Challenges to the HMO market could lead to increased pressure in the PBSA market

Houses of Multiple Occupancy (HMOs) are a key accommodation option for students who are unable to rent a room in Purpose-Built Student Accommodation (PBSA). The number of students living in HMOs has grown by 18% in the last 10 years to the highest it has ever been, with more than 35% of students relying on HMOs in cities like Manchester, Nottingham and Edinburgh. However, the number of HMOs in England are declining. This will put pressure on all renter communities, especially students, as the delivery of PBSA isn’t keeping pace with demand.

The Department for Levelling Up, Housing and Communities estimate the total number of HMO licenses across England has decreased by 4%, or 21,000 licences, between 2019/20 and 2021/22. This is equivalent to between 60,000 and 80,000 beds.

There are multi-layered regulatory changes which are disincentivising HMO landlords and driving the decline:

1. Increased mortgage costs and taxation changes are making it less beneficial to operate an HMO. Landlords are selling up stock; this is positive when viewed from the perspective of increasing the amount of housing stock available for local communities to buy, but a negative for those including, but not limited to, students who require rental accommodation.
2. Regulatory requirements for operating an HMO have increased, now including additional permission licensing in some locations, building regulations including minimum standards and fire regulations. Failure to follow these can result in hefty fines.
3. Changing regulations for minimum EPC standards, discussed in our previous article, mean all private rented homes will soon need to meet minimum energy standards. The remedies needed to meet these could involve a significant cost and potentially accelerate private landlord disposal of HMO stock.
4. The proposed Rental Reform Bill includes a repeal of Section 21 and the replacement of fixed-term tenancies with a system of open-ended (periodic) tenancies.

The Rental Reform Bill would have the largest practical and structural impact on the student HMO market. Currently, the PBSA sector is exempt from this bill, but the student HMO market is exposed to the regulatory changes.

The need for fixed term tenancies in the sector are driven by the higher education academic cycle. Removing fixed term tenancies for student HMOs per the proposed legislative change means a landlord cannot guarantee vacant possession at the required time. This will restrict them from marketing their properties at the right time in the cycle and make operating an HMO increasingly difficult, resulting in stock falling out of sync with the academic year. The inability to end residential contracts will make it very hard to get back into that cycle unless incurring significant void periods. Furthermore, this could also lead to stagnating rents where landlords are unable to “reset” the rents every cycle. The National Residential Landlords Association (NRLA) and organisations in the higher education sector including the Universities of Cambridge, Leeds and Southampton, have sent a letter to the Ministers for Private Housing and Higher Education, respectively, highlighting the problem with open-ended tenancies for the whole student accommodation market.

On a backdrop of a known growing student population, and in an already undersupplied market, we expect to see record rental tension and occupancy in markets most affected by the demand and supply imbalance. This has already been seen in the 2022/23 academic year, and for reported bookings for 2023/24 to date, with faster letting trajectories and record rental growth being widely reported.

Lack of student accommodation supply is already a major challenge and some students have had to defer their studies as a result. This is particularly prevalent in Scottish university cities like Glasgow, Edinburgh, and St. Andrews, where the open tenancy/no fault evictions regulation is already in place. Some students have been forced to live in a different city to that of their studies due to lack of available accommodation – including English markets such as York, Bristol, Manchester and Durham. Students are also moving to displace other community groups in build-to-rent accommodation, where it is reported that 16% of tenants are now students.

The increased challenges students are facing finding accommodation, could lead to an even earlier start to the letting cycle than ever before for available HMOs. This has consequence for students who may feel rushed into making housing decisions they are not ready for. Students could commit to housing that is not conducive to studying and in poor condition just to secure a room. Students require clarity on availability of HMO stock as much as landlords require the defined fixed term to plan and operate.

From an investment perspective, the PBSA sector will continue to appeal due to its increasingly compelling dynamics. Operational assets will likely further increase in popularity due to the strength in rental performance and such strong demand will further reduce stabilisation risk on new schemes.

There is however some optimism for the HMO market. A report published by the Levelling Up, Housing and Communities Committee (a departmental select committee) on 6 February 2023 proposed changes to the Rental Reform Bill, including retaining fixed term tenancies for the entirety of the student accommodation sector (including HMOs), acknowledging the close alignment the sector has to the academic year and the existing demand and supply imbalance that is driving up rents. This would be a positive outcome for students already trying to source accommodation from a limited supply, and for private landlords who want to operate in the student market. It is unknown at the time of writing if these recommended changes will be weaved into the ultimate bill.

Get in touch with our Student Accommodation team to maximise your opportunities and understanding in the PBSA market.