It’s an uncertain, interesting, worrying, exciting (delete as appropriate!!) time for owners of property businesses. We work closely with estate and lettings agency owners to help them enter and exit the sector, and there’s a low burble of discussion about what may be around the corner.
A quick reminder of just a few changes and factors having an impact on agents and the property market:
- The looming tenant fee ban. 2017, 2018, 2019? Who knows when it will come into force, but one thing appears certain, some form of ban on fees associated with tenancy applications is on the way.
- Increasing tenancy length. A shortage of supply means that those renters that may have moved more frequently in the past are now staying put. There simply is not the choice of alternative properties available on the market for them to upsize/downsize/relocate into.
- Changes to Mortgage Interest Rate Relief. Landlords, particularly the remaining accidental landlords of the late 2000s, could be sleep-walking into a tax bill if they haven’t taken the chancellor’s recent changes into account.
What does this mean for agents? Let’s take points 1 and 2 first. Most of the agencies we sell have a healthy mix of income from lettings, landlord/tenant fees and estate agency. There is overhead associated with each activity, but also good revenue. However, what’s the impact going to be on an agency with a good net profit, but now without tenant fee income, or with reduced landlord fee income because the re-let fees (when tenants move) are fewer and further between? We know that business overheads will be the same because of the work and cost associated with getting a tenant in through the door, but now you can’t charge for that service. The loss of tenant fee income, for those that don’t replace it with an alternative, could lead many businesses into loss.
Point 3 could lead to a trend for landlords to sell up. For many (me included!), renting out the home we used to live in was always just of marginal benefit, as long as my property value kept steadily rising whilst interest rates remain low. However, this year the new rules mean that 25% of my mortgage interest can’t be used as a cost of ownership, rising to 50%, 75% and 100% in coming financial years. Owning my rental property is about to start costing me money this financial year, and it’s going to get worse. Rental stock could become sales stock, which is great in the short-term, and even better if you retain the property by selling it to a new investor. But if not replaced, it could also deplete your rental stock and reduce your longer-term revenue.
So, what should you do with your agency? Is it time to Grow or time to Go? I’m a glass-half-full type and I see upside in both options!
Grow – If you’re an estate agent, point 3 is playing into your hands and there will be new stock on the streets that previously had the ‘to-let’ signs displayed. Problem is, the owner doesn’t know he or she needs to sell yet and they are waiting for you to remind them that selling may be a good option.
Go – Have a look at your revenue stream from tenant and landlord fees. Don’t sleepwalk into a situation where you can’t cover your costs without your old, traditional revenue streams. I appreciate that many agents may not have the appetite to develop alternative income, e.g. from adding estate agency into the mix, or adding/selling more insurance, or branching out into commercial listings. It’s hard work and righting the applecart that the chancellor helped knock over is not an easy task. Make the decision early – plan for your revenue downturn or plan to sell up.
Grow – If you’re staying in the industry, acquisition is the current buzzword for growth in a property business. Adding the portfolio of one of your former competitors into your business, but without all of the associated overheads, could make excellent business sense. We have seen an increase in enquiries from agents about the selling process, so make sure you position yourself to hear about, and move fast on, these potentially lucrative acquisitions.
Go – If selling up sometime in the next few years was on your mind, now may be a really good time to list. Lack of new rental stock to enable organic growth is leading to unprecedented thirst for acquisitions, meaning that demand for your business is excellent right now.
Grow – And finally, if you choose to grow then make sure you get the right growth advice. We have insider access to some of the best growth coaches in the UK and we’d love to put you in touch with them.
I’m sure you’ve heard the saying that a business is either growing or shrinking and that standing still is just a myth. Never has this been so relevant for those in the property industry. As a letting agent, you can’t plan to stand still because you are about to lose a valuable revenue source. Now more than ever, to do nothing is to steer your business towards inevitable decline.
So, it’s time – plan to Grow or plan to Go!
Sean Mayers is the owner of BusinessResale and has owned several estate and lettings agencies.
