Money for old rope is how most tenants would describe the various administrative fees charged by an agent before they can move into a rented property. So there was schadenfreude all round when the government said on Wednesday that it would legislate to ban them in England and Wales. Shares in leading listed estate agents Foxtons and Countrywide fell, but the long-term impact should not be significant.
Estate agents have increasingly turned to rentals as a less volatile revenue stream, especially as sales volumes in the capital have shrivelled. The vast majority of the income from lettings comes in the form of a percentage-based charge on the gross rent.
Take Foxtons, the enfant terrible of the UK rental market in the eyes of many millennials. Its average property rents for £440 a week on a tenancy of 18 months. Net of tax, and adjusting for the proportions of tenancies that end or renew, tenants could expect to pay about £446 in one-off fees. That is less than a tenth of the overall income that the tenancy generates for Foxtons. Assuming that the hit to profit is the same, and given that lettings account for half of group profit, that implies a 5 per cent drop in annual earnings.
Those who oppose the ban claim that the charges will simply be passed on as higher rents. In the example above, rents would have to rise 12 per cent to make good the income to the agent lost from tenant fees. Such an increase seems implausible; it is more likely that the income foregone will be loaded on to landlords or absorbed. Margins of 30 per cent before interest, tax, depreciation and amortisation suggest there is ample scope to do so. The experience of Scotland, where a ban on fees was introduced in 2012, corroborates this. Rents rose a little, then drifted back.
And the change does not really alter the longer-term picture. Private renting is on the increase, especially in cities. Foxtons points out that the number of privately rented homes in London has increased at over 7 per cent a year since 2004. Agents have far more to fear from digital disruption of their business model than from a ban on tenant fees.
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