Marcus Dussard

Is the year of the HMO/MUFB ahead?

Marcus Dussard

sales director, specialist mortgages, Hampshire Trust Bank

Despite the spiralling cost of living, rising interest rate environment, and overall worsening UK economy, the buy-to-let market is not showing any signs of losing its attraction for the serious property investor.

In fact, the cost-of-living crisis, brought on by rising inflation and record energy costs, is playing into the hands of some elements of the landlord community. With affordability continuing to be a serious issue for would-be first-time buyers, competition for rental properties remains high, especially in cities and commutable areas. Tenants are looking for affordable but good-quality rental options, and consequently, demand for houses in multiple occupation (HMOs) and multiunit freehold blocks (MUFBs) is strong.

It is important to understand fully the distinction between the two. HMOs are strictly defined under regulation: if at least three tenants live there, forming more than one household, and they share toilet, bathroom, or kitchen facilities with other tenants, then that’s an HMO. (If at least five tenants live there, then that’s defined as a large HMO).

On the other hand, an MUFB is a single building with multiple separate, independent residential units owned under a single freehold title; no unit is subject to a lease. If tenants have to exit their units to use the bathroom or kitchen, that’s not an MUFB. Due to the strong tenant demand for well-presented, cost-effective rental properties, HMOs and MUFBs can offer better yields to landlords than traditional rental properties. This is especially the case in areas where there is a large and established student population and/or wellpopulated urban areas.

At Hampshire Trust Bank, we’re seeing landlords use the increased equity in their portfolios to finance the purchase or conversion of properties for HMO/MUFB purposes. They are both remortgaging existing portfolios and using bridging finance to achieve this. Either way, the broker should ensure that the landlord has accurately calculated the costs of refurbishment and/or conversion, especially at a time where costs for materials and labour are increasing considerably.

We expect demand for both HMOs and MUFBs to remain strong over the next 12 months. The choice of which route to go down is up to landlords and their analysis of the demography and local authority’s stance in the area where they are thinking of investing.

One important consideration for landlords on whether to go down the HMO or MUFB route is licensing: multiunit freehold blocks do not need to be licensed, unlike HMOs. While there are national building regulations, health and safety standards, and minimum space and services requirements that will need to be satisfied, local authorities may also have their own requirements for HMOs. For example, planning consent will be required – and consent may well not be a given – if the property is classed as an HMO and is in an area where the local authority has imposed an Article 4 direction. This is usually because it has deemed an area to be overpopulated, which creates issues in terms of infrastructure and services.

For example, in an area with a considerable student population, the local authority may be more disposed to issue an HMO licence. In a quieter residential neighbourhood, and where there are more owner-occupied properties, an MUFB may well be preferred by the council.

Such decisions are happening regularly and can be on a ward- or borough-wide basis. For example, last year Bromley council in London voted through two Article 4 direction schemes in the Biggin Hill and Darwin areas. They also approved a second Article 4 direction that will cover the whole borough from 1 September 2022 – “Too many people” was the cry!

Landlords’ costs and potential yields can be significantly affected by such decisions, so it is advisable for a landlord to meet with an area’s planning officers to get an idea of where they stand before deciding upon which route to take.

At Hampshire Trust Bank, we don’t have a view on which strategy a landlord should take; we lend on both HMOs and MUFBs, and provide both buy-to-let and bridging finance as a way to achieve this. We also believe that the underlying factors in the property market are such that both routes can be extremely beneficial to landlords in the right cases. They just need to do their homework properly before making their decision.