Controversial Post (on social housing leases)
“If I add a social housing contract to my HMO before I sell, will it increase the value”
I get asked this most days. The obvious answer should be ‘yes’ – what’s not to like about a fixed net income and a long term tenant who will ‘technically’ keep the property in good order and then hand over again in the same state that you gave it to them?
Take a 5-bed HMO in a blue collar area in the North West as an example;
Based on the likely 13% gross yield sale price for a recently/newly converted HMO and room rates of, say, £85 pppw (£22,100Pa) – this values the HMO for resale at £170,000….and I could sell these weekly with good occupancy, a managing agent in place and as a healthy HMO.
Now, add in the social housing lease, let’s say at an LHA rate of £60 and the income is reduced to £15,600 but the tenant pays the bills and maintenance costs (in theory) so you end up each month at a similar level of net income minus some risks like voids and variables like running costs.
We see these valued at ‘8% net’ – so somewhere North of £190,000.
But do they sell?
The problems I see with them on resale are;
• buyers don’t want to pay ‘that much’ over bricks and mortar – already at the £170,000 it’s a push
• there’s unfamiliarity with the tenant type and possible (unfounded) concerns over asylum seekers, homeless etc
• lending is harder and therefore you’re tying up more cash for longer
• ‘social housing contracts’ are the new R2R and they’re aimed at ‘struggling landlords’ who are tired of managing their HMO or who have lower occupancy than they expected – they are the perfect marriage in this situation but when they are offered on newly refurbished HMOs to sell we get asked by the buyers “won’t it work as a standard residential?”, “what’s wrong with the area?”
• as above, they can be seen as a sign of weakness for an HMO and the product, location and it having multiple tenant options
Most new HMO buyers who buy up-and-running HMOs are just starting their portfolios (and maybe after 2 or 3, they get the experience and cashflow to develop their own and create their own value) and, for this reason, they are optimistic, full of energy and excited to be running a ‘professional HMO’ – they aren’t ready to take on board the “running HMOs is hard work, y’know” advice yet.
They don’t want an asylum seeker lease on their exciting new HMO, they want a GP, a nurse, an engineer and 2 graphic designers instead….
Lots of them will sign social housing or R2R contracts after a couple of years of owning them when they decide it’s for them – either due to negatives with their HMO that they didn’t know about or due to it just fitting their investment plan better.
But, at this stage, just like the many other existing HMO landlords who respond to the ‘social housing boom’ and get long leases signed on their property, they have already refinanced and are actually probably breaching mortgage terms or their insurance by changing to supported living.
Lastly, you see people advertising ‘3/5 year leases’ with ‘guaranteed rents’ but the shine is coming off this terminology.
a) the leases usually have 2 month break clauses either way so they are essentially a hammed up AST and buyers realise this.
b) there’s stories of bad management, shoddy practices, providers overpaying at stupid levels that aren’t sustainable, providers still getting landlords to do repairs etc. There’s some quality, respected supported living specialist managing agents out there and they wouldn’t be constantly advising and even exist if renting via these leases was ‘hands-free’ and a guarantee.
The 7 year + long leases which can extend to 25 years are often more robust, come with heavy provider capitalisation, void insurance, strong covenants for the property owner and 3+ years until break clauses etc – these leases are what the REITs and funds buy at 5-6% yield on volume but these leases are not the same as a ‘bridge-it housing lease’.
So, in summary, technically you could value the identical HMO with a supported housing lease higher than the ‘AST equivalent’ but the asking price is only part of the story – they’re less popular with buyers, there’s less cash buyers and there’s more nervousness or buyer trepidation to consider.
Social housing leases marry well with tired existing landlords.
