Have HMO values gone down?

Have HMO values gone down?

📈 What am I seeing with HMO valuations and offers from buyers in this market? 📉

I’m currently working on a lot of HMO stock that I visited, valued and appraised between late ’21 and mid ‘22.

It’s not unusual for me to work on HMOs that I’ve assessed much earlier.

A huge portion of my day job and advice over the years has been with clients that won’t need a sale service straight away.

It does, however, give me an opportunity to compare the valuations that I gave and the gross yields that I recommended then against today’s buyer feedback and market conditions.

❓Have prices gone down?

Well, in nearly all cases yields have gone up and that means that, pound-for-pound, values have gone down.

That might be the headline marketing yield or it could be the ultimate selling yield that a buyer has engaged at – either way, gross yields have drifted upwards in order for a consistent ‘net’ to be achieved.

🤓 Put into perspective, this means the following:

2️⃣0️⃣2️⃣2️⃣ HMO – income £30,000. Valued in March 2022 at £250,000. Yield = 12% gross

2️⃣0️⃣2️⃣4️⃣ HMO – income £30,000. Now valued in March 2024 at 13.5% gross = value £225,000

This HMO has reduced in value by £25,000 to level things out due to market conditions, interest rate rises, utility increases, etc etc

❓So what does this mean for selling landlords?

🫣 If your HMO has remained stagnant from a USP and income perspective during this downturn period then you will feel the full pinch of the gross yield increase which has happened across the board.

Your HMO is worth a lot less.

🙌 Now for the good news!

There are so many HMOs that haven’t remained in a status quo during this period and, in fact, have been “rocking all over the world”, to use a really bad analogy.

Returning back to our HMO at £30,000 PA income…

Let’s say that the rents have gone up by £3,000 per year now…

At 13.5%, the value would be £245,000…

That’s not a bad result – £5k less after all Kwasi Kwarteng has thrown at you!

Or, let’s say that, in 2022, the HMO wasn’t in an article 4 area or it didn’t have an LDC or good management structure. Maybe it had sketchy occupancy or a few maintenance issues?

All of this would have meant that the ultimate sale price in 2022 would have been lower than the £250,000 because buyers always find out these things if they do decent DD.

So there wasn’t actually a rental increase but still extra USPs to add ‘value’ and desirability.

Bringing the HMO back to market better prepared, despite the tougher market conditions, will at least level out the ‘losses’ with some ‘gains’ – both would probably sell for £220,000 in our example.

The reality is with the HMOs I’m selling, have offers on, sold or I’m appraising right now is that most have reduced in value slightly.

The impact of stamp duty, utilities, interest rates, arrangement fees and all other ownership cost increases has outweighed the gains make on an individual property by good management, better rents and more sales USPs.

👀 HMOs have dropped in price ’a bit’.

🪦 It’s not, however, the graveyard that it could have been for most.

Decent HMOs still retain an attractive sales price that works for both parties and the potential catastrophic reduction in value has been mitigated by positives.

In the examples where landlords have re-financed their HMOs post Liz Truss and are coming to me with current lender valuations for their HMOs with a view to a buyer paying the same level, we’re seeing buyers ‘almost’ hit this level with offers.

Most are happy that the value is there and that the experts (RICS surveyors or lenders) are saying it’s worth £X but they are offering a slight margin below this level due to mortgage set up costs and stamp duty.

🤝 The good news is, the market is buoyant and the gap between 2022 value and 2024 value is much less than it could be for most HMOs because landlords have nailed down on optimising every are of their investment – out of necessity for their own cash flow, usually – and this has helped manage the downturn.

🎯 HMO investors and buyers need to arrive at their target ‘net’ and a good dollop of AST increase is the best way to achieve this.

😅 “Thank god for the rental housing crisis” Mr Tory McTory Gammon McMiser said to me yesterday.

“Ain’t that so”, I replied.

The story is slightly different for HMOs in the South that are more closely linked with bricks and mortar values and I’ll do another post on this.