Keeping abreast of the HMO resale market
It’s been quite an eye-opener in 2021 in the HMO resale market – sales of up and running HMOs to new investors.
In general, demand is still high for tenanted HMOs across the UK *but* most locations have seen changes and we’ve had to adapt as the year has gone by, often reactively.
The bad news first – Doncaster is on its arse.
Only joking. But…
In 2019, we could get Doncaster HMOs (or similar locations) over the line to new buyers at around 12% gross yield. The buyers would be a combination of cash buyers, those requiring lending (but happy to ‘top up’), or funds working with supported living providers. At that time, it was clear we were at a tipping point in terms of quality of stock and saturation but demand was still high due to the “Amazon warehouse” or abundance of local blue-collar work.
Since then, the quality of the stock we’re seeing on Rightmove or passed around the ‘off-market’ circles has reduced significantly, and we have noticed rents are reducing to maintain occupancy or occupancy reducing in general. Some HMOs in Doncaster (and other places) are nothing but slums…
There are some really, really crap HMOs in Balby or in DN1 which have negatively impacted the local area noticeably and this has hindered sales of the better HMOs locally.
I walk the streets of most dense HMO markets across the country (and where traditional HMO investors have flocked) and Doncaster is currently one of the scruffiest, Wolverhampton is minging too. It’s not fair on the quality HMOs, the good landlords, or the quality HMO managing agents but when there is too much crap, the popularity of the area comes down nevertheless.
Ergo, Doncaster's average yields are now 14% gross on resale as a result.
Lenders currently HATE Doncaster and we’ve had first-hand experience of surveyors almost looking for excuses to provide nil or down-valuations.
Now we’re into what I call the “Article 4 migration” – experienced HMO developers moving from areas where A4 is now implemented and taking their ‘rinse and repeat’ boutique HMO model to secondary towns and conurbations in order to keep developing with ease and within permitted development.
Leeds, Sheffield, Doncaster developers going to Barnsley, Normanton, Wakefield, and Gainsborough…
Liverpool developers going to The Wirral…
Manchester developers going further…
This has meant that the HMO stock in many areas has improved significantly which is great if it can be sustained and there is a tenant demand for it but these secondary, non-article 4 areas can (and have) hit saturation levels very quickly and this means lowering rents, poorer quality tenants and poorer occupancy.
It hits the resale market too as buyers and lenders see this. You can’t dress up Birkenhead Park as Sefton Park despite many trying (and some succeeding to naive overseas investors on the Peninsula).
Other areas in the UK have had a 2021 ‘ leveling out’.
Places like Derby, Peterborough, and Salford had examples of completed HMO sales sub 9% (many through auctions), and this heady level was clearly not sustainable as buyers want more value than 9% gross in locations where HMO capital appreciation is non-existent and the bulk of the tenant base is still sub £30k PA “upper blue collar”.
9% GROSS in these areas is madder than the off-spring of Jim Carey and Imelda Marcos, net off the running costs, the voids, non-payers, and hassle and you are at minus 14% net. Buy Bitcoin instead…
A yield drift of +1-3% has been blowing across the Midlands this year and prices are settled at a more comfortable level – which isn’t good news for people who’ve been caught out with a refinance or found their property was hard to sell this year but it’s a fairer market moving forward and we don’t have to wince when we see new listings.
As a minimum, we’ve added 1% to the yield on every area above the Midlands this year which has reduced the price we think HMOs are currently selling for. There are exceptions, of course, and this is where our advice is being given to HMO developers and landlords currently.
So what the hell is in demand?!
If your HMO has been full for the last 2 years (through all 11 pandemics) then you have a very good HMO and the buyers will pay you good money.
Big City, article 4, well run, recently refurbished, quality HMOs sell all day long and you can be tight to the minimum yield allowed as any other type of HMO on the market.
Student HMOs are popular – the fear of VOA banding is one possible reason why student HMOs are seen as a great alternative. Watch the yields though, and look out for how many HMOs are currently on the market in any student market. I valued a portfolio in Bangor, North Wales this year and the landlord expected an 8% gross yield, a quick look on Rightmove and there were over 30 HMOs for sale, many for over 6 months, and all over 10% gross yield. It was a bad indication of the local student HMO market.
‘Down South’…
Our best sellers this year have been in the South East. Good money is being paid for quality, well-run HMOs (that haven’t been hit by Covid too much) and there is a noticeable upturn in demand for HMOs in prime real estate regions – and this includes Bristol, Cambridge, Oxford, Brighton, Inside or just outside M25.
I’d add that any area affluent area is seeing demand increasing – Harrogate, Chester, York, St Albans…basically anywhere with a Waitrose, a Pret, and a Joules instead of a BetFred, a BetFred and a BetFred.
It could be because the bricks and mortar property price increases have made lending easier or the long term investment more attractive or it could be because property investors are egotistical show-offs and they would rather own a “professional HMO in Oxford, darling” rather than a “Serco HMO in Runcorn, duck”…
Probably the latter.
Portfolios are selling well – as long as they are good and not your “retiring slum landlord off-loads his unlicensed HMOs before the council imposes large fine”.
Northern blue-collar locations are still popular PROVIDING the yields are on point – drifts from 11% to 12% or from 13% - 14% kind of thing.
Crewe, Stoke, Liverpool, Sheffield, Leeds, Greater Manchester we could sell HMOs in these places every day.
Nottingham is great. Corby is hard but will get better as there are dozens of HMOs in Northamptonshire leaving the residential market and being repurposed into supported living (homelessness) so this will help demand and occupancy.
In fact, follow the funds and wherever they do a big ‘HMO grab’ for supported living, wait 6 months and buy HMOs there.
Still, try not to sell directly to the ‘funds’ yet though because, as we’ve found out, they are still very, very flaky.
The main principles still apply – if the HMO solves a genuine local housing need if it has sustainable tenant demand, room rates and is more than just a ‘boutique HMO’ by way of having the fundamentals of amenities (both locally and in the house), space, design, and layout then its appeal to new buyers will be the same as its appeal to new tenants.
Buy HMOs opposite hospitals. If you’ve read this to the end, you deserve this nugget of advice. They ALWAYS work.