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Small HMO’s: Portsmouth’s Perfect Storm

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Rents for family let small houses are at record highs, demand for student accommodation is hitting a cyclical low, costs are going through the roof  and the process to introduce Additional Licensing for small HMO's has started – our recommendation is to sell up or switch to family lets.

The Financial Angle 

Many local landlords with smaller houses came into the market with a simple choice – rent the property to a family for £750-900 per month or furnish it, take on the overhead of managing an HMO and charge £350 per month to each of 4 tenants, giving a gross income considerably higher than a family let.

Now that situation appears to have reversed. A 3-bed family let can easily bring in £1,200 per month and we are increasingly seeing some go for as much as £1,300. By comparison, a student let in the same property when let to a group of 4, might bring in £1,600 gross but that is fully inclusive.

Landlords now must ask whether the 'HMO Premium' of perhaps £300 per property per month is worth it.

Firstly, a family let will bring in income for 12 months of the year (12x£1,200) = £14,400 whilst a student let will typically be on 10-month contracts (10x£1,600) = £16,000.

So, the choice is simple, let to a family all on one contract / set of paperwork, changeover perhaps once every 2.5-3 years and have lower mortgage and insurance costs or be £1,600 per year better off, but have 4x the paperwork and have to do it every year. And also have to pay for all of the furnishing in the house, its upkeep, repair and maintenance, major clean and redecorate costs every summer, plus PAT testing, and now potentially a licence.

And now factor in rising energy prices - an HMO will be fully inclusive of gas, electricity, water, sewage, TV licence, internet/wifi, etc and with the average homes energy usage set to rise from £1,200 / year to possibly £3,000 - remember that an HMO will typically be heated 24 hours a day, 7 days a week as the varied living styles, work patterns and habits of the individuals will mean that turning it off at 9am and back on at 5pm for 2 -3 hours like many family houses do is not an option in an HMO - so expect the already high utilities bills to increase in line with the industry pricing.

And did we mention the need to pay council tax too?

For those that choose to continue with small HMO's, the question has to be, why would you?

The Supply Cycle

In the south of the city, much of the HMO demand is driven by the University and it is a fact of life that student numbers go up and down, partly in line with demographics but also many other reasons. We saw the University grow (measured by total student numbers) over the past 20 years, with the number of 18-year-olds in the population peaking in 2015 before dropping back 15% to today's low.

This low (which is lower than at anytime since 2000) has been accompanied by the unprecedented arrival of student halls in the city – jumping from around 3,500 rooms to around 9,000 rooms.

By comparison, student HMO's have dropped over the past 3 years from around 1,200 to an estimated 800 now.

The good news is that the number of 18-year-olds in the UK hit a major low in 2020 but is predicted to rise 25% by 2030. The question for student HMO landlords is whether the planned student halls in Arundel Street and elsewhere will outpace that growth, if Portsmouth will get any of the predicted growth and whether it is worth risking a few lean years before the student housing demand picks up again.

Additional Licensing

This month Portsmouth Council voted to start the process of introducing Additional Licensing for 3 and 4 bed HMO's. There is no certainty this will happen and on paper, it should not – as to do so there needs to be evidence of a citywide problem that can be fixed by the scheme and whilst we have never seen a complaint of poor property standards in Drayton or HMO rubbish in Milton, as well we know, details such as this tend to be ignored by councillors who mistakenly believe that doing anything is better than not, regardless of the impact.

As good landlords, we should not care, as well-maintained houses should not be an issue. The reason many members complain is because it takes time to produce drawings of the appropriate standard and to fill in the necessary forms, to collect together all of the requisite paperwork, approvals and certificates, to host inspections which invariably show up petty issues as no inspector wants to say they could not find anything wrong (and most of the PCC ones are not formally trained, let alone qualified which sadly makes them more eager and enthusiastic to show that they can spot problems) and also, the cost – both in time and money – both for the application and any minor repairs which are stipulated (like the thumb-turn release on a back gate to ensure the resident was not trapped in the back garden if the house caught fire – ideal for allowing burglars to open the gate when stealing stuff from the shed, but necessary as god knows how many city tenants have burnt to death in their back gardens…)

What Does It Mean For The City?

Many will think any actions which result in a reduction of the number of HMO's in the city is a good thing. Sadly, there are a number of issues with this view.

Firstly, single people under-35 on housing benefit or universal credit are only eligible for weekly payments of £78.81p. That equates to £341 per month. As above, that is not enough to be able to afford a room in an HMO in the city. Historically there have been some properties of low standard available at these prices, but the proposed new rules are focussed on removing exactly these properties or upgrading them which will mean that landlords need to charge more to cover the costs of maintaining the higher standards.

Also, with Additional Licensing focussed on squeezing out the smaller rooms and raising standards across the sector – prices will be pushed up. If you cannot let to as many people and/or have to spend more on fixtures and fittings to meet the high standards expected, your costs are going to be much higher and this will be reflected in your rents.

Additional considerations are the planning restrictions the city has put in place to limit the number of HMO's – there is no flexibility in the city's housing stock to move between different tenures in response to demand. This is why so many small HMO's are being converted to mega-HMO's – if you are not allowed to create a new one, you have to upgrade an existing one.

The net impact of these points is that the most in need will have nowhere to live, the number of small, nice homes for 3-4 nurses or dockyard contract workers will decrease and the number of mega-HMO's will rise in response to the high demand and high prices that this will create.

An unpleasant side effect of this will be the premium pricing of HMO's will continue to exist (often 30% more than a neighbouring similar property) and this has a knock-on inflationary impact on both local rents and local house prices which increases the pressure further for more affordable rents and affordable homes.

What Does It Mean For You?

If you have a large HMO converted from an old Victorian house, you probably have no choice but to retain it as an HMO as properties such as this have few alternative uses in this day and age. Either that or sell or convert to flats.

However, if you have a small HMO (3 or 4 beds) you probably need to think about family lets for the next 4 or 5 years. Either that or extend the property to convert to a 7-8 bed HMO as only then will you be able to hope to break even. However, if you do choose to switch to family lets and want to switch back to an HMO in the future you need dual use C3/C4 planning status and there are issues with that – see our article on that subject here: add link).

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