On 1 October 2018 the UK government brought in a number of changes for landlords operating Houses in Multiple Occupation (HMOs). In what was seen by many as a move to tackle “rogue landlords” the effect has been more wide reaching that originally expected. Before we look at the impact on the market, let’s look at the new definition of HMO properties.
Definition of an HMO for licensing purposes
The new definition of an HMO property for licensing purposes has been simplified to any property:-
• Occupied by five or more people
• Forming two or more separate households
Prior to October 2018 a property requiring a licence was classed as an HMO if:-
• Occupied by five or more people
• Forming two or more separate households
• Taking in at least three stories.
Calculation of floor area
Floor area for living purposes is obviously a big issue with regards to HMOs and there have been problems in the past. Therefore, from 1 October 2018 any part of a room with a ceiling of less than 1.5 m will not be counted towards floor space. Specific recommendations (although not yet part of law) regarding floor space include:
• When used as sleeping accommodation for one person under the age of 10 a room cannot be less than 4.64 m²
• There is a minimum size of 6.51 m² for sleeping accommodation for one person over 10 years of age
• Sleeping accommodation for two people over 10 years of age cannot be less than 10.22 m²
While minimum room sizes will likely become law in due course, it is the obligation of the landlord to ensure that the current recommendations are put into place. Where there has been a blatant breach of the recommendations there is every chance that the landlord will lose their HMO licence.
Previously exempt HMO licenced properties
There has be some confusion and additional paperwork required during the crossover period from the old regulations to the new regulations. Strictly speaking, properties which didn’t fall under previous HMO regulations, but are classed as HMOs under the new regulations, required a licence prior to 1 October 2018. At this point it is worth noting that each HMO licence is for an individual property as opposed to individual landlords.
Additional expenditure
Slowly but surely, the UK government is eroding the attractions of operating HMOs. Even though the authorities will be fairly helpful with regards to newly required renovations and potential time delays, there will be a cut-off point where penalties will be incurred. However, any additional investment will have a major impact upon short, medium and long-term returns with some landlords possibly struggling to increase rents accordingly. When you also bear in mind the tapering down of mortgage interest relief to be replaced by a 20% basic tax allowance, many of the previous attractions of buy to let properties are diminishing.
Property market reaction
For some time now there has been a suspicion that the UK government would prefer larger corporate landlords rather than many private landlords. The recent HMO changes together with the ongoing erosion of tax benefits have certainly dented the ambitions of many private landlords. We’ve also seen the introduction of a new initiative by the UK government forcing landlords to join a newly formed tenant complaints body. The general consensus seems to be, while it is fair to look after the rights of tenants, who is fighting the corner of the modern day landlord?
It is very easy to get caught up in the stream of negative press comments but let us look at the cold hard facts. Demand for private rental properties is still extremely strong, assisted by a lack of social housing and the fact net immigration into the UK will continue even after Brexit. There are still extremely good returns available in the private rental sector and especially HMOs with the potential for double-digit rental yields. Investors will still need to be selective and carry out due diligence but the long-term attractions of property investment are still strong.