What happens after the tenant fees ban?

If ever there was a year of reckoning for the letting agency market, this is it. The full ramifications of the tenant fees ban will be seen in June but the proposed legislation is fairly clear and we know already this is going to drastically alter the current charging structure for agents.

The change was underlined in December when the announcement to reduce the maximum security deposit from six weeks to five was made. If that were not enough, the industry is faced with the adoption of an incoming code of practice and increased regulation. Not before time, some will say.

Elsewhere in the industry, there are other factors at play. The number of landlords is falling as a result of increased stamp duty on additional residential property purchases and the reduction of mortgage interest as an allowable expense. Figures from UK Finance show a 12% drop in landlord purchases in 2018 alone. It is no wonder that Fixflo reported recently that many agents who predict a material drop in their income are planning to leave the sector.

It’s not all doom and gloom

There are over five million households, or 21% of the property market, that are privately rented according to PwC. This figure is set to rise to 24% by 2021.

Analysis of the official English Housing Survey by Labour found that over 1.7 million renters believe that they will never own their home because of low wages and rising rents, and research from Countrywide showed that the amount paid in rent across the UK has grown dramatically in the past decade and exceeded £50bn in 2018.[/box]

If they haven’t already, now is the time for letting agents to seriously review their businesses and carry out a detailed analysis of how market changes will impact their income – no matter how painful it might be.

What is clear, is that finding new revenue streams, new ways to attract custom and positively standing out from the crowd, are all going to be key in such an uncertain environment. However, as with all changing markets, there are opportunities.

Some agents have put in place sophisticated responses to the fees ban, which include offering a range of additional products and services to both tenants and landlords. The commission earned from these services will help replace lost revenue, and in some cases, some interesting side-benefits are emerging.

Oakfield, a Sussex estate agent, recently reported that they were getting as much as 26% more interest in rental properties with deposit replacement available. Deposit replacement schemes enable renters to reduce the upfront cost of renting, enjoy the interest accruing during their tenancy, and avoid borrowing.

Instead, the tenant pays a fraction of the deposit (a week in our case) before they move in. Clearly, tenants are placing significant value on agents that are able to find ways to put the pounds back in their pocket, and the best schemes have end-of-tenancy claims processes that mirror the current cash deposit regime, so landlords don’t lose out if they have a fair claim.

The benefit of deposit replacement goes way beyond the money. A by-product of the process is that it brings all the protagonists in the rental transaction closer together. Tenants are happy because they have more money than they otherwise would have done.

Agents are happy because properties offered with deposit replacement are a more attractive option and help get tenants into properties quicker, and landlords are happy because security and peace of mind is not compromised. It is rare that a new product comes along that so clearly benefits all parties.

Of course, there is a note of caution to all of this.

Markets for financial products have been created in the past that have been unchecked and led to horrendous consequences, like PPI. As FinTech and InsurTech businesses like ours move to solve the growing problems of tenant affordability, it is our view that they should do so under the regulation of the FCA.

It troubles us that there are providers emerging in the deposit protection market that do not have the protections of FCA regulation. In some cases, this fact is not being made clear and there is a real risk that agents and customers could be misled if they believe that these unregulated products carry the same protection as a regulated product, which they do not.

We hope that as the letting agency market responds to the opportunity, that all agents think about the potential implications should any non-regulated provider fail and potentially leave their landlords with no protection.

As with any changing market, there will be winners and losers. However, one thing is for sure; the winners will be the agents open to embracing change and finding innovative ways to seize opportunities in the new normal.

Jon Notley is Co-founder and CEO of Zero Deposit.

Read more: Adam Walker’s take on the tenant fees ban.