When my company, The Property Franchise Group, presented our 2017 results to the city, we also took the opportunity to update investors on the impact a tenant fee ban would have on our group. The impact over a full year would see a loss of revenue of £10m.
With an expected implementation date roughly a year away and other “mitigation” work we are doing with our franchisees, we are hopeful that this will reduce down.
However, let’s take that £10m full year figure and do some maths.
We manage around 52,000 properties across 280 traditional brand letting agents. The Government impact assessment reckons that there are 16,000 letting agents in the UK.
So our Group represents 1.75% of the total, and multiplying our “lost” £10m gives a total loss of revenue for the industry, in a full year, of £570m against the Government’s peak assessment of £273.9m.
Either we are unusually efficient at charging tenant fees or the impact assessment woefully underestimates the scale of the losses.
Secondly, at the profit level the impact could be even worse. In my experience the small to medium sized letting agent operates on sub-30% profit margins. So removing 10-15% of revenue could mean a third to a half less profit.
Where can agents find alternative sources of profit? Well, not by charging an insurance premium to a tenant for a “deposit replacement” or “nil deposit” scheme on which the insurer will pay commission.
It’s now clear the Government intends to limit agents to only charging rent and a deposit (which might be extended to include a deposit proxy), with all other tenant charging being tightly defined and restricted.
We recently obtained fresh advice on the position in Scotland (where there has been a tenant fee ban since 2012) and were advised that whilst offering a tenant an alternative to paying a deposit may not fall foul of the law (but is untested in court), it would be completely illegal for the agent to benefit from any commission. Do we really think that the English Parliamentary draftsmen will allow us a loop-hole?
Some of these “deposit replacement” schemes rely on the tenant paying a monthly additional premium throughout the term of their tenancy. What is best advice to the poor landlord now that we know the Government’s intentions? What would happen if the insurance premium is ruled illegal and no physical cash deposit is being held by the agent?
Finally, in my opinion there is only one “silver bullet” now that we see there is complete cross-party support for a tenant fee ban, and that is for agents to acquire their competitors’ managed portfolios and scale up their property management departments.
Commission from management portfolios is recurring and contractually locked, and the profit margins on big management businesses rise with their scale.
- Ian Wilson is chief executive of The Property Franchise Group whose brands include Martin & Co