Tight regulation makes HMO an area for specialists

Nick Davis, Partner in the Valuation Division at Glenny, recently spoke with Property Week on the Licensing of Houses in Multiple Occupation (HMO). The Licensing of Houses in Multiple Occupation (Prescribed Description) (England) Order 2018 came in to effect on 1st October, changing which residential properties will be categorised as HMO for mandatory licensing purposes.  Now, any property occupied by 5 or more people, forming two or more separate households is classified as a HMO. The Residential Landlords Association have estimated that this will affect 160,000 properties that currently don’t require a licence. Many houses and some flats will now be required to have mains powered fire alarms, fire check doors and fire escape areas that could result in considerable expenditure. Also, the penalty for not obtaining a licence can be a criminal conviction, a £30,000 fine as well as being required to refund rent received. This long-awaited extension will offer greater clarity of minimum standards across all local authority areas including specified minimum room sizes that are deemed to be suitable in a HMO for occupation. Prior to this, many Local Authorities were interpreting the definition for Licencing differently. The new rules allow a valuer, investor or lender to accurately and factually establish if accommodation will or won’t meet minimum standards. It should enhance the stock held in this sector which until now has included a number of HMOs that offer sub-standard living accommodation. The minimum standards have been welcomed by many stakeholders in this investment sector including valuers and lenders, with the legislation further “professionalising” the market. With many Council Housing Officers unable to police HMO’s in their area due to limited resources and officer hours, the roll of Chartered Surveyors and lenders inspecting and deeming properties fit for purpose and suitable security can’t be under estimated. However, the legislation may increase the burden on investors/property owners in terms of costs, and where existing rooms don’t meet minimum room requirements there will be a reduction in rental income when these rooms are excluded from letting. This could impact on capital values and potential on loan to value covenants where properties are held as security for bank lending.  We may also see some investors withdrawing from the market. It seems very likely that this new Order will result in a reduction in the supply of HMO accommodation available over time which will inevitably create upward pressure on rents - at a time when there’s a focus on the need for increased provision of affordable accommodation. The legislation is likely to further increase the specialist nature of HMO ownership, a sector that has become increasingly specialised over the past ten years, requiring a much more professional approach from the landlords. The times of amateur investors buying in to the HMO market for possible high returns has passed. The need to understand and comply with the licensing requirements, as well planning legislation (a parallel requirement that must also be considered) HMO ownership is now best suited to those with specialist knowledge of this sector.