look at this niche sector in recent years and there seems little sign that the appetite for creating new HMO’s and co-living units is waning, at least in parts of the UK where the financial numbers - in theory at least - still add up.

One of the main drivers amongst landlords for investing in HMO’s, especially those that have not converted their portfolio into a limited company, is the higher yields achievable, which is crucial for many, thanks to the new tax regime in operation, caused by the infamous Section 24.  

New HMO supply in recent years has also been boosted by those adopting the ‘Rent to Rent’ approach, which again - at least in theory - seems to offer new investors a route to market and a monthly income without the need to invest tens or even hundreds of thousands of pounds into a property that they own.

Those with more of a property developer mindset have been converting outdated commercial buildings, such as ex-public houses and the upper floors of retail premises, while many have used the changes in permitted development (PD), introduced back in 2013, to allow conversions of offices into residential units without the need for planning permission. A number of larger shared accommodation HMOs have been created from redundant office buildings via planning approval (sui generis) around the UK, with room numbers ranging from seven to more than 40.     

And yet, there have increasingly been many anecdotal tales online and from data sources such as SpareRoom, suggesting that an oversupply of HMO rooms has been occurring in a number of locations with some mentioning ‘saturation’. The ratio of new applicants when a room becomes available has been steadily falling in many locations according to some of my industry-wide contacts, but this is not happening everywhere. And to add a further twist to the tale, we are also now hearing anecdotal tales of more landlords exiting the sector completely as new licensing and room size regulations, alongside the increases in tax from S24, take effect.

So what should any prospective investor/landlord consider if they feel that shared accommodation (HMOs) is a viable proposition? To help answer that question I spoke with a number of experienced operators around the UK to gage their opinions and to hear their thoughts on demand and supply in their localities.

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