One headline from the Queen’s Speech in June was confirmation of the government’s intention to ban letting agents from charging a fee to tenants in England. Welcomed in some quarters but met with anger in others: what will the impact be on the property sector?
Letting Agents Fees Ban: What Happens Now?
Currently, letting agents charge private tenants for a range of services related to the lease of their property. These can include credit/reference checks, reserving/holding a property, inventory, contract negotiations/amendments, administration and tenancy renewals. Charging tenants fees for these tasks is perfectly legitimate but often contentious. Some agents’ fees seem excessive, lack transparency (not directly related to costs) and vary significantly across agents. The current situation means that agents could double charge both landlords and tenants, even though the landlord is the agent’s primary client. Tenants also have no say or choice in the fees if they want to secure a particular property. Plus they have to get together large sums of money up front at the start of a tenancy.
The Tenants’ Fees Bill: What Does It Mean?
The new Tenants’ Fees Bill will mean private tenants will no longer have to pay money to agents for these services. Fees average £223 (higher in London) according to government figures. The new bill will also enable tenants to recover any fees that have been charged unlawfully.
When Will It Come Into Force?
A draft bill will be published “later this year” according to a government spokesperson.
The Impact On Letting Agents
“A ban on letting agent fees will cost the sector jobs, make buy-to-let investment even less attractive, and ultimately result in the costs being passed on to tenants,” said David Cox, ARLA Propertymark’s chief executive via BBC News.
If the government introduces a full fees ban, then obviously letting agents’ revenues will be hardest hit. Tenants’ fees are estimated to make up 15% of most agents’ income. Even taking into account some profiteering by some agents, certain costs are genuine and agents will need to accounted for these somewhere down the line.
One solution could be for agents to pass the costs straight onto the landlords. They inevitably may pass the cost on to tenants by charging higher rents. But simply passing this on to landlords would not be a popular move, particularly in such a competitive market. Tenants would still have to pay and ironically, the fees will be even less transparent as they would be absorbed into the rent. If agents are not able to pass costs on, then they will need to absorb these costs themselves. Agents will have to find other ways of making their money. They will need to re-work their business models and significantly cut down on their administrative costs where possible. In particular, smaller agencies unable to share costs across branch offices will need to adapt, or see their profit margins slashed. However, online agencies with lower overheads could prosper.
The Impact On Landlords
With letting agents losing this valuable revenue stream, landlords are waiting to see how agents will react. Will they pass the costs on, or won’t they? According to ARLA Propertymark: “landlords would lose £300m as a result of the ban and would be likely to increase rents” (source: Simply Business).
There is a precedent; in Scotland when parliament introduced a similar law in 2012. But here, evidence has been inconclusive. Has the ban inflated rents, or have other economic factors have come into play? Residential landlords are already facing the Stamp Duty surcharge on second homes and changes to tax relief. The savvier ones will shop around for agents who offer lower fees. This will encourage more competition overall and could have the knock-on effect of helping to bring down fees for landlords.
How Business Forecasting Can Help
Whether you’re in favour of the ban or not, there’s no doubt that the change in legislation will create new challenges for both letting agents and buy-to-let owners. However, the overall outlook for residential property lettings remains bright.
There’s little landlords can do about the proposed law or the uncertainty surrounding the reactions of letting agents. But there are always ways to manage your rental finances more effectively and reduce the impact on your bottom line. Please see our blog with 9 tax planning tips for landlords.
The other thing you can do is to prepare for all eventualities through business forecasting. Working together with several of our clients using Futrli, we have helped small businesses plan and forecast for a variety of future scenarios. Futrli is an all-in-one forecasting and reporting tool which uses real-time data and both general and sector specific KPIs to help them future proof their businesses.
Working with an accountant, Futrli enables property business owners to:
- Create forecasts for up to ten years either from scratch or based on historical business trends.
- Generate detailed cash flow forecasts in seconds over a custom period.
- Monitor business performance by combining actual versus budget on live dashboards.
- Model accurately with automated sales tax, creditor, debtor and cash calculations, custom payment terms and split payments.
- Plan business expansion or model business start-up using flexible forecasting methods
- Receive custom notifications for major changes in business performance with financial, non-financial, KPI and predictive alerts.
Futrli, combined with the advice of a specialist property accountant, enables businesses to be on top of their current financial situation against budget at any point. So property business owners can have the confidence to plan for the future and make more informed decisions, whatever changes the law brings.
If you’d like help or advice on reducing your tax bill or forecasting using Futrli, please get in touch with us. We work with a number of clients in the property sector and would love to help!