Is it time to sell your HMO or Portfolio?
What’s going to happen with HMO values (both sale and finance) in 2023?
From our experience over the past few months, HMOs are currently falling into a few categories;
- Higher yield Northern C4 HMOs which traditionally held at yields 11-13% (and sold at a premium above bricks and mortar in most cases) are reducing slightly in value despite rent increases outweighing the increase in running costs.
To play it safe, add 1% onto the gross yield you had in mind and you might be ok for only a 0.5% yield drift.
- Lower yield ‘bricks and mortar’ HMO sales (usually in South East or more expensive areas) where investors have been happy to exchange lower yields for capital growth and solid rental demand. In these markets, where rents are much higher per room, running cost increases have been swallowed easier and price drops haven’t yet happened BUT we expect a downturn slightly if the local residential market regresses as predicted next year.
- Large Sui Generis HMOs where economies of scale kick in and the value is solely linked to revenue and the commercial aspect are holding value for now – rent increases and varied buyer types have meant they are resilient to rate increases at the moment. To play it safe, add 0.5% to your expectations though.
- Student HMOs in key areas are largely unaffected as the market is propped up by ‘mum and dad’ buyers or those solely interested in student properties. No council tax and a secure tenant base add to the USPs which are keeping values held currently.
How much more pressure can HMOs take though before all prices reduce?
We expect HMO values to be more resilient that any residential property decreases because they are income producing and have multiple buyer types, many of whom are immune to the going’s on in the UK.
But if rates continues to go up & lending gets harder, running costs increase more and concerns over tenant affordability come to fruition then we’ll see too much stock left out to dry on Rightmove or available ‘off-market’ and it will be hard to create the hype needed to shift yield-based valued HMOs en-masse in these areas.
4 and 5 bed HMOs will be the worst affected in this scenario as will properties that don’t have full en-suite facilities. Yields could go up (prices down) 2% or more for these types of HMOs and stop only when they hit the natural bricks and mortar baseline.
This is ok for the HMOs that can be flipped back to family homes but potentially tough for those that can’t be or that aren’t in a saleable residential area.
For the rest of the HMOs – good quality, well-run, on spec and positioned correctly – a strong market will remain from the multiple exit routes a sale can provide and I think HMOs will outperform other property types by reducing in value the ‘least’ in comparison to new builds, regular homes, BTLs etc.
You might have to accept less of a ‘premium’ over bricks and mortar for your HMO but at least there’s still a premium available!
What should you do?
If you’re thinking of selling in the next year or so, look to get a buyer lined up in Jan – March 2023 as it’s likely HMO stock available on the market will increase significantly as we progress into next year (people not being able to refinance a big one) and this will give buyers more choice.
Also, make your HMO as ‘buyable’ as you can (compliant, optimised, ready for handover, LDC in place etc) as the one thing in your favour is the majority of your rival stock won’t be prepared or able to pass through lenders or conveyancing with delays due to planning etc.
Plan your exit as early as you can and you’ll also be as immune to any unpredictable reactions as possible.
The best value we get for landlords sometimes takes 6-9 months to come to fruition.
*This was wrote in November 2022, and is only our early prediction for 2023*