Worcester landlords and tenants : what does the tenant fee banning order mean for you?

 

• Tenant fees set to be banned within 12 to 24 months
• Rents due to rise as those fees passed to Landlords
• Landlords won’t be worse off – and neither will tenants or agents

 

The recent Queen’s Speech, confirming it is the Government’s intention to introduce a ban on fees that tenants pay when applying for a rental property, raises the question ‘What does this actually mean for Worcester landlords and Worcester tenants?’

The private rented sector in Worcester forms an important part of the Worcester housing market and the intervention from the Government is a welcome sign that it is recognised as such. I have long supported the regulation of lettings agents to improve and cement better practice across the rental industry. I also 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 increase in the regulations and legislation governing private rental. It is important that the role of qualified, well trained and regulated lettings agents is understood.

Great news for Worcester 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 Worcester tenants, at least in the short term, they may not realise how it could rebound 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 prevent tenants from receiving an invoice at the start of the tenancy, but the inescapable outcome will be an increase in the proportion of costs to be met by landlords, which in turn will be passed on to tenants through higher rents.

 

The charity Shelter and Scotland

Scotland banned Letting Fees in 2012. The charity Shelter have been an influential voice in persuading and lobbying the Government since it managed to persuade the Scottish Parliament to ban fees in 2012. On all the TV and radio shows, at the moment, they keep talking about their Independent Research, which they said showed that,

“renters, landlords and the industry as a whole had benefited from banning fees to renters in Scotland. It found that 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.”

 

Going on,

“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”

 

Yet the devil is in the detail….

In April, Shelter were quoting research from December 2013 to say rents never went up following the tenant fee ban in Q4 2012. Having read that research I agree with it, however it was published three years ago, 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 to the CityLets* Index,

by 15.3% between Q4 2012 and Q3 2016

(*CityLets are the equivalent of Rightmove North of the Border – so they know their onions and have plenty of comparable evidence to back up their numbers).

When I compare 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

….and let me remind you about Scotland … 15.3% increase.

 

Are you really telling me the Scottish economy has outstripped London’s over the last 4 years? Is anyone suggesting Scottish wages and the Scottish Economy have boomed to such an extent in the last 4 years they are now the powerhouse of the UK? If they had, Nicola Sturgeon would have driven down the A1, in a flash, demanding immediate Independence.

 

So what will happen in the Worcester rental market in the short term?

Well nothing will happen in the next 12 to 18 months … it’s business as usual!

… and the long term?

Rents will increase. The fees previously paid by tenants will be passed on to Landlords in the coming few years. Not immediately … but they will.

As a responsible letting agent, I have a business to run. According to ARLA, (Association of Residential Letting Agents) it takes on average, 17 hours work, by a letting agent, to

complete the formalities necessary to get a tenant into a property. We need to complete a whole host of checks prescribed by the Government; 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 that 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 all of this very seriously, and are expected to know the detail inside out, making us the experts in our field. Yes, of course, there are some awful agents who ruin the reputation for others, but isn’t that the case in most professions?

No landlord or tenant and certainly no letting agent works for free; business is business.

Along with every other Worcester letting agent Nicol & Co have to consider passing some of that cost onto landlords in the future. Whilst Landlords will be able to offset higher letting charges against tax, like them no doubt, I wouldn’t want them out of pocket, even after the extra tax relief.

So what does all this mean for the future?

The current application fee for a single person at my lettings agency is £210 and for a couple £420, meaning on average, the fee is around £300 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 says its 4 years, whilst the actual figure was nearer one year and eleven months, so let’s round that up to two years.

That means £300 would need to be found through additional fees to the landlord, on average, every two years.

 

In actual pound notes

In 2005, the average rent for a Worcester property was £518 per month and today it is £593 per month, a rise of only 14.5% (against an increase in (RPI) of 38.5%).

Using the UK average management fee rate of 10%, this means a Worcester landlord will be paying £712 per annum in management fees.

If the landlord is expected to cover the cost of that additional £300 every two years, rents will only need to be increased by an additional 2% a year, after 2018, assuming the same annual growth as the last 5 years.

So, if that were to happen in Worcester, average rents would rise to £701 per month by 2022 (see the white line on the graph) and the landlord would pay £841 per annum in management fees… which would go towards covering the additional costs without having to raise the level of fees.

 

… but is that bad news for Worcester tenants?

Quite the opposite. (Look at the green line on the graph). If the average rent that Worcester tenants pay had risen in line with inflation since 2005, that £518 per month would have risen to an average of £726 per month. If inflation remains at 2% per year for the next six years, the average rent would be £780 per month by 2022.

So remembering, the average today is only £593 per month, even if landlords increase their rents to cover the costs tenants are still much better off when we compare the £701 per month to the £780 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, assuming rents had otherwise increased in line with inflation.

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

So in the light of the announcement in the Queen’s speech what does the future look like? The agents that charged the silly high application fees are the ones that will have a problem. We at Nicol & Co shall be able to offer you, our valued customers, both landlords and tenants, the same if not better service.