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Truth at last: What really happened in Scotland after letting agent fees were banned

NES NS

What follow is an opinion piece but I believe it to be the factual truth.

It was a Sunday evening – August 26, 2012 – when the Scottish Government confirmed that all charges (called premiums in the legislation) levied on tenants are illegal and must cease immediately.

Up to that point there had been ongoing negotiations between private landlord and letting agent representative organisations with the Scottish Government about imposing a cap on tenants’ charges rather than a total ban.

This proposal was eventually discounted and the total ban on tenants’ charges came into effect – a big mistake really!

Since then, jobs have been lost – the ban has been called ‘empty desk syndrome’ and rents have risen. Agents have gone out of business, as have providers such as inventory firms.

I forecast the same – but 15 times worse – will happen in England.

Industry fragmentation

The letting industry in Scotland is made up of approximately 800/900 SME businesses with private landlords in addition and separate from that figure.

Nearly all letting agents are self-starters with the majority of offices being individual and in direct competition with each other, so consequently all letting agents came up separately with their own particular plan for dealing with the immediate income reduction – they had no choice really!

It was this entrepreneurial spirit that meant letting agents ended up successfully coming to terms with this income reduction on an individual basis, each office coming to their own solution.

This meant looking at their profits and losses, and identifying where they could save money and increase their charges. This inevitably resulted in increased charges to their clients, staff losses and increased rents.

It was this individuality and industry fragmentation that has hidden the true cost of losing the income from tenants’ fees.

Industry internal effects

The initial effect, after offices got to grips with the reduction in budgets, was that the casual employees – property viewers and inventory staff – were not given any more work, with property managers, directors and owners taking back that work.

Also, after a few months empty desks appeared in some offices as staff became casualties of the fees ban. These desks were completely clear – no phone and no PC. In reality, the position has gone permanently.

And some offices downgraded their premises at the next lease break point to save some substantial costs.

Industry external effects

The major income into letting agents was now coming from landlords, and all offices realised that you can only squeeze so much out of a single income area.

This decrease of income into letting agents has come at the same time where there are more property checks required as statutory.

In addition to the gas safety check, agents also have to conduct an electrical check and Legionnaires check. Plus in addition to the EPC, agents at present have to produce a Tenants Information Pack

And for tenant referencing – still seen as an important part of the tenant assessment process – agents now had four choices:

Do it yourself;

Pay for referencing yourself;

Charge to landlords;

Ask tenants to provide a third party reference.

Agents throughout Scotland selected a mixture of these choices.

One immediate effect of the fees ban was that rents increased from January 2013 to January 2014 (the period immediately following the fees ban) by 4.3%, where they had been relatively static for the previous 12 months. [Source: LSL Property Services & UKtenandata]

Industry rental effects

This increase meant that, on an average rental of £550, the tenants were paying an extra £24 per month equating to an extra £288 yearly, with the average charge of tenants fees before the ban having been £80 to £100 per tenancy.

And this upward trend in rentals is continuing with average rental prices have growing faster in Scotland even than in London during the last 12 months, UKtenantdata has discovered.

The cost of renting a property has increased by 0.9%, to £671 a month for new tenants in Scotland since April last year while existing tenants renewing their lease have seen their rent shoot up by 6.1% year-on-year to £598.

Meanwhile in central London, new tenants and existing tenants have seen their monthly rent rise by 0.8% and 1.6% respectively.[source: Countrywide]

So, despite what outside organisations such as Shelter say, the effects of that single decision for the Scottish lettings market have been far reaching – even extending to today’s market.

As indicated previously, due to the fragmentation of the lettings industry, the actual effects were hidden as individual offices tackled the income problem in their own way and to suit their own business model.

Shot in the foot!

Landlords have exited the market due to increased cost, resulting in a decline in available private rental housing with this placing direct pressure on the already week social housing sector.

The Scottish Government clearly hasn’t thought through the implications of the banning of fees and has pandered to the lobbyist, namely Shelter which in my opinion has provided completely inaccurate fictional figures on rent increases post-fee ban.

So what for the English market?

What we have seen in Scotland post fee ban will be amplified 15-fold in England.

The effect will be the same, rents will rise, landlords will exit the market, agents will cut their cloth and all the associated third party support services, i.e. inventories providers and property inspectors will all but disappear.

What’s the answer?

In Scotland, agents and landlords alike entered into meaningful discussions on capping fees.

These ended abruptly, and resulted in a complete ban on fees being charged.

Had the Scottish Government implemented a solution that was fair for all, i.e. a cap on fees, I believe the picture today would be much different, with lower rent increases and more landlords staying in the market and even expanding their portfolios.

A message for the English government

Look to Scotland for the real acid test of what really happened post-fee ban.

If you don’t, the negative effects of your decision will be around in perpetuity.

Don’t pander to aggressive left wing lobbyist, look at the facts and act upon them.

You need the Private Rental Sector, and your tax paying entrepreneurial English landlords can make the sector flourish given the chance.

Don’t create a self-engineered paradox of “We need more housing” when you are on the cusp of destroying it.

An open invitation to Shelter Scotland and England

UKtenantdata would like to formally invite the representatives of Shelter in both Scotland and England to evaluate our rental data for Scotland for the last five years, and we would welcome your comments on the findings.

Mitchell Thomson is business development manager (Scotland) at referencing firm UKtenantdata. He has worked in the tenancy screening industry for over a decade, and says he pretty much knows every letting agency in Scotland personally. He tells us he wrote this article for EYE because he was tired of the fiction being pedalled. He also says that it is a commonly held view by agents in Scotland that the government has no understanding of the sector and seems hell-bent on destroying it

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Source:: Truth at last: What really happened in Scotland after letting agent fees were banned