A regulation change that is due to be discussed in parliament early this year is raising some serious concerns across the UK’s buy-to-let property investment community.
In the 2016 Autumn Statement, the government referred to banning letting agency fees, which would mean that letting agents could still demand deposits and rent, but nothing else from tenants. Despite there being no certainty about how these changes will come into effect, the possibility has sent shockwaves through the property investment world and if legislation is amended there will be huge repercussions across the industry. But what are these repercussions likely to be?
Reasons behind the proposal
There is a belief among the voting public that tenancy fees are too high, and while some of them may be, there has been an inordinate amount of pressure applied by certain groups urging the government to review the current system.
Those in favour of the ban suggest that some unscrupulous letting agents have set up a “cottage industry” for themselves by overcharging tenants for references, credit checks, etc. In other instances, these letting agents might be charging tenants for fees that have already theoretically been charged to the landlord. The problem is that the clear majority of letting agents almost certainly charge solely for costs incurred to them, and a blanket ban of tenancy fees would penalise ethical letting agents who simply want to cover their own costs.
The average tenancy fees charged in the UK differ depending on who you ask. The Association of Residential Letting Agents put the average cost at £202, Citizens’ Advice claims the average cost is closer to £337 but can go up to £700, while Shelter said fees can reach £500. Such conflicting figures make it difficult to say whether tenants are truly being taken for a ride or not, but the government apparently believes that there is a large enough issue here to step in with the aim of eradicating unfair charges.
Changes since Scotland’s ban
Tenancy fees were banned in Scotland in 2012, and this saw a hike in rent across the country immediately following the change. When Shelter carried out research into rent across Scotland a year later in 2013, the charity found that only 2% of the country’s landlords had raised their rents specifically because of the ban, and the most common reason for the hike is likely to have been a response to tax changes during this time rather than being specifically due to the banning of tenant’s fees. However, as the years have gone on, there is little doubt that buy-to-let rents North of the English border have risen considerably, with 17 out of 18 areas in Scotland seeing average rents rise between 2015-16.
Despite the ban on tenancy fees in Scotland, the Office for National Statistics states that English rents rose faster than those in Scotland between 2012 and 2016, with English tenants facing a 9% rent increase over the last four years compared to a 5% rent rise in Scotland. The question is, will this trend accelerate even further, in response to the proposed tenancy fee regulations?
What will happen in England if the tenant fees ban goes through?
The devil is in the detail when it comes to regulation changes, so it is always best to wait and see what the actual rules are, if and when they change. Some sections of the government have already hinted that what at first seems to be a hard-and-fast ruling may in fact be watered down, with caveats allowing for tenancy fees so long as they accurately reflect the costs incurred.
If letting agents will be able to charge rent and nothing else, they will still have to pay fees for tenancy renewal, references, admin costs, etc, and the market will of course react. Working as a letting agent is a business, and unless it is profitable then people simply won’t do it. The number of people offering the service will likely reduce until the profit to be made rises to a level at which it becomes an attractive business prospect again. Other than this, the immediate change will probably take the form of raised rents, creating a boomerang effect that will hit tenants harder than it will letting agents or landlords in the long term.
I believe that most companies will comply with such an act, despite it potentially being difficult to police, but they are likely to strive to make that money back in other ways. In Scotland, there are perfectly legal mechanisms that letting agents use to make up for the fact that they can no longer charge tenancy fees, so property investors across the rest of the UK may be wise to begin researching these.
While the legislation is still only being discussed, we are already seeing online letting agents emerging whose USP is charging lower fees than the average high street letting agent. As with any industry development, there will always be companies and entrepreneurs spotting opportunities and disrupting the landscape, and while there may be industry-wide changes immediately following the emergence of any new regulation, the sheer health of the UK economy means that most property investors will eventually flourish rather than falter.
For now, I recommend that letting agents and investors keep a cool head and wait and see the full details to emerge, before jumping the gun and assuming that disaster and slashed profits lie ahead.
What do you think of the proposed change? Do you think it will come into effect? How would this affect your business, and how do you think the industry will respond?
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