How long does it take for HMO values to change after article 4 is implemented?
Article 4 is usually brought in for a reason.
Too many HMOs.
Just like property strategies become trendy and ‘all the rage’ (right now we’re in the ‘Supported Living Era’, we’ve just come out of the ‘Serviced Accommodation Era’ and I remember the days of ‘Same Day Remortgage Era’ and the ‘Sale and Rent Back Era’…), non-article 4 locations become en vogue for the sole purpose of add value opportunity, ease of development or BRRR potential.
Deal packagers flock, newbie/wannabe developers gather and the angel investment hunters sharpen their GDV brochure tools.
Random place names in the UK suddenly echo around PIN meeting event halls and property WhatsApp group chats.
Peterborough, Derby, Doncaster, Crewe, Liverpool, Barnsley, Portsmouth, Coventry, Corby, Middlesbrough.
One by one they drop off the ‘hot list’ due to the implementation of Article 4 – Corby and Derby seem next in the queue from what I’ve read…
But what actually happens in these locations in the run up to, and after, Article 4 comes in?
First of all, there has usually been a slow drop off in saleability, refinance levels and ultimate property value in C4 HMOs due to over supply of newly developed stock already.
It’s the worst properties that get hit hardest first.
I define ‘worst’ in this instance as ‘woodchip’ HMOs, shared bathroom HMOs or those that need a wee bit of TLC. Also 4 and 5 beds have a tougher ride.
New, sexy HMOs catch the cold last.
The gradual decline isn’t stopped by the council announcing that they intend to bring in article 4.
If anything, values haven’t yet hit their nadir.
Across the 18-24 months that it usually takes for the restrictions to be enforced, it’s not like the developers stop their C3 to C4 orgy – the HMOs keep on comin’…
More HMOs than usual are created and this worries lenders and valuers and reduces prices (increases the sales yield average).
It’s therefore fair to say that worries over values and saturation accelerate after Article 4 is announced.
The good news is that when Article 4 eventually does come in, it puts an end to the conveyor belt of conversions that flood the local rental market and then stock value can start to increase (unless the council is years behind in knowing how many HMOs there are in any given street (see Portsmouth)).
The value of having ‘grandfather rights’ or a Lawful Development Certificate suddenly make any HMO inside article 4 more attractive on a sliding scale depending on how narrow the restriction area is.
In other words, if you have a knackered old 5-bed HMO inside an Article 4 area that’s very small geographically but very sought after, your HMO will be very popular. Broaden the size of the Article 4 area (see Barnsley) and this USP is diluted.
It takes a few years for things to properly level out.
In Doncaster, I’ve seen that tenant expectations have shifted as a result of the free-for-all in developments that the pre-article 4 days brought. Now everyone wants an en-suite room as a minimum and there is the stock to handle it too.
The shared houses can be palmed off to Bridge-it Housing on long leases, problem solved…
The introduction of A4 restrictions stops HMO values reducing in the first instance and then, after time and a settling down period, it usually sees values increase.
This increase is usually to the level that it was ‘before the slide’, though, and back to where values should be.
Lenders get more interested as do ready-made HMO buyers and ticking these 2 boxes is big.
Like any marketplace, the best product will thrive regardless and we’re seeing that with studio-style HMOs in Derby right now, for example, but, eventually, every HMO will be a victim of reducing saleability, refinance levels and value if C3-C4 permitted development rights aren’t squashed.
Derby doesn’t have an article 4 and it is a large conurbation, with multiple tenant types and demographics. It also has cheap C3 houses and continued support from Shawbrook.
Sale prices of the best HMOs in Derby have slipped from their zenith of 10% gross yield, through 11% and now sit just shy of 11.5% – lending levels have probably taken a similar path.
If Article 4 doesn’t come in then we’ll see these HMOs selling for above 12% by next year.
But, Article 4 is coming in and therefore yields will reverse again soon. I can see 10.5% in 2026.
Article 4 is only an issue for more fair weather investors – it’s brilliant for landlords of existing HMOs or for experienced developers.
In areas like the ones I’ve mentioned, the introduction of Article 4 usually comes at a time when values are already declining and then, when the restrictions get announced, they continue to reduce slightly before picking back up in the 18-24 months following its implementation.
It’s a different picture in Southern markets.
