It is commonly accepted that the property market has survived Covid-19 well but this is not entirely true. The truth is that some sectors of the market have done very much better than others.
Residential sales agents have been to hell and back. When the first lockdown was announced last spring, many agents felt that their businesses were doomed but most survived the next few months better than expected with the help of virtual viewings and generous hand-outs from the government including furlough money, grants, bounce-back loans and CIBLS loans.
The recovery in the housing market that followed the end of the first lockdown was quite astonishing and it took almost everyone by surprise. However, this recovery has not happened everywhere. Family houses have done much better than flats and rural areas have done much better than city centres. Nevertheless, by the end of 2020, most agents had made up for all the income that they lost during lockdown and many had a record year for profit.
The residential lettings agents have mostly survived Covid even better than their colleagues in residential sales. However, again, the results have been patchy. Rents for rural and suburban houses have risen whilst rents for city centre flats have fallen quite sharply.
The agents who have suffered most from Covid, however, are those who earn most of their fees from let-only contracts. Managed agents earn most of their income from management fees which are paid every month for the whole duration of the tenancy. However, most let-only agents only earn a fee when there is a change of tenancy and because so few tenants have moved in the last twelve months, their income has fallen off a cliff. Some of these firms have been hit so badly that they may not survive.
The disparity between the fortunes of managed agents and let-only agents has been so sharp that I believe Covid-19 may well be the catalyst that finally ends the let-only business model. Our business buyers certainly think so. A year ago, the value of a let-only business was about 70% of the value of a managed letting business. Now, a let-only business is worth only 30% as much as a managed letting business and many of our regular buyers value the let-only element of a book at nothing.
It is not just Covid-19 that has caused this. Transactional income has always been worth less than recurring income but several other factors have combined to reduce the value of a let-only book. The main factor is the ever-increasing complexity of compliance legislation.
Many agents believe that if they are not managing a property, they are absolved from responsibility for any mistakes that their landlords make during the tenancy but this is not the case. Actions such as drafting the tenancy agreement, taking up references, arranging a gas safety certificate, collecting the first month’s rent and registering the deposit all trigger obligations and legal responsibilities for the agent which will last for the whole duration of the tenancy. As a consequence, it is all too easy for the agent to be hit with a substantial fine for a mistake that the landlord made even if they were unaware of it.
So, what is the solution? Well, the best solution is to stop offering let-only contracts altogether. If you are asked to let a property on a let-only basis, you need to explain to the landlord that there are over 125 things that they need to do before a new tenant can move into their property. Unless they know what these things are, they cannot be a let-only landlord. Because of the danger to them and to you and the size of the potential fines, you can no longer offer this service.
The same case can be made to existing landlords at the next change of tenancy. Many of my clients have been remarkably successful at persuading their let-only landlords to upgrade to a managed or part-managed service and everyone wins from this outcome. Your income will increase significantly, and the value of this part of your book will quadruple. It is also the right advice to give to your landlords.
If a let-only landlord refuses point-black to upgrade to a managed or part-managed service, then you have two choices. The safest option is to decline to take the instruction on the basis that the small amount of profit that you make from a let-only contract is not worth the risk. If you cannot bear to turn away business, the only other option is to let the property on a tenant find-only basis. This means that you find the tenant and leave the landlord to prepare a tenancy agreement, take up references and, crucially, to collect the first month’s rent.
My view is that the letting market will now polarise between tenant find-only agents who operate mostly online and full-service agents who operate in the traditional manner. This trend has been developing for some time and Covid-19 will be the catalyst that brings this development to its logical conclusion.
Adam Walker is a management consultant and business transfer agent who has specialised in the property sector for more than forty years.