The first quarter of 2019 has been a challenging one for the property market with reduced levels of sales transactions and much “grinding of teeth” and indecision due to Brexit and, in the lettings market, several new pieces of legislation for agents to contend with.
The lettings sector saw two new pieces of legislation become law on April 1st. The Fitness for Human Habitation Act and a requirement for all letting agents holding and controlling client money, to have in place Client Money Protection. In addition, the much heralded Tenant Fee Act will come into effect on June 1st and will remove the ability of agents to charge tenants or prospective tenants any fees or charges as part of their tenancy or tenancy set up – with the exception of rent, a tenancy deposit and payments for arrears, changes of tenants during a tenancy and things like lost keys.
The Fitness for Human Habitation Act will require all property within the private rental sector to meet certain minimum standards across 29 aspects. My recommendation is that agents should ensure that these 29 aspects are incorporated within property inventories going forward in order that any shortcomings can be identified and rectified. Whilst the majority of property being let via agents is unlikely to fall foul of this legislation as it will largely be “rogue” landlords who are profiteering and they are unlikely to be using professional services, there may be commercial opportunities for letting agents to advise and provide services to help mitigate and remove risk.
Mandatory Client Money Protection (CMP) is obviously a good thing for consumers. Unfortunately, there are lots of horror stories of “rogue” letting agents who have had their “fingers in the till” and used client money for their own purposes. Client money protection will, at least, compensate a consumer for any loss from such circumstances in the future.
The big issue in the short term will be ensuring that all letting agents are part of a scheme and do have the appropriate separate client accounting arrangements in place. All agents already have to be a member of a redress scheme for consumers and ongoing membership will require proof of CMP. Hopefully enforcement will be robust but I fear we will continue to see, for some time, some agents go “under the radar” and some may be forced out of business by not being able to meet the client accounting requirements even if they want to. This could potentially therefore see the mandatory introduction of CMP create some situations where greater risk is actually created outside the protection of a scheme. Consumers are urged to ensure that their agent has CMP protection. Of course ,it might also provide opportunities for letting agents to acquire portfolios from those who are unable to meet CMP requirements – due diligence would, of course, need to be robust.
The effect of the tenant fee ban on the market will potentially be the most dramatic. Many agents have, in recent years been growing their businesses on the basis of charging lower fees to landlords and making up their revenues through charges to tenants. It is estimated that the average letting agent will lose around 15% of annual turnover with some losing as much as 30%.
Agents only have three realistic ways of mitigating this situation.
1 Charge landlords higher fees. This is inevitable and we are likely to see a growing array of “menu” pricing of services with aspects that agents may have previously been including within headline fees, become chargeable as part of an “a la carte” approach.
2 Become more productive and efficient to save costs. Better training and better use of technology will undoubtedly be at the fore. Outsourcing of various service aspects may also work well for many.
3 Sell additional products and services. I expect to see a growing range of insurance and peace of mind products being more effectively sold. Deposit replacement insurance is likely to be a significant way forward enabling tenants to pay circa one weeks rent instead of five or six weeks rent by way of a tied-up deposit. In the longer term this arrangement is likely to identify bad tenants more easily and also release some of the £4bn plus currently held in deposit schemes back into the economy.
With costs likely to rise to landlords there will be growing pressure on raising rents. It is likely that we will see an increase in rents over the coming months although this will be tempered by affordability and local supply and demand. Of course, the irony of tenants saving on fees but potentially ending up paying higher rents will not be lost on anyone and it remains to be seen how this eventually plays out.
Despite a lot of change, the lettings market remains reasonably buoyant although is no longer growing as a sector. Recent Government policy has hit landlords (reducing levels of tax relief, higher acquisition costs, increased safety and energy efficiency requirements) and has been aimed at creating greater opportunities for first time buyers to purchase rather than rent. Reductions in stamp duty and, on new homes, Help to Buy, have undoubtedly created an environment which has seen greater numbers of first-time buyers enter the market.
I have written before about Help to Buy, which is as much a sop to developers as it is to buyers and I do have fears that we could be storing up future issues of negative equity if house prices continue on a downward trend and buyers are effectively borrowing at very high loan to value levels.
The sales market is not immune from tightening legislation and regulation. Following concerns over the low numbers of suspicious activity reports being filed by estate agents under Money Laundering Regulations, the Government launched its “Flag it Up” campaign in an attempt to get agents to treat compliance in a more robust fashion. This was reinforced by HMRC, who supervise the sector, announcing that they had levied a penalty of £215,000 on Countrywide and just shy of £70,000 on the now defunct online agent Tepilo.
HMRC have also just announced an increase in their annual supervision registration fee for estate agents. The increased revenues this will produce will be allocated to additional resources being deployed in policing and supervising the estate agency sector.
The sales market is undoubtedly challenging at the moment and the indecision and lack of clarity over Brexit is impacting on people taking decisions. This lack of urgency is resulting in a significant drop in the number of transactions. If, in the coming weeks, we can finally secure greater clarity over Brexit we may see an increase in confidence and an immediate uplift in transactional numbers. As I write however this looks like a big “if.”
In conclusion, it is a challenging market place. There are still transactions being made between those who are motivated to move and agents need to work harder on ensuring that they are informing clients and customers sensibly about the market and are proactively using the positives to overcome the general “malaise” caused by endless division and indecision over our future with the EU.
Michael S Day MBA FRICS FNAEA FARLA