The UK private rental sector (PRS) is going from strength to strength, with demand for rental property up 6% in Q2 2022 compared with the same period in 2021, according to data from Rightmove. This is only likely to increase, for a number of reasons.
First, although a slowdown in growth is causing much speculation about the prospect of upcoming decreases, house prices are still on an upward trajectory, reaching record highs even as inflationary pressures and the rising cost of living take their effect across the country. Add to this the tightening budgets and rising bills affecting prospective buyers from all walks of life, and we are seeing ever more people put their dreams of homeownership on hold in favour of renting.
Another factor fuelling demand in the PRS is the UK’s perennial supply issue. The number of properties available to rent has halved over the past three years, according to Propertymark.
This all leaves landlords in a strong position to charge higher rents. In addition, increased costs such as those around energy performance, as well as those same inflationary and living cost pressures, are likely causing many landlords to see higher rental yields as a way of shoring up their own finances.
Rightmove’s Rental Price Tracker shows that rents have risen 11.8% since Q2 2021 – 3.5% since the previous quarter alone – and this does not show any signs of slowing.
For renters, this means greater monthly costs at a time when outgoings need to be carefully considered and streamlined.
HMO appeal
Where shared accommodation might previously have been largely the preserve of the student market, an increasing number of landlords are seeing the value in splitting larger properties, while renters are also coming to understand the appeal.
For the landlord, creating a house in multiple occupation (HMO) – with three or more tenants from multiple households who share facilities such as bathrooms, living spaces and kitchens – means decreased risk of complete void periods, as well as the potential for higher rental yields overall.
For an individual, they are likely to find better rent prices in an HMO than they would renting a one-bedroom flat. In addition, following the Covid-19 pandemic, many solo renters have realised the importance of community. Having potentially spent more than two years in relative isolation, particularly during the strictest periods of lockdown, the idea of having companions may have taken on a greater appeal.
Many HMOs are also able to offer the potential to live closer either to professional hubs or desirable social spaces, where renting alone or buying a property is not financially viable. With many taking advantage of the opportunity to move to a new city post-pandemic, HMOs also have the appeal of providing a sense of community in an unfamiliar place.
All of these factors are contributing to a rise in the popularity of HMOs among a more diverse range of occupants, including young professionals.
Taking advantage
A savvy landlord might be well advised to convert larger properties in their portfolio into HMOs. There are a number of ways to fund this, and the right choice of course depends on the property, the local environment and regulations, and the borrower’s individual circumstances. An important avenue to consider, for those brokers whose clients are looking to make this move, is bridging finance.
With a short-term loan, borrowers can access fast funds and flexible criteria, underpinned by human underwriting, in order to stay agile and make the most of this burgeoning market.
The kind of changes necessary to make a property suitable to let as an HMO might include converting rooms into bedrooms or additional bathrooms, as well as expanding or improving the shared and outdoor spaces.
Depending on the extent of the work needed, these renovations might be classed as either light or heavy refurbishment, both of which are catered for extensively by bridging finance.
Those landlords looking to place their property even further in the lead, particularly for the up-and-coming young professional, might also consider putting in amenities such as a home cinema, games room or gym, to help capitalise on the growing appeal of community living post-pandemic. For those renters who appreciate the lifestyle benefits but, might only be able to afford something simple if living on their own, the draw of these luxury elements could make a considerable difference.
While high demand and low supply will continue to make this a landlord’s market for some time, increased costs due to regulation and taxation and tightening financial and economic pressures mean that many landlords are looking for ways to make their portfolios work harder.
An HMO conversion might not always be the answer, but when it is, partnering with an experienced lender that can provide short-term finance tailored to their needs will help borrowers stay ahead of the curve.
Barry Searle is managing director of Property at Castle Trust Bank