Will the ban on letting fees push up rental prices?
Posted: January 2017
By Jo Eccles
Q: Will the introduction of the agent fee ban lead to higher rents?
A: In November’s Autumn Statement, the Chancellor Philip Hammond pledged to ban upfront letting fees charged to tenants as soon as possible. It is not yet clear what will be classified as “upfront fees”, as tenants face a number of fees when they rent a property, as do landlords.
Some tenant costs are genuine, for example the cost of being reference-checked or having an inventory clerk visit the property to document its contents and condition, or the cost of having the tenant’s deposit registered with a government-approved scheme.
However, I suspect that the upfront letting fees which the Chancellor is proposing to ban will relate to the ‘administration fees’ charged by letting agents. The administration fee covers the time and expertise required to negotiate the tenancy terms and draw up the tenancy agreement, and the process often involves tailored and complex clauses being inserted for tenants’ and landlords’ protection.
These fees can vary enormously, and some letting agents do seem to charge disproportionately – I have seen fees charged anywhere between £125 to £495 exclusive of VAT – so for these unregulated fees to be scrutinised is a welcome move by the Government in my opinion.
There are concerns that this may result in rents going up, as letting agents may try to pass on fees to landlords, who will in turn try to pass them on to tenants via increased rents. In my opinion this won’t be the case. Rental levels are market-driven. Even if some landlords try to raise their asking rent, there is currently an oversupply of rental properties across London, so tenants will most likely choose more reasonably priced alternatives. We have seen this over the past 18-24 months, where tenants have had choice and London rental prices have remained broadly flat as a result.
We would need to see a fall in supply of rental properties to create an increase in rents. There is the risk that buy-to-let investors might start selling as returns become less attractive for individual landlords following the introduction of the extra 3% stamp duty on additional home purchases last year, and also the scrapping of mortgage interest relief, which is being phased out from this year. However, across the portfolio of more than 100 properties we manage on behalf of landlords, not one has decided to sell over the past two years.
In the short term, many landlords are choosing to hold on, although over the medium term we may see selling as returns diminish. If this is the case, all eyes will be on the Build to Rent sector and larger portfolio or institutional landlords to fill the gap.
In the short term, if upfront letting fees are banned, I expect letting agents will ultimately need to swallow this industry change by reducing their profit margins, rather than passing them on to landlords or tenants, or they too may find themselves being squeezed by the competition.
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