The letting agency market place is facing unprecedented change, the perfect storm is brewing, and 2019 promises to be the year of significant winners and substantial losers.
It is the most chaotic market on record for letting agents.
Letting agents across the UK are faced with risks to their business and risks to their customers.
However, I believe there are also opportunities for those willing to take them.
New firms are popping up almost on a weekly basis, promising to solve all our problems – I am a letting agent myself – but what are they really promising?
Once you cut through the smoke and mirrors, the ‘proptech’ offerings often fall short on delivery and fail to understand the actual needs of agents and their customers.
There seem to be so many solutions looking for a problem to solve.
Offers to provide free references or complete references for say £5 are just not real.
Having spent 15 years either managing or owning tenant referencing businesses, I know for a fact that this is not possible.
Attached to such promises are ‘do-it-yourself’ style platforms or contracts to procure other services and products that more than fund the cost of a reference.
The actual pay away to external organisations, when completing a full reference with Right to Rent verification, AML checks etc, comes very close to £5, so agents can figure this out for themselves.
Several so-called referencing firms are now saying that they report tenants who pay their rent on time to the credit agencies, helping them improve their credit rating.
In my view, this is no more than smoke and mirrors.
The only way these claims can be remotely accurate is if the following statement is issued to every tenant: “We will improve a tenant’s credit score, but it will only improve the credit score we have set up for you that no lenders will accept and which is only shown to you.”
Tenant fee ban
The tenant fee ban, due to become effective from next April, makes cheap offers and opportunities to cut costs look very attractive.
But at what risk?
In an environment where margins are squeezed and both agents and landlords are under pressure, the worst possible scenario is a tenant occupying a property, failing to pay rent and refusing to vacate.
The potential losses to both agents and landlords are significant.
Even worse if the agent has no recourse from the reference provider, the landlord will certainly want to know what due diligence the agent carried out.
Unpaid rent is on the increase and rents are at a UK all-time high. Relatively minor changes in tenants’ circumstances can result in rent being unpaid.
For an insignificant sum, in the context of investing in a residential property and receiving the appropriate yield, letting agents can remove this risk from their business and from their landlords.
Rent guarantees can be high value to landlords and a serious income generator to letting agents’ businesses.
Rent guarantees with excesses, however, create chaos for letting agents; landlords are almost always disappointed that they did not receive all the rent lost and this often results in agents losing the landlord customer.
Replacement deposit schemes
Replacement deposit schemes are the new trendy product, with several credible players entering the market.
These schemes are unproven and whilst very attractive to certain tenants, we are yet to see the claims experience at the end of tenancies.
Standalone replacement deposits represent the greatest risk to both the agent and the provider.
I believe that the best chance of delivering a sustainable replacement deposit scheme is to do so on a fully integrated basis.
The key is to offer a whole package, including referencing, tenants’ liability insurance, tenants’ contents insurance and tenants’ income protection. The combined earnings for agents is much greater, the protection for tenants is complete and the chances of the replacement deposit scheme being sustainable are far higher. However, time will tell.
Selling to tenants
The changing market requires agents to treat tenants as valued customers.
Tenants are consumers with a propensity to buy value added products at the time of moving home.
From the application stage through to the move-in day, the opportunity to provide tenants with the right products and services is huge.
They want the property and are open minded about the things that will help them through the whole process. They also want to reduce the risk of high costs either during or at the end of the tenancy.
It becomes difficult if not impossible to sell tenants products the day after they move in when their whole focus and mindset changes.
London – and the rest
There are two lettings markets in the UK – London and the rest of the country.
London has specific challenges and risks that must be managed. London also has fantastic opportunities for agents – the average rents make the rest of the country look very poor indeed.
Tenant fraud in London is the most serious risk, followed by tenant affordability.
We have seen an increase in organised crime in London, often unknowingly facilitated by Airbnb. Applicants in London need to be assessed differently to the rest of the country and agents in London need to share more data. This is exactly what the LonRes Let Alliance proposition for London delivers.
Outside London, lower average rents means the tenant fee ban will have much more impact on agents currently reliant on it for income.
Tenant fees on average produce 20% of agents’ income, and this can often be 100% of the operating profit.
Action is urgently required – the waiting game is over. With as little as just seven months to replace tenant fee income, a proven solution is required, and the time for trying things that ‘might’ work is over.
Now is not the time to make rash decisions or hope that a white knight from the tech sector will turn up with the silver bullet.
Tried and trusted solutions are already there for you, from firms which do not use the word ‘proptech’ to describe themselves.
* Andy Halstead is CEO of Let Alliance which works exclusively with letting agents. He is also a letting agent, with a family business in Chester