Known as a way to achieve a high return on investment, conversion to an HMO is a popular way in which landlords can unlock the rental potential of a property that would otherwise be let to family.
In order to let a property as an HMO, landlords must change the use of a property from residential (known as Class C3) to a (small) HMO (Class C4). Traditionally this could be done for a property where there are 3-6 unrelated tenants sharing on 2 or less floors without any need for planning permission.
However, many local authorities in student areas have now introduced an Article 4 direction, which means that landlords do have to seek planning permission when converting property use from residential to a small HMO.
Officially the Article 4 Direction is “a planning legislation that gives the local council the means to control the number of Houses in Multiple Occupation (HMO’s) in their area”. In simple terms this means that the council are trying to reduce the number of multiple occupancy (or Student) houses in an area by putting a limit on the number of these houses allowed in an Article 4 area.
So what does this mean for HMO landlords? We take a look at the pros and cons of the introduction of Article 4 in student areas.
Limitation of HMO Housing Stock
Article 4 regulations is only applied to HMO’s which are opened on or after the day that Article 4 officially comes into force in a particular area and therefore offers some benefits for existing student HMO landlords.
While in theory the introduction of Article 4 in an area does not automatically preclude the conversion of properties to HMO’s, in practice it does tend to limit the development of new HMO’s. Some Councils have set limits of only 10% of housing stock in a particular street to consist of HMOs to help control and limit the problems associated with HMO's in neighbourhoods such as waste and noise pollution. The Council's aim is also to avoid "student ghettos" from developing and to promote a more balanced mix of HMOs amongst residential accommodation. The exact number of permitted HMOs however depends on each individual Council.
Market competition for existing HMO landlords
The limitation of supply of student accommodation can sometimes mean that landlords with existing HMOs in those areas can benefit from increased rental returns as they face less competition from new HMO landlords.
Further, those HMO landlords looking to sell their existing HMOs can often do so at a premium as the Council in Article 4 areas will often only permit those houses to be run as HMOs which were already HMOs prior to the sale. On the other hand, the value of remaining residential housing stock in those areas could in some instances see a decrease as they can be less desirable to landlords.
Difficulties Facing New Landlords
For a prospective landlord who is seeking to purchase a property which they would like to let to student tenants, purchasing property in an area which is covered by an Article 4 direction can be a risk.
Like any other purchase that is subject to planning permission, until the right is granted, it’s uncertain whether you will obtain the permission to reclassify the use, and unlike say, an extension, due to the nature of the change, planning permission cannot be obtained prior to sales completion.
If you are a new landlord who is purchasing a home to be let to sharers in an area governed by an Article 4 direction, it is wise to ensure that you have a back-up plan of how you will let your property should you not receive the outcome you wish for when applying for permission.
While landlords who wish to move into or expand their property portfolio with HMO’s may find the introduction of Article 4 in student areas a headache, it does not make it an impossible task.
Students need housing close to their chosen university, and a large number of them will wish to share the burden of rent costs by sharing accommodation. Therefore landlords existing or new, will be able to benefit from the student HMO market, although access to it may be less easy than before.
What are your thoughts on Article 4? What do you think are the Pros and Cons?
Student Haus is a property letting and sales agency specialising in student HMO properties. If you are looking for an agency to look after or sell your student HMO – please do get in touch with us to find out how we can assist.