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How will the proposed ban on letting agent fees impact on buy-to-let landlords?

By Guest Blogger on in Industry News, Letting

How will the proposed ban on letting agent fees impact on buy-to-let landlords?

By Ryan Weston, of Just Landlords Insurance Services

It’s now almost six months since Philip Hammond’s first (and last) Autumn Statement, where the Chancellor outlined plans for another controversial legislation change to impact on the buy-to-let sector.

In the Statement, Mr Hammond announced that the Government was to ban letting agent fees paid by tenants. These fees are currently required to cover essential administration tasks, such as reference and credit checks.

On 7 April 2017, a consultation on this move was launched, which will run until 2 June. The sector has been quick to criticise the proposals, with many leading industry peers against the move.

So, why has the Government chosen to forward the legislation? How could the move impact on the market? Who will be most severely impacted? We explore these questions:

Why has the ban on letting agent fees been proposed?

Chancellor Hammond announced the ban on letting agent fees to provide a fairer deal for millions of tenants, but also to increase competition in the private rental sector.

The Government wants to remove hidden charges hitting tenants in the pocket, while rooting out rogue estate or letting agents charging unfair fees.

Alongside raising standards in the market, Mr Hammond believes that the ban on estate or letting agent fees will help £4.3m households in England, by stopping them from paying upfront fees. Citizens Advice state these costs average around £337 per household.

How will the proposal impact on the buy-to-let sector?

On the face of it, many tenants will be better off because of lesser outgoings and an improved sector. However, many industry peers are concerned.

It’s feared that these fees once paid by tenants will simply be absorbed by landlords – leaving many with no option but to pass them back onto tenants in the form of higher rents.

Many landlords and industry bodies are unhappy at another perceived attack on the buy-to-let sector, coming soon after other major changes in legislation. These include:

• Alterations to mortgage interest tax relief.
• The rollout of the Right-to-Rent scheme.
• The 3 per cent increase in Stamp Duty surcharge for buy-to-let and second properties.

Chief Executive of the National Landlords Association, Richard Lambert, feels that while the Chancellor is “clearly aware of the pressures facing those living in the private rental sector,” he, “lacks an understanding of how the whole sector works.”

Lambert also stated: “Agents will have no other option than to shift the fees on to landlords, which many will argue is more appropriate, since the landlord employs the agent. But adding to landlords’ costs, on top of restricting their ability to deduct their business costs from their taxable income, will only push more towards increasing rents.”

What about the wider public?

Despite the perceived negativity from industry peers, the wider public have shown their backing to the proposed ban.

A recent survey from Citizen’s Advice revealed that 46 per cent of UK residents believe tenants should not pay any admin charges, apart from their deposit and monthly rent, when renting a property through an estate or letting agent.

This figure increased to 61 per cent when renting directly from a buy-to-let landlord. The same number of respondents felt that tenants should not pay any more than £50 to obtain a rental property. Unsurprisingly, this figure increased to 74 per cent when looking specifically at results from private renters.

Speaking on the report, Nick Marr, co-founder of The House Shop, observes: “There is little public support for the current system. Many tenants are prepared to pay a small fee for legitimate expenses involved in securing a property, such as a professional reference check but vague and undefined admin charges that can total hundreds of pounds are tough to defend in the current market.”

Will the impact really be so severe?

Many landlords are going to be upset about the impact that the ban of letting agent fees paid for by tenants could have on their income.

On average, it’s estimated that letting agents charge buy-to-let investors an average of between 10-15 per cent of their income to pay for their management services.

Research from The House Shop below shows how a typical landlord could be affected, based on average UK rents of £902 pcm and typical yields of 5 per cent per year.

The House Shop research - Shop for an Agent
The House Shop research

Mr Marr notes: “The figures show that even if letting agents are forced to pass on the costs of tenancy fees directly to landlords, it will not have a significant impact on the landlord’s overall yield and profits. In fact, the additional loss in returns could be as little as 0.14 per cent when compared to the existing landlord fees structure.

“Some landlords will undoubtedly raise their rents as a result of the ban – as we have seen in Scotland – but many will be able to absorb the costs of this new system without substantial losses, meaning tenants should not face a barrage of rent rises once the ban is in place.”

What does this mean for letting agents?

While it would be wrong to suggest that all letting agents will not be impacted by the proposals, research seems to show that the long-term forecast looks to be stable.

An investigation from the UK Association of Letting Agents (UKALA) suggests that only 9 per cent of landlords plan to leave their letting agent should their premiums rise.

This is despite 79 per cent of landlords believing that their agent will increase their costs should the ban on fees come into operation.

Richard Price, the executive director of UKALA sums the situation for letting agents up perfectly by saying there is a “tricky path ahead to navigate for agents, as they’ll need to balance out the need to cover their costs in the wake of a ban on tenant fees, without alienating their primary customers and source of income.”