30 March 2023

HMO landlords need help as energy costs set to remain high

By Adrian Moloney, Group Intermediary Director, OSB Group

If you’ve opened a fuel bill, filled up your car or listened to the news recently, you’ll be only too aware of the energy cost crisis gripping the nation. Your landlord clients will also know all about it, and some may be more worried than others – particularly perhaps, those invested in Homes in Multiple Occupation (HMOs).

HMOs tend to generate higher yields than other buy-to-let properties, returning an average annual net yield of 6.2%, according to the BVA BDRC Landlords Survey Q3 2022. That compares to 5.9% for a terraced property or a detached house and 5.7% for a semi. Those HMO yields are under threat.

Many HMO landlords fold some or all of the property’s utility bills into the monthly rent they charge. In any environment, this can be attractive to young people leaving home who are not used to paying their own property running costs and overseas students who have never set up an account with a utility company in the UK, for example. In the current circumstances, with energy bills at record highs, there has been a huge increase in tenant demand for rentals with bills included. Rightmove data shows a 57% leap in the number of searches for such properties between December 2021 and December 2022.

While this burgeoning demand is good news for HMO landlords, at the same time the surge in energy costs poses a challenge, forcing them to choose between passing on the increase in higher rents or accepting falling yields. According to the BVA BDRC Q3 report, 43% of landlords intend to put up their rents in the next six months, and this is likely to include a large contingent of HMO owners.

But this is not a six-month issue. While many predict that energy prices will start to come down from their record highs later this year, analysts warn that these costs will remain relatively high until 2030, compared to pre-2021 levels.  So smart property investors should be looking to mitigate the impact of escalating energy prices wherever possible with an eye to the longer term.

Technology such as digital smart meters can help tenants and landlords with budgeting by keeping track of how much energy is being used. The temperature of a property can be controlled remotely using a digital thermostat – turning it down by one degree can save £80 a year on an average property, according to the Energy Saving Trust.

But in the long run, the logical course of action for landlords looking to limit their exposure to rising fuel bills is to make their properties more energy efficient. The rules surrounding Energy Performance Certificates (EPCs) and HMOs are a grey area at present, but rules aside, making an investment property as economical to run as possible simply makes financial sense. Easy wins include adding extra insulation, installing energy efficient lightbulbs and passing tips on to your tenants, such as switching electrical appliances off at the plug when they are not in use. Installing an energy efficient boiler and heating system, replacing old windows and doors and adding solar panels, for example, are of course bigger commitments, but pay for themselves over time.

Our Landlord Leaders research, carried out in August 2022, revealed that the majority of landlords appreciate this logic, with 68% saying they had already have or will invest to upgrade their properties ahead of any changes to EPC requirements.

As an industry, we have a key role to play in helping to improve the quality and energy-efficiency of the UK’s housing stock. When landlords, and perhaps particularly HMO owners, are actively seeking ways to make the running of their properties more sustainable and cost-effective, we - as brokers and lenders - need to be having the right conversations and identifying the most appropriate solutions for their needs. Working together, we can create better quality property for tenants, protect precious yields for landlords and help improve the planet for everyone.

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