Let’s discuss Derby again…
Let’s discuss Derby again.
I’m worried that people are rushing in still developing HMOs there as we approach the article 4 cut off and walking into an even tougher marketplace than already exists.
I’m worried that several factors will start to work against these developers across the next 12 months.
– Builders becoming difficult, hard to employ or failing to perform (I’ve seen this already this year in Derby)
– Bricks and mortar rises and bidding wars on the properties to be converted squeezing margins from the outset
– Over-inflated rental figures push GDV expectations too high. This is an issue for angel investors, over optimistic developers and, ultimately, the lenders and valuers
– Reducing lender support as they feel overexposed in the local market
I can actually see all of this happening at the same time across the rest of 2024 and into 2025.
My opinion is that Derby still has good tenant demand but that’s not going to last forever if there are too many modern HMOs being created.
By the end of the year, the average studio room rate will drop on the next ones off the conveyor belt in order to fill them.
If you want to get into the Derby market and own one of these quality, well-rented, studio-style HMOs in my opinion I would be buying a ready-made product from a quality developer that is fully tenanted, spacious, has a recent RICs valuation attached to it already and is performing as it should be.
Then I’d be focusing on working with one of a few managing agents that seem to be able to beat the saturation issues whilst also keeping on top of the tenant finds and optimisation myself. Be attentive and proactive at all times.
You can buy a brand new ready-made studio style HMO that has been created by an experienced developer for 11.5% gross yield (slightly lower yield for huge Sui Generis ones) and this would equate to around £75,000 a room/studio.
To me, buying a finished studio that’s already rented and will be positioned nicely inside the new article 4 areas for £75,000 – £80,000 a studio (with full self-contained facilities for the tenants approved by the council and stocked with beds, appliances, cooking utensils, TVs, furniture, soft furnishings and everything else a tenant will need) is a much better option now that risking creating yet another HMO locally and taking the chance on beating the deadline, navigating the build phase and finding any tenants that will pay what you need in 9 months time.
I bet in many cases the same new build HMO would cost more than £75k a studio to create.
Let the crap HMOs flush out the bottom of the market and return to resi, the awful HMOs secure social housing leases, the average HMOs flop in a competitive environment and stem the flow of new quality, higher end HMOs to stabilise demand and longevity of the product.