Clarity for HMO valuations needed in a growth market – Shawbrook

Research from Shawbrook Bank has found that, as the demand for shared accommodation grows and potential returns are realised, investors are beginning to see the potential for HMOs over traditional buy to lets, with 34% having cited this model as their preferred property type. This marks an increase of more than double on the 16% seen in July 2015.

However, with little guidance on how a property is valued and lenders approaching valuations and stress testing differently, few investors are aware of the key challenges they may face in the market if regulation is increased, according to Shawbrook.

Karen Bennett, sales and marketing director of commercial mortgages at Shawbrook, said: “As far as we are aware, no real valuation framework currently exists that provides the necessary clarity. This is causing problems for both lenders and investors, as the perceived value of the property affects how much equity the bank is prepared to release in order to aid them in future investments.

“Too much and the bank is at risk, too little and it limits the investor’s potential for expansion. A lack of guidance in this area means there is a risk that houses being approved will be questionable in their quality and this will further increase the risk to lenders.”

Nearly three quarters (72%) of investors cite yield as the main attraction for investing in a HMO followed by the potential for capital growth (29%), according to Shawbrook statistics, which identified three main types of investor in the area:

• Accidental landlord: the home owner who rents out a spare room, becoming an accidental HMO as the property would have been originally purchased as a residence rather than an investment
• “Smash and bash crowd”: active investors looking for properties that would be suitable for HMO purposes after seeing the growth opportunities, often completely reconfiguring properties to house up to six or seven tenants
• Regular BTL: investors who have bought a large house for a standard buy to let but have used as a HMO because the property lends itself to the model

With a lack of a genuine valuation framework in place, work has been done to try and provide at least some guidance by engaging with valuers across the country and releasing some more clearly defined categories, Shawbrook said in a statement.

Stephen Johnson, deputy chief executive and managing director for commercial mortgages at Shawbrook said: “As the spotlight continues to shine on the HMO space, it is becoming increasingly important for investors to have a good grasp of these more technical concerns and an understanding of future risks.

“While there are certainly new challenges on the horizon, there are still a great number of opportunities in a market that has produced excellent yields for property investors in the past.

“Taking a responsible approach means that a sustainable future for the market can certainly be found. This is a market that is constantly moving and investors and lenders will need to learn, adapt, and move with the times if they are to continue to take advantage of the opportunities presented by this attractive asset class.”