tenant fees ban

What Does the Tenant Fees Ban Mean for Colchester Landlords and Tenants?

The new Chancellor of the Exchequer revealed a tenant fees ban in his first Autumn Statement on Wednesday 23rd November 2016. What does this actually mean for Colchester tenants and Colchester landlords?

  • Tenant fees ban to be introduced within 12 to 18 months
  • Rents due to rise as those fees passed to landlords
  • Landlords won’t be worse off and neither will tenants or agents!

The private rental sector in Colchester forms an important part of the Colchester housing market and the engagement from the chancellor in Wednesday’s Autumn Statement is a welcome sign that it is recognised as such. I have long supported the regulation of lettings agents which will help ensure best practice is followed across the rental industry. I believe measures to improve the situation for tenants should be introduced in a way that supports the growing professionalism of the sector. Over the last few years, there has been an increasing number of regulations and legislation governing private renting and it is important the role of qualified, well trained and regulated lettings agents, is understood.

Tenant Fee Ban – Great News for Colchester Tenants

So, let’s look at tenants – the tenant fee ban is great news for them, isn’t it?  Well before you all crack open the Prosecco, read on. Banning letting agent fees is news Colchester tenants will surely welcome but what they may not realise is that it will probably rebound back on them.

Consultation to introduce the tenant fees ban will take between 12 and 18 months after which it will need an Act of Parliament to implement the change. A tenant fees ban may well mean tenants won’t receive an invoice at the start of their tenancy, but the inescapable outcome will be an increase in the proportion of costs which will be met by landlords and that, in turn, will be passed on to tenants through higher rents.

As the same time the Autumn Statement was being presented the Office for Budget Responsibility (created by Government in 2010 to provide independent and authoritative analysis of the UK’s public finances) published its Economic and Fiscal Outlook on the Autumn Statement which said:

The Government has also announced its intention to ban additional fees charged by private letting agents. Specific details about timing and implementation remain outstanding, so we have not adjusted our forecast. Nevertheless, it is possible that a ban on fees would be passed through to higher private rents.

Scotland Banned Letting Fees in 2012  – What Happened?

The charity Shelter have been a big voice in persuading and lobbying the UK Government since it managed to persuade the Scottish Parliament to introduce a tenant fees ban in 2012. On TV and radio shows Shelter talk about their independent research, which they says showed:

Renters, landlords and the industry as a whole had benefited from banning fees to renters in Scotland. It found that any negative side-effects of clarifying the ban on fees to renters in Scotland have been minimal for letting agencies, landlords and renters, and the sector remains healthy.

And…

Many industry insiders had predicted that abolishing fees would impact on rents for tenants, but our research show that this hasn’t been the case. The evidence showed that landlords in Scotland were no more likely to have increased rents since 2012 than landlords elsewhere in the UK. It found that where rents had risen more in Scotland than in other comparable parts of the UK in 2013, it was explained by economic factors and not related to the clarification of the law on letting fees.

However the devil is in the detail. Only a few days ago Shelter were still quoting this research from December 2013 and saying rents never went up following the tenant fees ban in Q4 2012. I have read that research and I agree with it BUT it was published three years ago – only 12 months after the tenant fees ban was put in place. Shelter choose not to mention what has happened to rents in Scotland in 2014, 2015 and 2016 because that tells us a completely different story!

What Really Happened To Rents in Scotland?

According to my research up to the end of Q3 2016 the evidence is that rents have risen, according the CityLets Index (the equivalent of Rightmove in Scotland so they have plenty of comparable evidence to back up their numbers) by 15.3% between Q4 2012 and today. Using the Office of National Statistics figures for the English Regions over the same time frame here’s how rents in England fared:

  • North East 2.17% increase
  • North West 2.43% increase
  • Yorkshire and The Humber 3.21% increase
  • East Midlands 5.92% increase
  • West Midlands 5.52% increase
  • East of England 7.07% increase
  • South West 5.82% increase
  • South East 8.26% increase
  • London 10.55% increase

All a lot lower than the 15.3% increase in Scotland!

Rents in Scotland since tenant fees ban in 2012

It’s safe to say if the Scottish economy had outstripped London’s, over the last 4 years to become the powerhouse of the UK, Nicola Sturgeon already be campaigning for a second referendum Independence referendum for Scotland.

What Will Happen to the Colchester Rental Market in the Short & Longer Term?

Nothing much will change in the short term and over the next 12 to 18 months, it’s business as usual! In the longer term rents will inevitably increase as the fees tenants previously paid will be passed onto landlords in the coming few years.

As a responsible letting agent, I have a business to run. According to ARLA (Association of Residential Letting Agents) it takes a letting agent, on average, 17 hours work to get a tenant into a property. There are many compulsory checks prescribed by the Government including:

  • Right to rent check
  • Anti money laundering checks
  • Legionella risk assessments
  • Gas safety checks
  • Affordability checks
  • Credit checks
  • Smoke alarm checks
  • Construction (Design & Management) regulations 2007 checks
  • Compliance with the Landlord and Tenant Act
  • Registering the deposit so the tenants deposit is safe
  • Carry out references to ensure the tenant has been a good tenant in previous rented properties

All of which lettings agents take seriously and are expected to know inside out making us experts in our field. Like any profession there will be a few rogue traders by they are a tiny minority.

Business is business and no letting agent works for free so I, along with all the other Colchester letting agents, will have to pass at least some of those costs onto landlords when the tenant fees ban comes into force. Of course landlords would be able to offset higher letting charges against tax but I wouldn’t want them to be out of pocket – and I’m sure they won’t be happy – even after the extra tax relief.

What Does This Mean For the Future?

The current application fee for a single person at my lettings agency is £125 exc.VAT and for a couple £250 exc.VAT which works out, on average, around £200 ex.VAT per property. I am part of a group of over 500 letting agents and we recently carried out a poll, across all our agencies, to determine the average tenancy length. The result worked out at just under two years – that’s less than half the four years stated by the government! On average that means £200 +VAT additional fees passed onto the landlord every two years.

The Bottom Line

In 2005, the average rent of a Colchester property was £798 per month and today it’s £911 per month, that’s a rise of only 18.6% (against the Retail Price Index inflation rate of 38.5%). Using the UK average management rates of 10%, this means the landlord will be paying £720 excluding VAT per annum in management fees. If the landlord is expected to cover the cost of that additional £200 every two years, after 2018, rents would only need to rise by an additional 2% a year on top of annual growth rate over the last five years.

If that were to happen in Colchester average rents would rise to £1093 per month by 2022  (the red line on the graph) and so the landlord would pay £1156 per annum in management fees – which would go towards covering the additional costs without having to raise the level of fees.

Isn’t That Bad News for Colchester Tenants?

No, quite the opposite in fact (look at the blue line on the graph). If the average rent Colchester tenants pay had risen in line with inflation since 2005, that £798 per month would have risen to an average of £1064 per month today compared to today’s £911 per month. Even if inflation hits the upper end of expectations at 2% per year for the next six years, the average rent would be £1156 per month by 2022. So, even if landlords increased their rents to cover their costs, tenants are still much better off when you compare the monthly £1093 (blue line) and £1156 (red line) per month figure.

Tenant Fees Ban – My Conclusions

I believe the tenant fees ban is good news for landlords, tenants and agents. It removes the need for tenants to find lump sums of money and gives them greater freedom to move. They will also be better off, in real terms, taking into account rents would have increased in line with inflation.
Landlords should be happy because their yield and return will increase with greater rents while not paying significantly more in fees to their lettings agency.
Letting agents, who have always charged fair application fees, won’t be penalised as rent rises will compensate for any losses (only agents that charged exorbitantly high fees will lose out – and that’s their problem).
When this announcement from the Chancellor comes into force I am confident I will still be able to offer the same, if not better, service to both my landlords and tenants in the future.

If you have any thoughts about the tenant fees ban or would like to chat about any aspect of the Colchester housing market give me a ring on 01206 862288. Alternatively email me at grahamwood@hometorent.co.uk or add your comments below.

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