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What are the implications for Buy to Let?

In an article written for 4 business magazine, Kevin Cruiks outlines his thinking on the fall out of the Government’s decision to ban agent fees. At Ayers & Cruiks, we like to keep our fingers on the pulse when it comes to property news, changes in legislation and anything we think is a talking point in the news, or in the property sector.

It’s all about to change in the Buy to Let Market following the Government’s decision to ban agent admin fees, we consider the implications

In November 2016, the Chancellor of the Exchequer Philip Hammond announced that the government would ban all letting and admin fees charged to tenants across England. This has since been confirmed in the Queens speech and we are expecting a draft bill to be published in the Autumn 2017.

These announcements have caused shock waves across the industry and have led to questions as to why the government have felt the need to bring in this legislation and whether they have fully considered the implications that this will have on the lettings market and the businesses that operate within it.

When an agent introduces a tenant, it would be normal for them to take up references via a credit referencing agency, check that they have the right ID and the right to rent within the UK, prepare Inventories, meter readings etc. There is also the preparation of what is now a very large pack of documents to include the tenancy agreement, the EPC, the How to Rent documents, gas and legionnaires safety documents etc. It is arguable that some of this cost should be covered by the letting fee charged to the landlord, but some agents have been charging higher fees Admin to tenants to supplement some of this cost.

The ban on these fees is expected to cover the following areas;

  • Referencing & Credit checks
  • Preparing Tenancy Agreements
  • Preparing Inventories
  • Checking Right to Rent
  • Renewal & Exit Fees

There are also other possible areas that might be covered which include

  • Capped Refundable Deposits
  • Capped Refundable Holding Deposits
  • Compensation Clause for tenants who feel they have been overcharged

The implementation of this ban will undoubtedly have a dramatic effect on the business model of many agents, as the cost of referencing and time spent on admin in preparing an inventory, a tenancy agreement, carrying out move in and move out inspections can be considerable and are not always sufficiently covered by the letting or management fee paid by the landlord.

A report commissioned by ARLA Property mark estimates that agents could lose in the region of £200m in turnover, which is a staggering 1/5th of the total of lettings income in the UK and could lead to the loss of 3,000 jobs.

A lot of agencies are unlikely to be able to absorb these costs and continue to make a profit, so these costs will need to be passed on to landlords.

Buy to Let landlords have already been hit quite in the last 18 months, with the changes in the tax regime, increases in stamp duty and the new EPC regulations that take effect from April 2018, which will mean that any property with a rating below Group E will be unlettable.

Therefore, landlords are unlikely to want to stomach another increased cost affecting their investment returns and will undoubtedly seek to recover this cost from the tenant which would appear to be totally counterproductive to the governments initial intention, as the tenant still ends up paying through increased rent.

Furthermore, landlords experiencing lower returns are less likely to spend money on repairing and refurbishing their properties, which again impacts on the tenant.

There is no doubt that there were some agents who were taking advantage of the admin fee charges and the government’s wish to curb this practice is perhaps understandable, to ensure that the market place is fair to tenants. However, the total ban might be argued to be an overreaction to the problem and one that creates a whole new set of problems with potentially higher rents, poorly maintained property, and unreferenced tenants.

We won’t know the full situation for a few more weeks and the act is unlikely to become law until the end of 2018, so all parties have time to react and to organise for the changes ahead, but it’s clear that the Buy to Let market is about to change for all participants.

This article was first published in 4Business Magazine – bringing together commercial, local, industry and informative news across the board.

For more information, please contact the team.

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