In April, 2010, just before the general election that saw the beginning of a coalition between the Conservatives and the Liberal Democrats, the government put in a place an alteration to planning regulations that meant that an owner of a single dwelling, residential property (a Class C3) would only be able to convert that property to a small HMO (a Class C4) if they secured planning consent to do so.
This did not last long. Once the coalition government had formed, it quickly rolled this regulation back at a national level but gave local authorities the power to use it, should they believe it was necessary, after conducting consultations with property owners in the local area.
The legal consideration by which councils can require the owner of a property to apply for planning, should they want to convert that property into an HMO, is called an Article 4 Direction.
What is an Article 4 Direction?
Article 4 Directions are the legal means by which a local authority can require property owners to seek permission to convert a single dwelling house into a small HMO. The idea is that by doing this the councils are given more control over housing stock through their ability to control the density of HMOs in a given area and also, in the case of conservation areas, this allows councils to consider the impact any development might have on the character of that area (not just HMO’s)
For instance, Manchester City Council, who have an Article 4 Direction in place, describe their policy, “H11 of the Council’s Local Development Framework Core Strategy sets out the approach which we will take towards controlling further HMOs. In general, we would be unlikely to let you change your property into an HMO if there are a lot of other shared houses nearby”.
While Historic England describes Article 4 Directions as having the ability to “increase the public protection of designated and non-designated heritage assets and their settings”.
Permitted Development Rights and Property Use Classes
The reason such a legal means are required for local authorities to do this is that homeowners enjoy permitted development rights under the Town and Country Planning (General Permitted Development) Order of 1995 and are therefore permitted to change the use of their properties. An Article 4 Direction, therefore, withdraws those rights (pending local authority approval) that would otherwise be protected by the GDPO.
It’s also important to note that Article 4 Directions only apply to smaller HMOs or Class C4 properties. Larger HMOs fall under a different house class and require different permissions. Property use classes are set out in the Town and Country Planning Order, 1987.
So, What’s Really Going On?
It’s difficult to say. Article 4 Directions are designed to grant greater powers to councils wishing to control the local housing stock and protect either designated or non-designated heritage areas. This, of course, seems logical. Too many HMOs in an area can threaten both the market and the community and why wouldn’t councils seek to protect areas of local interest?
And yet, what about young people and what does this mean for student areas? Article 4 Directions directly impact landlords who wish to rent out their properties to groups of between 3 and 6, unrelated people and it is mainly students and young people who choose such living arrangements.
The Residential Landlords Association point out that the arguments for this kind of regulation began from a position of unease that some felt about the ‘Studification’ of some areas. The argument being, essentially, that young people living together in small groups, make bad neighbours and therefore such living arrangements need to be curtailed and controlled.
But is it the right approach to try and deal with social problems through planning law when these could be dealt with by environmental health policy or the police?
The RLA take this even further arguing that Article 4 Directions actively discriminate against students and young people, wanting to live in small groups and they apply further pressure on an already limited affordable housing stock.
And of course, despite it being the choice of Councils whether they choose to adopt this policy and despite its voluntary nature and the fact that it requires a consultation process with local communities, it has been widely adopted across the county.
The Effect of Article 4 Directions on Local Markets
Students need places to live and in many cities, there simply isn’t enough purpose-built accommodation to house them. Granted, so-called student ghettos can be problematic for local residents where six people to a house can cause problems with undermining community cohesion to parking to anti-social behaviour.
But, simply limiting the number of small HMOs that are available does nothing to decrease the demand that exists for them and when you have that disconnect between supply and demand, prices go up.
As is well described in the article entitled, ‘HMO investment:
the impact of Article 4’ in this magazine from Allsop, what we are seeing in cities that have Article 4 Direction zones is that investors are much more cautious about buying C3 houses to convert into C4s.
Subsequently, houses passed for C4 use are being bought and sold for significantly more than their C3 counterparts. That is to say, you could take two houses that are exactly the same size, in the same area and the C4 house would be worth considerably more.
This is because of two factors. Not only are the C4 houses more desirable for investors due to their capacity for rental returns but C3 houses are less desirable, in that an investor’s ability to add value to these properties is hampered. And less investor activity in the C3 housing market means slower capital growth for normal homeowners.
So, what we have seen with Article 4 Direction zones are an increase in the value of C4 houses while we have also seen slower growth for differently classified, and yet identical C3 properties. We have also seen less housing options for students and young people and with less supply, higher rents have followed at a time while this demographic is already feeling squeezed.
All this while the problems associated with student ghettos, that Article 4 Directions are supposed to address, are still very much on display in our cities.
It would be hard to argue that the problems that Article 4 Directions are supposed to address are not real. Student populations rise year-on-year and in most of our cities, there are areas that feel abandoned during the holidays and can be chaotic and unkempt during term times. One can only imagine that such places must often not be too pleasant to live in for normal homeowners and their families.
It is also impossible to talk about the effects of Article 4s in broad strokes. There is no national uniformity to how it is applied and even the rationale behind its use varies a great deal from council to council.
But the laws of supply and demand are still in force. While many councils are doing a fantastic job in encouraging the development of purpose-built student accommodation so too are there many places where there simply aren’t enough places for students to live. With growing student populations this is putting a huge amount of pressure onto local markets.
Takeaway Points for Investors
- It’s important not to confuse a change of use with physical changes to the building. Article 4 Directions apply to how a property is being used, not to physical changes to the property. There are exceptions to this, however. Article 4 Directions can be used to require planning permission for the demolition of a non-designated heritage asset by removing demolition rights under part 11 of the GDPO.
- It is equally important to understand what the definition of a small HMO (a Class C4 House) is, as this is where an Article 4 Direction will apply. Under Section 254 of the Housing Act, 2004 and HMO is a house, lived in by more than 3 people who do not form a household but who share amenities. HMOs with more than 6 people fall into a different class and there are additional permissions that are required.
- Once a property has been re-designated as an HMO it can be used as a family home without the homeowner seeking permission to do so. However, once it has been a family home the homeowner must re-apply for planning to convert it back into an HMO.
- The strategy of taking a residential property in order to turn it into a small HMO is a much more difficult proposition than it once was. Approach with caution.
- For the student market, we recommend to our clients that they take a look at PBSA as an investment strategy. As local councils, universities and developers seek to meet the needs of the student population while turning away from the old HMO models, there is a lot of development in this area in our major cities. However, you need to consider supply and demand. In many places, there is simply not enough student accommodation but this certainly isn’t true everywhere.
- Make sure to consider individually (and the combined impact) of planning, licensing and tenant demand as all need independent consideration and you need to satisfy all three, failing to satisfy one of these will be problematic for your HMO and property aims.
What You Need To Do
If you are thinking about converting a property into a small HMO you will need to check the website for your local authority to see whether they have adopted the Article 4 Direction and do your research before you make any definite plans.