A look back at HMO sales in 2023

Well that was the year that was!! Across the UK property market we have seen many challenges and obstacles to getting business done. It has been a rollercoaster felt throughout different property sectors, almost invariably when I speak to brokers, agents and service providers in similar positions, the feedback has been unanimous, it has been quite a slog!

The beginning of the year saw the continuation of a period of economic uncertainty, with interest rates fluctuating in response to global economic pressures and the aftermath of the ‘Truss-Kwarteng’ episode continuing to unfold. These factors affected the mortgage market, with shifts in lending criteria and interest rates impacting the profitability and viability of HMO investments. Investors had to navigate this challenging terrain, balancing the benefits of potentially high rental yields against the risks associated with an unpredictable economy.

The first quarter of the year was fairly flat and slow in terms of activity, not a great quantity of new sales were being agreed. Due to the length of time conveyancing had been taking we were still kept busy with completions. Then in March, a very high proportion of any new business which had been written over the previous 3-4 months fell out of bed as lenders pulled products from the market and seemingly went out of their way not to lend money!

We saw a flurry of activity from around Easter through to the end of June, followed by another period of stagnation over the summer holiday period. That was not unexpected but the fairly slow pick up in September was a little disconcerting before sales began to flow again as we drew towards the end of the last quarter. Having seen the Bank of England hold rates, inflation seemingly to be coming under control and the positive impact that has had on mortgage rates, buyer activity was resurgent over the last few weeks and long may that continue!

Running alongside the lending landscape, we were also faced with an almost complete cessation of activity from our regular institutional fund buyers. Whereby in the previous couple of years these sales had accounted for practically half of our total turnover. 2023 saw numbers into the sector fall off a cliff and activity has been sparse at best. The void has created an opportunity and we did see several large sales going to overseas UHNW investors and on a smaller scale closer to home, social housing properties have proved an attractive proposition as an alternative to standard BTL or private rental sector HMO’s.

Rental demand has remained high throughout the year, driven by an acute shortage of affordable housing and a growing population of young professionals, students, and migrant workers who favoured the flexibility and affordability of shared accommodation. This insatiable demand bolstered the HMO market's resilience, underpinning solid investment returns despite broader economic instability.

All of the above factors have resulted in a shift in achievable yields across the board, prime locations such as London and Manchester have remained strong throughout the year. Unless you are in a super prime, article 4 area the likelihood is that the gross yield has moved by around 1%, whereby you may have been able to agree a sale in the region of 10-11% gross in a certain area, that is probably now 11-12%. This shift has of course however been negated by the increase in rental return and therefore sellers can still achieve a premium for their well maintained HMO and buyers are actually potentially looking at a better return assuming they buy well.

The regulatory environment in 2023 continued to challenge many HMO landlords and investors. Early in the year, the UK government implemented stricter HMO licensing requirements, aiming to improve living standards and tenant safety. Landlords faced increased costs due to more stringent fire safety standards, minimum room sizes, and amenities provisions. These changes led to some small-scale investors exiting the market, unable to bear the financial burden of required property upgrades, especially when coupled with a potential re-mortgage and the resulting higher rates.

All the while in the background the threat of the introduction of higher energy efficiency standards meant that HMO owners had to have one eye on investing in more sustainable and energy-saving measures or risk facing potential penalties. While these measures were intended to combat climate change and reduce energy bills for tenants, they added another layer of complexity in the property investment calculation.

There was a landmark victory for landlords and tenants across the country, as the long fought campaign to bring to an end the policy of applying council tax to individual rooms within a HMO was successful and new legislation was brought into effect at the beginning of this month. This is a shining example of the power in this community and the capacity to have our voices heard when it is clear that a policy is unjust and will have a negative impact on renters and the economy alike.

Investment in HMOs in 2023 was marked by a rise in professionalisation of the sector. Larger, more sophisticated investors and investment firms strengthened their foothold in the market, often converting commercial properties into high-quality HMOs. In response to tenant demand, these players focused on providing "premium" HMOs, featuring contemporary designs, high-end finishes, and bespoke services like cleaning, Wi-Fi, and communal space management.

Portfolio diversification became a significant trend, as investors looked to hedge against volatility by spreading their interests across different types of properties, including HMOs, as part of a mixed-asset strategy. Meanwhile, a burgeoning interest in social housing HMOs was noted, as socially conscious investors recognized both the steady returns and social impact of offering affordable shared housing to vulnerable populations.

The UK HMO market in 2023 has indeed been characterised by its adaptability and resilience. Despite facing regulatory hurdles and economic uncertainties, the sector has shown an impressive ability to adjust to the changing environment. Looking ahead, the HMO market seems poised to continue evolving, with quality, sustainability, and professional management at the forefront of this vibrant segment of the UK housing market. As investors and stakeholders reflect on the challenges and opportunities of 2023, one thing remains clear: HMOs will remain a crucial component of the UK's housing ecosystem for many years to come.