With the recent Queen’s Speech confirming it is the Government’s intention to introduce a ban on the fees that tenants pay when applying for a rental property, what does this actually mean for tenants and landlords here in Rotherham?

The private rental sector in Rotherham forms an important part of the Rotherham housing market and the engagement from the Government is a welcome sign that it is recognised as such.

I have long supported the regulation of lettings agents which will ensconce and cement best practice across the rental industry and I believe that measures to improve the situation of tenants should be introduced in a way that supports the growing professionalism of the sector.

Over the last few years, there has been an increasing number of regulations and legislation governing private renting and it is important that the role of qualified, well trained and regulated lettings agents is understood.

Great News for Rotherham Tenants

So, let’s look at tenants… this is great news for them, isn’t it?! Well before you all crack open the Prosecco, read this…

Although I can see prohibiting letting agent fees being welcomed by Rotherham tenants, at least in the short term, they won’t realise that it will rebound back on them.

First up, it will take between 12 and 24 months to ban fees, as consultation needs to take place, then it will take an Act of Parliament to implement the change. A prohibition on agent fees may preclude tenants from receiving an invoice at the start of the tenancy, but the unescapable outcome will be an increase in the proportion of costs which will be met by landlords, which in turn will be passed on to tenants through higher rents.

Published at the same time as the Autumn Statement in 2016, hidden in the Office for Budget Responsibility’s Economic and Fiscal Outlook on the Autumn Statement (provide independent and authoritative analysis of the UK’s public finances), it said on Wednesday:

“The Government has also announced its intention to ban additional fees charged by private letting agents. Specific details about timing and implementation remain outstanding, so we have not adjusted our forecast. Nevertheless, it is possible that a ban on fees would be passed through to higher private rents.

What can we learn from Scotland?

Scotland banned Letting Fees in 2012.

The charity Shelter have been a big voice in persuading and lobbying the Government since it managed to persuade the Scottish Parliament to ban fees in 2012. Shelter have been talking a lot across different media platforms about their independent research, which they said showed that:

“Renters, landlords and the industry as a whole [have] benefited from banning fees to renters in Scotland… any negative side-effects of clarifying the ban on fees to renters in Scotland have been minimal for letting agencies, landlords and renters, and the sector remains healthy.”

“Many industry insiders had predicted that abolishing fees would impact on rents for tenants, but our research show that this hasn’t been the case. The evidence showed that landlords in Scotland were no more likely to have increased rents since 2012 than landlords elsewhere in the UK. It found that where rents had risen more in Scotland than in other comparable parts of the UK in 2013, it was explained by economic factors and not related to the clarification of the law on letting fees”

However, the devil is in the detail:

Shelter have also used this same research to argue rents never went up following the tenant fee ban in at the end of 2012. I have read that research and I agree with that research, but it is now several years out of date and the research was undertaken only 12 months after the ban was put into place.

I find it strange they don’t seem to mention what has happened to rents in Scotland in 2014, 2015 and 2016… because that tells us a completely different story!

What really happened in Scotland to rents?

I have carried out my research up to the end of Q3 2016 and this is the evidence I have found.

In Scotland, rents have risen, according the CityLets Index by 15.3% between Q4 2012 and Q3 2016

(CityLets is the equivalent of Rightmove in Scotland – they have plenty of comparable evidence to back up their numbers).

When I compared the same time frame, using Office of National Statistics figures for the English Regions between 2012 and 2016, this is what has happened to rents

  • North East 2.17% increase
  • North West 2.43% increase
  • Yorkshire and The Humber 3.21% increase
  • East Midlands 5.92% increase
  • West Midlands 5.52% increase
  • East of England 7.07% increase
  • South West 5.82% increase
  • South East 8.26% increase
  • London 10.55% increase

But in Scotland it is far more… a 15.3% increase!

Have rents increased in Scotland

Are you really telling me the Scottish economy has outstripped London’s over the last 4 years? There’s no way that Scottish wages have risen that much! There has to be another reason for this growth.

So what will happen in the Rotherham rental market in the long term?

The lettings fee ban will not be introduced for another 12 to 18 months so it’s business as usual!

However, in the long term, rents will increase as the fees tenants have previously paid will be passed onto landlords in the coming few years. Not immediately… but this will happen.

As a responsible letting agent, I have a business to run.

According to ARLA (Association of Residential Letting Agents), it takes an average of 17 hours work by a letting agent to get a tenant into a property. We need to complete a whole host of checks prescribed by the Government. It’s an extensive list including:

  • A right to rent check,
  • Anti-money laundering checks,
  • Legionella risk assessments,
  • Gas safety checks,
  • Affordability checks,
  • Credit checks,
  • Smoke alarm checks,
  • Construction (Design & Management) Regulations 2007 checks,
  • Compliance with the Landlord and Tenant Act,
  • Registering the deposit so the tenants deposit is safe and
  • Carry out references to ensure the tenant has been a good tenant in previous rented properties.

The vast majority of lettings agents take these things very seriously. We are expected to know every check on the list inside out – we are the experts in our field. Yes, there are some awful agents who ruin the reputation for others, but isn’t that the case in most professions?

At the end of the day, business is business.

No landlord, no tenant and certainly no letting agent does work for free.

I, along with every other Rotherham letting agent will have to consider passing some of that cost onto my landlords in the future.

Now of course, landlords would also be able to offset higher letting charges against tax, but I  wouldn’t want them out of pocket, even after the extra tax relief.

So what does this all mean for the future?

The current application fee ranges between £60 and £225 per property for the tenant(s), depending on the rental level, meaning on average, the fee is around £90 per property.

I am part of a group of 500+ Letting Agents, and recently we had to poll to find the average length of tenancy in our respective agencies. The Government claim it is 4 years, whilst the actual figure was nearer one year and eleven months, so let’s round that up to two years.

That means and average of £90 needs to found in additional fees to the landlord, on average, every two years.

In 2005, the average rent of a Rotherham Property was £401 per month and today it is £468 per month, a rise of only 16.7% (against an inflation rate (RPI) of 38.5%).

Using the UK average management rates of 10%, this means the landlord will be paying £561 per annum in management fees.

If the landlord is expected to cover the cost of that additional £90 every two years, rents will only need to rise by an additional 1% a year after 2018, on top of what they have annually grown by in the last 5 years.

Even if rents increased by 2% in Rotherham, average rents would rise to £604 per month by 2022  (see the red line on the graph below) and so the landlord would pay £724 per annum in management fees… which would go towards covering the additional costs without having to raise the level of fees.Screenshot 2017-06-30 14.31.48

But surely that’s bad news for Rotherham tenants?

Actually, it’s quite the opposite.

Look at the graph!

If the average rent Rotherham tenants pay had risen in line with inflation since 2005, that £401 per month would have risen today to an average of £555 per month. Instead, that average is only £468 per month. Even if inflation remains at 2% per year for the next six years, the average rent would be £535 per month by 2022… meaning that even if landlords increase their rents to cover the costs tenants are still much better off, when we compare to the £535 per month figure to the £604 per month figure.

Conclusion

The banning of letting fees is good news for landlords, tenants and agents.

It removes the need for tenants to find lump sums of money when they move. That will mean tenants will have greater freedom to move home and still be better off in real terms compared to if rents had increased in line with inflation.

Landlords will be happy as their yield and return will increase with greater rents whilst not paying significantly more in fees to their lettings agency. Letting agents who used to charge fair application fees won’t be penalised as the rent rises will compensate them for any losses.

As for the agents who have been charging the silly high application fees… well, that’s their problem. At least I know I can offer the same (if not better!) service to both my landlords and tenants in the future in light of this announcement from Phillip Hammond.