There is a perfect storm brewing in the lettings market, and as the saying goes, “you can’t change the direction of the wind, but you can adjust your sails”.
Not only do letting agents have the upcoming Tenant Fees Bill to contend with, but there will likely be fewer landlords and more corporate Build to Rent developers who find their own tenants and handle all ongoing property management.
These are undoubtedly the three biggest challenges to overcome in 2019, yet, it seems many letting agents are still in denial and failing to assess and rework their business plans.
With the dawn of the New Year just weeks away, it’s time for business owners to decide if they are going to sink or swim.
1. Tenant fee ban
Still expected to come into force around April 2019, the tenant fee ban could wipe out some letting agents’ profits entirely. A recent report from Fixflo revealed that almost half of agents (48%) are considering quitting the marketing altogether, while 49.6% predict they will lose between 10% and 30% of their revenue.
In contrast, a report titled ‘The State of The Property Nation’ from Zoopla paints a more optimistic picture. A survey of 660 estate and letting agents found that only two fifths of letting agents expect revenue to decrease, with 56% saying they think revenue will stay the same or rise. In addition, agents are generally confident that revenue will grow from property management.
This positive outlook is great to hear, but only if it can be backed up with evidence that action is being taken to cut costs, increase income streams and improve service offerings.
In our experience, many letting agents don’t even have a business plan or haven’t reviewed their existing one for some time. This suggests that income and expenditure forecasts haven’t been calculated, and therefore such confidence may be misguided.
2. Less landlords
It’s not just the lettings industry that has fallen victim to increasing government legislation. Private buy-to-let investors have been dealt a series of blows over the last couple of years too - namely the extra 3% Stamp Duty to be paid on additional residential property purchases and the reduction of mortgage interest as an allowable expense (Section 24 of the Finance Act 2015).
This means that their profit margins are being squeezed as well, to the point where one in five are planning on selling their rental properties, according to the National Landlords Association (NLA).
Figures from UK Finance also show a 12% drop in landlord purchases in the last year alone, suggesting there have been fewer new entries to the market or existing landlords growing their portfolios.
This represents a triple whammy for letting agents – less new landlords to win business from, fewer landlords bringing new properties on board and those who are left wanting to pay less for property management or take it on themselves.
3. Rise of Build to Rent
Last year, 72% of attendees at the ARLA Propertymark conference in March said Build to Rent was their biggest concern. There’s no new data to confirm whether this remains on the list for 2019, but it certainly should.
With developers and institutional investors being responsible for the design, build, tenancy and long-term management of multiple rental units, the opportunity is taken away from letting agents – especially independent and single-branch agents.
Such purpose-built schemes are promising a more streamlined and highly quality renting service for tenants from a large and ‘capable’ organisation. Things like on-site coffee shops and Amazon delivery points, well-maintained communal spaces and 24/7 access to a property management will become the norm.
The reality, however, is that these models, based very much on enhancing the rental experience like on complexes in the U.S., will come with a premium and struggle to take off outside of London or large cities. It will also take time before we’re even seeing numbers that will rival the private rented sector.
With great change comes great opportunity
The key to overcoming any challenge is to face it head on. Letting agents need to take the time to seriously review their business and how it operates now and carry out a detailed financial analysis of how market changes will realistically impact their income – no matter how painful it might be. Only then will they have a true ‘gap analysis’.
It is then a case of looking at ways you can cut costs while increasing income streams. This may involve considering outsourcing, investing in PropTech and introducing new and improved services so you can increase your fees – think ancillary services, referral schemes, partnering with smaller Build to Rent developers and premium landlord packages, for example.
There will unfortunately be casualties over the coming year, but if you can survive and weather the storm, there will be a bigger market share of business up for the taking, and you will be in the perfect position to thrive.
*Simon Duce is Managing Director of the ARPM Group, which provides national outsourced lettings support