Tenants are demanding better quality HMOs according to new research from specialist buy to let lender Paragon Bank.

The bank’s survey of HMO landlords identifies a flight to quality over the past year with 48 per cent saying they’d seen growing demand for high end HMOs and 45 per cent saying demand from young professionals was up over the past year. 

Just under a quarter also said HMOs were appealing to older, affluent tenants.

The majority said demand for higher speed broadband had increased over the past year, while a significant proportion of tenants were seeking larger rooms, en suite bathrooms and better quality furnishings. And 35 per cent of respondents said tenants were asking for office facilities to enable home working.

Paragon Bank’s mortgages managing director Richard Rowntree says: “HMOs used to be dogged by a reputation for poor quality housing, but that perception is shifting as landlords upgrade stock and meet the changing demand from tenants. Tenants will no longer accept poor quality; they want broadband, bathrooms and better-quality furnishings.

“We saw strong growth in demand from landlords to acquire HMOs during the pandemic. This may reflect the wider shortage in rental property with tenants are opting for a room in a shared home because one or two-bedroom properties are in short supply. Tenants also like the flexibility and social nature of HMOs, particularly if they are renting with friends.”

Rowntree says the investment case for HMOs is compelling, with 47 per cent of landlords with an HMO agreeing that they offered better rental yields than other residential rental property. Some 40 per cent said HMOs offered better financial protection from voids, while 53 per cent said there was no material difference in capital gain between single units and HMOs, making income the deciding factor.

The largest proportion of HMO landlords, 42 per cent, reported net yields of over 10 per cent, while two thirds reported yields of eight per cent or over.

Nearly half of HMO tenants fell into the young single bracket, chiefly students, white collar, clerical or professional workers. Elsewhere, 27 per cent of tenants were manual workers, with 15 per cent represented by older singles. Smaller groups included Universal Credit claimants, families with children and migrant workers.

One in five tenancies were in place for two years but by far the most tenancies were for one year. Just two per cent of tenancies lasted longer than five years.

The survey also found that given shifts in tenant demand and the higher yields on offer, HMO landlords are more likely to purchase additional stock than sell. 

Over four in 10 HMO landlords said they planned to buy an additional HMO property in the next six months. In terms of those looking to trim properties, four per cent said they planned to sell all of thei HMOs and exit the sector, with  eight per cent intending to reduce their HMO holdings in the next 12 months.

Rapidly rising energy costs stood out as the frontrunner when HMO landlords were asked what their biggest challenge had been over the past 12 months. 

Two thirds of those surveyed said higher energy bills had been a concern, reflecting the fact that 62 per cent of tenancies in HMOs are inclusive of all bills including energy, broadband and council tax. 

A further 14 per cent include utilities bills only – gas, electricity, water and council tax.

While one in five landlords said they had no plans to pass higher energy bills to their tenants, more than half do plan to increase rents to cover the higher cost of living. Some 19 per cent have already raised their tenants’ rents.