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Letting agent fees ban - what does it mean for the rental market?

  1. 28 November 2016
  2. By Rosie Rogers

reallymoving.com takes a look at the news that the government is banning letting agent fees charged to tenants, and what this might mean for the rental market

The Chancellor of the Exchequer, Philip Hammond, recently delivered his first Autumn Statement. Alongside measures on savings bonds, fuel duty and the national living wage, there were also a number of housing and property policies announced.
 
The Government has upped its commitment to building more homes, setting aside almost £7 billion to kick start the housebuilding industry. And, in an unexpected move, it has announced that it is seeking to ban letting agents' fees charged to tenants.
 
If letting agents can no longer charge these fees - which usually cover anything from referencing to administration - who will pay for them? And will it have a positive or negative effect on the rental market?

Why are fees being banned?

For a few years now there has been a sustained campaign from numerous organisations - including Shelter, Generation Rent and Citizens Advice - to outlaw letting agents charging tenants fees upon moving into a rental property.
 
Anti-fees campaigners have long argued that fees should be paid by landlords and as the cost of renting has continued to surge in recent years, so their argument has intensified.
 
There have been numerous parliamentary Bills aiming to ban fees - all of which have failed up until now. The most recent, The Renters' Rights Bill, was actually making significant progress having recently passed the committee stage in the House of Lords.
 

This Bill had been supported by Liberal Democrat Baroness Olly Grender and had generated additional publicity by running alongside a petition against fees which amassed over 258,000 signatures.
 
Now the Government has decided to ban fees, the Renters' Rights Bill will need to be heavily amended - but the volume of campaigning over the last few years shows just how popular the initiative will be in some circles.
 
The Government claims that a ban on fees will benefit almost 5 million tenants. It estimates that the average tenant pays letting agency fees of £300+ when moving into a rental property. However, the Association of Residential Letting Agents calculates the figure to be closer to £200.
 
Agents' fees have been banned in Scotland since 2012 - but it has been hard to determine whether this has had a positive or negative impact. Campaigners from both sides of the fence have tried to use the Scotland example to their advantage.

Potential winners and losers

 Winners

Tenants - If fees are banned, renters simply won't need to find as much money at the start of a tenancy. Problems have been most acutely felt in London, where tenants have had to pay high rents and deposits and sometimes high agency fees to boot. Anecdotal evidence from tenants, released alongside the launch of the Make Renting Fair campaign, shows some London tenants have paid upwards of £500 in letting agency fees. If tenants no longer need to pay fees, this could help them to save towards buying a home in the future.

Build to Rent - The ban on fees adds to a list of measures which could adversely affect the small-time buy-to-let landlord. This could pave the way for the Build to Rent sector to really take hold. Build to Rent is the Government initiative which encourages the development of largescale purpose-built rental accommodation which is funded and managed by institutional investors. The fledgling sector has received strong Government backing in recent years and one letting agency, Strutt & Parker, recently went so far as to say that 'we're on the brink of a Build to Rent explosion'.

Letting Agents - This may seem like a strange argument, considering agents have had their opportunity to charge fees to tenants banned. However, it is quite widely accepted that they will now merely pass these charges on to landlords - meaning they may not potentially be losing out on revenue. What's more, the fact that tenants will no longer have to pay fees to letting agents means that the latter's reputation among the general public may actually receive a timely boost.

Losers

Tenants - The counterargument to the fact that tenants will no longer have to pay a fee at the start of their tenancy is that they'll have to spend more on rent over the duration of their contract. If landlords are charged for referencing and inventory fees by letting agents, it's widely believed that they'll simply incorporate these costs into tenants' monthly rental payments.

Landlords – The simple fact is that if tenant fees are banned, landlords will have to start paying additional costs which they have never had to pay before. This comes alongside controversial tax changes being introduced next year as well as increased stamp duty since April this year.

Letting Agents – Agents may still be able to recoup some administration and referencing costs from landlords but competition to lower prices – and management fees – will surely increase. Landlords will be more keen to shop around now, which could affect some agents’ bottom lines.

As you can see, depending on which side of the fence you sit, you can make arguments for most outcomes and scenarios. It’ll take some time to see exactly how and who the fee ban impacts the hardest.

Reaction from the experts

Isobel Thomson, chief executive of the National Approved Letting Scheme: "We don't believe banning fees is the answer. The majority of letting agents’ fees are fair and reasonable and charged for the service they provide."
 
Nick Leeming, chairman of Jackson-Stops & Staff: "This legislation is short-sighted and is yet a further challenge to landlords who have faced a barrage of increased costs over recent months -  its impact on the UK housing market could be far-reaching."
 
David Westgate, group chief executive of Andrews: “We welcome transparency around fees and honesty in terms of cost vs margins and have witnessed some outrageous charges by others within the industry."
 
Jeff Doble, chief executive of Dexters estate agents: "We broadly welcome the Government's action. We would prefer to see compulsory regulation of letting agents but this is a step in the right direction, as it will lead to more transparency."

What next?

When confirming that the Government would be banning fees, Philip Hammond said that the measure would be implemented 'as soon as possible'. It is believed that the Government will launch an official consultation in the New Year. So, it looks like a ban on fees could come into force sometime in early to mid-2017.

The Chancellor also announced that his first Autumn Statement would also be his last. The Autumn Statement is being abolished in 2017. From next year, there'll be just one annual Budget.  

 

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