Truth at last: What really happened in Scotland after letting agent fees were banned

What follow is an opinion piece but  I believe it to be the factual truth.

It was a Sunday evening – August 26, 2012 – when the Scottish Government confirmed that all charges (called premiums in the legislation) levied on tenants are illegal and must cease immediately.

Up to that point there had been ongoing negotiations between private landlord and letting agent representative organisations with the Scottish Government about imposing a cap on tenants’ charges rather than a total ban.

This proposal was eventually discounted and the total ban on tenants’ charges came into effect – a big mistake really!

Since then, jobs have been lost – the ban has been called ’empty desk syndrome’  and rents have risen. Agents have gone out of business, as have providers such as inventory firms.

I forecast the same – but 15 times worse – will happen in England.

Industry fragmentation

The letting industry in Scotland is made up of approximately 800/900 SME businesses with private landlords in addition and separate from that figure.

Nearly all letting agents are self-starters with the majority of offices being individual and in direct competition with each other, so consequently all letting agents came up separately with their own particular plan for dealing with the immediate income reduction – they had no choice really!

It was this entrepreneurial spirit that meant letting agents ended up successfully coming to terms with this income reduction on an individual basis, each office coming to their own solution.

This meant looking at their profits and losses, and identifying where they could save money and increase their charges. This inevitably resulted in increased charges to their clients, staff losses and increased rents.

It was this individuality and industry fragmentation that has hidden the true cost of losing the income from tenants’ fees.

Industry internal effects

The initial effect, after offices got to grips with the reduction in budgets, was that the casual employees – property viewers and inventory staff – were not given any more work, with property managers, directors and owners taking back that work.

Also, after a few months empty desks appeared in some offices as staff became casualties of the fees ban. These desks were completely clear – no phone and no PC. In reality, the position has gone permanently.

And some offices downgraded their premises at the next lease break point to save some substantial costs.

Industry external effects

The major income into letting agents was now coming from landlords, and all offices realised that you can only squeeze so much out of a single income area.

This decrease of income into letting agents has come at the same time where there are more property checks required as statutory.

In addition to the gas safety check, agents also have to conduct an electrical check and Legionnaires check. Plus in addition to the EPC, agents at present have to produce a Tenants Information Pack

And for tenant referencing – still seen as an important part of the tenant assessment process – agents now had four choices:

Do it yourself;

Pay for referencing yourself;

Charge to landlords;

Ask tenants to provide a third party reference.

Agents throughout Scotland selected a mixture of these choices.

One immediate effect of the fees ban was that rents increased from January 2013 to January 2014 (the period immediately following the fees ban) by 4.3%, where they had been relatively static for the previous 12 months. [Source: LSL Property Services & UKtenandata]

Industry rental effects

This increase meant that, on an average rental of £550, the tenants were paying an extra £24 per month equating to an extra £288 yearly, with the average charge of tenants fees before the ban having been £80 to £100 per tenancy.

And this upward trend in rentals is continuing with average rental prices have growing faster in Scotland even than in London during the last 12 months, UKtenantdata has discovered.

The cost of renting a property has increased by 0.9%, to £671 a month for new tenants in Scotland since April last year while existing tenants renewing their lease have seen their rent shoot up by 6.1% year-on-year to £598.

Meanwhile in central London, new tenants and existing tenants have seen their monthly rent rise by 0.8% and 1.6% respectively.[source: Countrywide]

So, despite what outside organisations such as Shelter say, the effects of that single decision for the Scottish lettings market have been far reaching – even extending to today’s market.

As indicated previously, due to the fragmentation of the lettings industry, the actual effects were hidden as individual offices tackled the income problem in their own way and to suit their own business model.

Shot in the foot!

Landlords have exited the market due to increased cost, resulting in a decline in available private rental housing with this placing direct pressure on the already week social housing sector.

The Scottish Government clearly hasn’t thought through the implications of the banning of fees and has pandered to the lobbyist, namely Shelter which in my opinion has provided completely inaccurate fictional figures on rent increases post-fee ban.

So what for the English market?

What we have seen in Scotland post fee ban will be amplified 15-fold in England.

The effect will be the same, rents will rise, landlords will exit the market, agents will cut their cloth and all the associated third party support services, i.e. inventories providers and property inspectors will all but disappear.

What’s the answer?

In Scotland, agents and landlords alike entered into meaningful discussions on capping fees.

These ended abruptly, and resulted in a complete ban on fees being charged.

Had the Scottish Government implemented a solution that was fair for all, i.e. a cap on fees, I believe the picture today would be much different, with lower rent increases and more landlords staying in the market and even expanding their portfolios.

A message for the English government

Look to Scotland for the real acid test of what really happened post-fee ban.

If you don’t, the negative effects of your decision will be around in perpetuity.

Don’t pander to aggressive left wing lobbyist, look at the facts and act upon them.

You need the Private Rental Sector, and your tax paying entrepreneurial English landlords can make the sector flourish given the chance.

Don’t create a self-engineered paradox of “We need more housing” when you are on the cusp of destroying it.

An open invitation to Shelter Scotland and England

UKtenantdata would like to formally invite the representatives of Shelter in both Scotland and England to evaluate our rental data for Scotland for the last five years, and we would welcome your comments on the findings.

 

Mitchell Thomson is business development manager (Scotland) at referencing firm UKtenantdata. He has worked in the tenancy screening industry for over a decade, and says he pretty much knows every letting agency in Scotland personally. He tells us he wrote this article for EYE because he was tired of the fiction being pedalled. He also says that it is a commonly held view by agents in Scotland that the government has no understanding of the sector and seems hell-bent on destroying it

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26 Comments

  1. RealAgent

    An excellent piece offering some very sobering prospects.

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    1. Typhoon

      I agree wholeheartedly.

      The government should read it too.

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  2. jeremy1960

    Good luck in engaging shelter,  they are far too busy looking inward and villyifying agents and landlords to bother about the truth! Let’s face it, if they told the truth then the overpaid executives at shelter might have to look at another target.  Here’s an idea, how about all shelter staff and directors take a 20% pay cut but do more work for say 12 months and then revisit the whole fees issue and see if they feel the same? Or, how about they concentrate on spending all that money that people donate on providing homes for the homeless, radical I know but…..

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    1. UKtenantdata

      Good point on the salaries! Shelter turned over in the period 31/03/17 £57,427.000 with salaries for the same period being £37,383.000. Believe it or not in this period they made a loss of £3,033,000

      And according to public domain records they even have an active County Court Judgment13/06/2012 NORTHAMPTON CCMCC £5,705 Judgment 2YJ77112

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  3. Wilson

    Brilliant article, thank you Mr Thomson. We should all make an appointment with our MP’s and take them a copy.

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  4. Peter

    “Also, after a few months empty desks appeared in some offices as staff became casualties of the fees ban. These desks were completely clear – no phone and no PC. In reality, the position has gone permanently.”

     

    Already happened. We have not replaced a staff member pending proposed fee ban outcome, but still have the phone and PC on the desk though just in case the government see sense by introducing a sensible cap instead.

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  5. Eric Walker

    Excellent article. Fee ban supporters made much of the fact that their figures showed rents were unaffected. What they omitted to mention was the devastating effect of the oil price crash in Aberdeen which distorted these figures.
    The effect of the tenant fee ban will be profound especially on any agents which have failed to plan for it. We have noted that in the many businesses we have looked at, the loss of fees exceeds the profit made by some margin.
    Large corporates will be hit hard too as they have already maximised all available income streams.
    We will see a period of readjustment where many agents will consolidate or sell reducing competition which is the opposite of what the government hopes to achieve. This is about votes and politics.

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    1. UKtenantdata

      As Mitchell stated in his article the lettings industry is fragmented, and as such the initial fall out can’t be measured accurately. When 12000+ agents make a single member of staff redundant in each of their offices you won’t hear a thing in the press due to this fragmentation-but should a steel factory in hull close resulting in 12000 job losses this will with out doubt make the press in spades, and result in the unions being up in arms and immediate government intervention. The fact is the government creates fiction based on fiction and nothing will change that!

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  6. is it just me

    How many affordable homes could a decent  developer build for £57 million plus? Would be interested to know where this money is coming from. I hope it isn’t tax payer’s money.

    £37 million on staffing IE nearly 2/3rd of their turn over. Presumably this does not include running their fancy offices and the cost of their ill conceived lobbying of the government over letting fee and the like. How much does that leave to actually assist those they profess to be trying to help in finding a home? If only those who are donating their hard earnt money could realised how these charlies are wasting these resources.

    The hard facts of Left wing socialism. The art of spending other peoples money, badly

     

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    1. UKtenantdata

      Here’s an extract from Shelters website.

      “Our core belief is that everyone should have a safe, secure and affordable home. We strive every day to give people the help they need, and campaign relentlessly to achieve our vision of a home for everyone”

      Well, with 37 million a year on salaries that is a significant amount of relentless campaigning!! 

       

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  7. Monk77536

    Maybe UKTenantdata are showing a little bias here. I believe you charge roughly £20 to each tenant to check their right to rent status on top of charging agents a referencing fee. Maybe you’re more concerned about your income loss than the effect it will have on landlords and agents. Having worked with UKTenantdata previously for referencing I know many tenants who were upset by this charge and felt it was unnecessary having already paid the agent for referencing. If everyone behind the agents weren’t trying to squeeze as much money out of tenants as possible maybe politicians, shelter and the like may look at us a little more kindly.

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    1. UKtenantdata

      I think you may be missing the spirit of the article, it’s more about what really happened post fee ban and the effects right the way down the line! And yes we do offer a paid service that is both value for money and keeps our clients compliant. I agree punitive charges do increase the base operating cost of any agency, for example Rightmove. Rightmove increases their cost significantly year on year and turns over £220 million pounds in agent subscriptions which is a bone of contention with 100% of agents. So it’s really about balance and finding what works for all..

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  8. RichardHill61

    Excellent article which I wholeheartedly agree with!

    So many agents are still burying their heads in the sand about the impact of the fee ban, trying to work out how to recover the loss of income and not really coming up with anything tangible that won’t be challenged as ‘illegal’

    Even if every politician understood the full implications of the ban they’d still not have the sense to reverse the decision!

    BREXIT was voted for without facts and, even now the truth is emerging, the Government is just cracking on with it and burying its head in the sand in a similar fashion to the agents!

    Basically the world is full of Ostriches!!!

     

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    1. The_Maluka

      “Basically the world is full of Ostriches!!!”

      Not the whole world, just the Palace of Westminster and Holyrood!

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  9. Scottish_Mist42

    My own experience, as head of a lettings team covering Scotland, was a bit different than the picture painted above.  We didn’t charge tenants exorbitant fees (pretty much cost + some) and after they were banned these costs were passed to landlords.  Some weren’t happy but acknowledged the reasons why were outwith our control and because the fees weren’t excessive they were more readily accepted.  Landlords now have the choice – carry out referencing and pay for it or don’t and take your chances.

    Those agents who charged unreasonable and excessive fees were those who suffered most and had to cut their cloth accordingly or go out of business.  This, in my own personal opinion, was a case of reaping what they sowed.  It was my opinion then and now that the few agents who made excessive charges spoiled it for the whole industry.  If they had kept their fees reasonable it would have stayed off the radar of government.  But no, they took advantage of tenants milking as much money off them as possible thus exposing themselves (along with them the industry) to criticism which was quite justified and difficult to defend.  The negative headlines of greedy agents (albeit a small % of them) tarnished the whole industry and as there was only one way it was going to go after that.

    I see the same happening in England, those handful of agents charging excessive fees have brought this upon the whole industry.

    In my own experience, we have increased our portfolio by 20% since the ban came into effect and we’re certainly not the cheapest to use.  We reviewed everything we paid out – contractors, inventories etc and looked at what we could keep in-house and created new income streams therefore we have had no negative financial impact and our team has grown.

    The most frustrating aspect has been the increase of applications that do not go through to contract.  The fact that you have to refund any holding deposits in full has meant there really isn’t any penalty for tenants who pull out of the deal.

    My advice to English agents is don’t stick your heads in the sand and hope this will go away.  It won’t.  Plan now, review and streamline procedures and look at what you’re paying out of your business and identify ways to keep it in-house.

     

     

     

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    1. Ding Dong

      Well said, agree 100%, I think the article above is somewhat written with their own agenda in mind

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    2. The_Maluka

      It is important for the prospective tenant to have an investment in the potential letting.  A financial commitment has been banned so time is now the only option.  I give prospective tenants a long form to complete, this almost instantaneously sorts out the genuine tenants.  One glance at a ten page questionnaire deters many opportunist enquirers, the genuine person is prepared to commit the time.

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      1. MrSerious

        We do the same as direct-let landlord, no agents.

        On initial enquiry from advert we also send them an initial application form, just one page, asking for basic information – name, address, employment status, employer name,etc., and that weeds out the time-wasters (not that many tbh).  If the details look ok, then we arrange the viewing, and if they wish to make an offer we send them a 2nd more detailed application form (only 3 pages mind!) based on the RLA Standard.  I can only see these forms getting longer and more detailed.

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  10. Ding Dong

    UK Tenant Data

    Please list the fees you charge your clients please?

    The problem what not about fees, but the level being charges, and as an industry we did ZERO to combat that argument.

    The mark up is the problem, when a referencing fee being charged to tenants by some agents was in excess of £60 when you charge ( I going to have a guess at around £15 maximum)

    The agents input was very little apart from sending the applicant an email link.

     

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    1. UKtenantdata

      It’s fair to say that there is a common misconception around agency fees. For example the fee can be referred to as a referencing fee, an application fee or otherwise. The case is that the fee doesn’t just cover the cost of the referencing process, it covers other aspects of the letting progression process-so an amalgam of different services are factored into it. I think that a fees charged by an agency in general is pretty commensurate with the work involved, although there are agents who certainly push the envelope and this has caused issues for the industry as a whole. Quite simply what is needed is a balance. Hope that helps..

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  11. CountryLass

    My fees are, I believe, fair and open. I charge a couple £200 including VAT to start a tenancy. This covers the referencing and right to rent checks, half an inventory fee and half a contract fee. The Landlord pay’s half a month plus VAT and this is the other half of the inventory and contract, all advertising, boards, viewings etc. Obviously EPC,GSC etc are on top as they are done by contractors.

    When you consider the time that goes in to starting the tenancy, I really do not believe those charges are unfair. Some agents in my area are charging £300+vat and upwards just for referencing, plus inventory and contract etc on top! But they only charge the LL less than £100…

    Also, do I remember hearing something about capping deposits to one month? What is supposed to happen if tenants leave with arrears and damage the property?

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  12. s71

    Regarding capping the deposit to 1 Month. I would suggest that you check your tenants thoroughly including past landlords checks and if you are happy then to proceed with them. The rest of the tenant you send them to SHELTER to deal with.

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  13. Votta583

    Spot on article!!!

    i think we may be too late though unless everyone uses their local MP toolkit and meets with their local MP as well as spread the word across ALL their media platforms.

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  14. moi81

    Forget ” truth at last”

    instead, please consider FACTS

    I write as owner of a Letting Agency in Scotland. The facts, which many of you will not want to hear, but do happen to be true, are that rents did not rise. I base this on the accurate data collated by th e office for national statistics. In fact, rent increases over the last ten years, have risen less than in the whole of the UK

    i agree with your earlier commentator based in Scotland, that our instructions have increased in number. We sell our services based on high standards and professionalism, not on a cheap fee service to clients using tenants to extract the balance.

    The commentator who referred to oil prices tumbling and affecting the market in Aberdeen is correct that oil prices have fallen. Rents fell in Aberdeen. However, this happened a good while after the fee cap

    be clear too that although banned, many, less scrupulous Agents continue to charge a fee, describing it as an admin fee or similar. These firms includecsolicitors and regulated firms. The law may be as stated. Enforcement of the rogues is another matter.

     

     

     

     

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  15. MrSerious

    What an excellent article, thank you Mr Thomson.  I am sending a copy to our local MPs and to the RLA.

    When will Governments learn that they cannot meddle in the Market to this degree; they do not know better than us; E=MC2 will always apply to their naive and stupid actions.  I dispair of them.  Work WITH the industry; don’t just keep smacking it in the face.

    As direct-let landlords we will only be affected a little…we charge just £75 (the UPAD basic charge) per tenant/guarantor for referencing, and £100 for both Inventories that we do ourselves.  We don’t charge any other Admin fee, so we may actually be slightly better off if rents do rise by c.4%.  But the idea of a sudden and complete ban on all Agents and Landlords charges just beggars belief.

    A reduction in supply of flats available, and the loss of many decent and professional agents in the business, will be to the great detriment of the tenants.

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  16. Deltic2130

    ‘The self-engineered paradox of ‘we need more housing’ ‘ is spot on. Great phrase.

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