Rents to Rise if Letting Agent Fees are Passed to Landlords

Rents would rise by 2-3% next year across the UK if letting agent fees currently charged to tenants are passed on to landlords, according to a forecast from a City analyst.

James Fletcher, of Cenkos Securities, yesterday gave a buy rating to The Property Franchise Company – formerly Martin & Co.

He says: “Should landlords decide not to pass these costs back to tenants through higher rents, we do not believe this change would materially affect a landlord’s decision to let a new property or renew an existing tenancy.

“However, combined with upcoming changes to mortgage interest offset and the already imposed buy-to-let Stamp Duty this year, political interferences are making life as a landlord increasingly a less attractive proposition.”

Fletcher reports that, for franchisees, tenant fees account for 16-18% of annual lettings income, and 11% of total income.

The entire Property Franchise Company network is expected to earn £57.1m in lettings revenue this year, with tenant fees accounting for £9.1m-£10.3m of this.

In Scotland, the letting agent fee ban has had a positive effect on the firm’s franchisees, claims Fletcher.

He explains that overall, the ban led to higher income returns for landlords and higher landlord fees for agents. The latter more than offset the removal of tenant fees, which were almost completely offset in the first year following the ban.

Scottish franchisees saw their total lettings income rise by 4% overall in the year following the ban. While this growth was attributed to higher instruction numbers (a 5% increase), the ban only affected underlying fee income by 1% in the first year.

Set up fees for landlords rose from around £200 at the start of the ban to £400 currently, reports Fletcher.

Most startling, he notes, was that franchisees’ monthly management commissions increased by 11% of total lettings income in the first year after the ban. Over half of this growth was attributed to higher rents, which resulted from passed-on tenant charges. The remaining growth was from franchisees winning more instructions.

Fletcher insists that the ban in England and Wales will not write-off letting agents’ income stream, but will simply change who pays the fees.

Will the ban on letting agent fees force you to put your rents up?