My family and I have lived in the same village for 25 years and in that time the high street has changed beyond recognition. When we moved here we had a butcher, a baker and a greengrocer, but all have closed down, replaced by a convenience store owned by one of the big four supermarkets. The last food shop to go was the fishmonger, driven out by the suffocating bureaucracy of the hygiene regulations.
The family-owned hardware store is now part of a chain and so is the hairdresser. The vet was bought out by a private equity firm so was the dentist. Even the undertaker was bought out by a major PLC although thy still trade under their old name and try to pretend to be independent. Now our lovely local pub has gone. The landlord blames the smoking ban, the increase in business rates and the rise in the minimum wage. Just one independent business still survives in our high street now and that is the local estate agent. Sadly I cannot see him surviving on his own for much longer.
Five years ago a typical independent lettings agency had a 20-30% margin after salaries. Now it’s 15-20%.
The consolidation of supermarkets, dentists, vets and other businesses has changed our high street forever and it seems inevitable that the same forces will have an impact on estate agents and more particularly, letting agents. The bureaucracy associated with running a small letting business is becoming ever more onerous and business owners are finding it ever more difficult to cope. There are 153 different regulations to be complied with before a property is let and the smallest mistake can trigger a huge fine for the agent the landlord or both. The big firms have compliance departments to deal with it all but the independents have to do it all themselves.
AND MORE BAD NEWS
New regulations will increase the burden. For example client money protection is much needed but it will take time to implement. Compulsory training sounds like a great idea but how will small business owners find the time and money to do it and will the skills taught have any impact on the bottom line?
In addition to the industry specific legislation the burden of general regulations is getting heavier and heavier. GDPR, HR, VAT, health and safety, money laundering – so many things to keep up with that many small businesses feel as if they must make a face a choice between complying with all the regulations and earing a living because they simply can’t do both. Business owners say they love being an estate agent but want to sell their businesses because they cannot cope with the regulatory burden. As if this wasn’t enough the economics of the letting industry are also rapidly changing. Changes in the taxation of landlords has caused many to consider selling up and uncertainty about Brexit , the additional 3 per cent stamp duty and worries about the economy means that new landlords are not replacing them. This means that income and profit margins are declining. Five years ago a typical independent letting agency was making a margin of 20 to 30 per cent after paying a commercial salary to everyone who works in the business. Now 15 to 20 per cent is more usual.
THE LAST STRAW
The final straw may be the tenant fees ban. The typical agent earns 10 to 12 per cent of their fee income from tenant fees. Unless these agents are able to find the selling skills necessary to pass these costs on to landlords their remaining profit will shrink to almost nothing.
The large letting agents are able to look at things in an entirely different way. If a large firm buys a smaller one and moves the business to their offices then the profit margin on the additional income will be huge. They have no premises costs, no marketing costs, central accounting, central compliance economies of scale with tenancy administration and property management. Taking all this into account their profit margin will often be 40 or even 50 per cent. This means that they can afford to pay a good price to buy in a letting book. The typical proprietor of a small to medium letting business may now find that they need to work for around 10 years to earn after tax what they could earn by selling their business now. This is why so many are deciding to do so.
My prediction is that in 10 years’ time the letting industry will have gone the way of the supermarkets where a dozen huge firms dominate the sector. The jury is out on whether this will be a good thing for landlords and tenants but like it or not consolidation of the sector now seems inevitable.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for over 25 years.