What your agency can do to address the supply and demand issue in lettings

20 March 2023

As stock availability dips, Robert Bolwell, Dutton Gregory, and Megan Eighteen, Haslams, share their insights into how your agency can face this challenge head on.

Robert Bolwell, Senior Partner at Dutton Gregory, and Megan Eighteen, Business Development Manager at Haslams, recently spoke on a Goodlord webinar to share their expert views on a range of topics. William Reeve, Goodlord's CEO, hosted the session - including the current supply and demand imbalance in the private rental market.

From the government plans for the sector to how agents can adapt to protect against the sector's pressures, here's a breakdown of what was discussed, to help you prepare your agency in the best way:

Prefer to watch or listen to the full interview?

Do you see any signs for hope on the long-term agenda that something will be done to even out the balance between demand and supply?

RB: Boris Johnson famously came up with a figure of [building] 300,000 new homes every year. That's what we need to build effectively to get supply and demand in equilibrium. If we were building 300,000 homes a year, there would be great opportunities for people who are building and people who are selling. But we're not.

In the 21/22 financial period, there were about 204,000 new homes built. So, even in our best year for ages, we're at 30% less than we should be building. If you think about what that means for the private rented sector, there's always going to be an imbalance between those who need property, need homes, need somewhere to rent, and what's available.

ME: One of the big fights that we're having at local level is that people want more housing but they're also fighting to protect green space. We're in this position where you're like, okay, you want somewhere for your family to live, but you don't want to give up green space. It's a balance, isn't it?

RB: Councils across the country are also reclassifying HMOs. What Portsmouth started doing is looking at reclassifying HMOs, such as reclassifying five bed sits into one HMO, as separate units.

They then band each of those rooms as a Band A for council tax. And all of a sudden, statistically, where they had one property before, they now technically have five properties tomorrow morning.

Which increases their council tax take, but more importantly, as far as government is concerned, all of a sudden we've got an extra four properties in the borough.

This is absolutely fantastic for statistics, but of course it doesn't actually change the number of properties that are available to tenants to rent. And that is happening across the country now.

We received feedback from our open letter that changes to taxation top the list of policy recommendations landlords and agents would like to introduce. Is that what you would have expected to see?

ME: When we actually spoke before the webinar, you asked, "What would you do if you had a magic wand?" And I said, "I think we'd have to sort the tax issues out." So, it doesn't surprise me that fellow agents felt the same. Taxations are a massive part.

The pejorative language that's being used when discussing landlords at the moment, within the media, within the political parties, does not help the cause at all. It does put us in that position where we are having to defend the undefendable.

If people could really see a full picture on what a landlord actually is - it isn't just somebody that's in a nice suit, who's got bags of money. If we start flipping the dial on that we might see that we'll have a bit more of a chance.

How has the current tax regime affected landlords?

RB: If you think about the changes we've seen in the tax regime over the last 10, 15 years, it's always hitting landlords. If you want to increase your portfolio as a landlord, you've got the extra Stamp Duty to pay.

If you're trying to run a business, we're not even treated as a business by the revenue, you are treated as someone who can never make a loss. So, losses are difficult to carry forward.

We've lost the writing down allowance, the fair wear and tear - and the biggest one, of course, was mortgage interest rates. You can claim your basic rate but you can't claim it against your higher rate.

If we go back to 2020, 4.4 million homes were in the private rented sector. That was almost 20% of the people living in this country. You throw in the social sector, it's a third of people who are now renting their homes.

We've reached a stage where I think the private rented sector is too big to fail, and we've got to make ourselves heard. We've got to express to the government that we're providing good homes, we're providing a service, we're housing the population of this country, and we need a little bit of support.

I welcome anything like an open letter, I welcome people writing to their MP, writing to local counsellors, making our voice heard. We need to think about supporting landlords.

Read and sign the open letter: Pressures on the Private Rented Sector

One of the key questions for many landlords is around capital growth. Megan, if I was one of your landlords, how would you be advising me?

ME: I think it's a difficult one because capital growth has increased over the last 100 years, if we look at properties. Rents are at an all time high, and it really depends on that particular landlord.

At Haslams, we like to categorise our landlords:  accidental landlords, pension landlords, and portfolio landlords.

The advice that I give each of those landlords is different. Accidental landlords are fearful. The important thing for them is making sure that they're able to offload their assets in a really safe way, that they're not out of pocket.

It's at times tricky to then expand your portfolios, because interest rates are so high at the moment, but we're hoping to see a dip down in house prices for sale... Sorry, I shouldn't say hope - I'm a letting agent, I can't help it! The more landlords we can get in, the better it'll be for everybody. That's really the best thing we can hope for.

And what about the mortgage outlook at the moment?

ME: I'm not a mortgage specialist, but from where we were pre-Christmas to where we are now, it's certainly looking more positive. We can't sustain this level of pressure on the interest rates, so something has to give.

That affects landlords, but it also affects homeowners, and of course, all these people that want to buy their first home, they can't afford to. Irrespective of what pressures they're putting on our landlords, it's not helping first time buyers either, so something has to give.

Are you seeing signs of the rent arrears going up already, or is that more of a forward-looking expectation?

ME: I think more of a forward-looking expectation. We've made a massive push ourselves to ensure that we've got a robust rent and legal protection in place for a lot of our clients, and we're seeing a huge take-up with that - which I think is showing that people are a little worried about what's going to happen. As an office, we are not doing too bad on the arrears front, but it is a fear for us, certainly in the future.

How can agents adapt their businesses to protect against some of these pressures?

ME: As agents, whilst we call ourselves the experts, are we actually making sure that we understand the current context? Being a good partner for a landlord also filters back down to your team. Is your team equipped to deal with questions from landlords? We have an obligation to them. We want to keep this sector alive and we want to continue working in the jobs that we hope to do.

But the problem is, if you can't have a conversation with a landlord at whatever level you are in the business, then you are going to continuously plant seeds of negativity or worry with them.

At Haslams, we made an FAQ for internal use, with all the answers to what possibly could come up from the Renters' Reform Bill, so that they could confidently answer that. Obviously, you can engage with things like Goodlord, the CPD, you've got the NRLA, and of course, Propertymark... You can use those bits of information to ensure you're always up-to-date.

If you can't have a conversation with landlords easily, then you're going to have problems. It's an opportunity when there's big legislative changes in the industry that send shockwaves through our landlords. That's our time to shine.

It leads in really beautifully to making sure that your team are fully trained and ready for that conversation - and making sure that tenants are fully educated too, because I'm sure I'm not alone here when I've said, how many tenants have rung up and said, well, the law says I can have a dog now.

And I go, whoa, no it doesn't. But the amount of times I've had people go, Megan, can they have a dog? Are they allowed to have a dog now? So, it is just making sure that we're all on the same page.

Download your free legislation e-book - with bonus audiobook and e-brochure

How might agencies need to review their business models, in light of the Renters' Reform Bill?

RB: The white paper suggested getting rid of fixed term tenancies. There's a certain logic because if you can't serve a section 21 to get your tenant out, what's the point of having a fixed term from the 1st of January through the 31st of December? Nothing's going to happen at the end of that tenancy, because the tenant will still be there, it'll roll over.

Michael Gove's idea is to get rid of fixed term tenancies all together. In other words, the moment your tenant moves in is effectively a rolling periodic tenancy that goes from month to month, until the second coming. Now, there are a lot of implications about this, and the number one, it's a difficult thing for landlords to get their heads around.

Traditionally landlords start a tenancy on day one, and finish it a year later, or whatever it may be. A lot of agents invoice commission to a landlord for all of the commission they would earn during the fixed term. You have a 12-month tenancy, how many agents will send out an invoice, a 12-month commission, in that first month?

It makes it a difficult month for your landlord who is getting no income at all, but from the cash flow point of view, for agents who do that, it's fantastic. You're effectively in 12 months fees in month one. If we do get rid of fixed-term tenancies and your tenant can go at any time by giving you just two months notice, how many landlords are going to happily pay 12 months' commission?

The other thing to think about is that, as an industry, we actually get quite a bit of money out of charging landlords for renewals. And of a fixed term, what do we do? We negotiate a new tenancy, or a rent increase, and we charge the landlord accordingly. If we don't have a fixed-term tenancy, no one's going to ask us to do a renewal.

Agents need to think about their cash flow. If we're not doing renewals, that could hit income. If we're not getting commissions 12 months upfront, that's going to hit cash flow. So, we need to start thinking about this, really the moment we see the shape of the new Reform Bill. But we're going to think about other sources of income.

ME: I could be the biggest fan of legal protection, but I don't think I'm alone. From what I can gather, it's worth its weight in gold, I don't think we could exist without it at the moment. I think the legal protection is actually sometimes more important than the rent protection.

It was interesting you touched on renewal fees there, because one of the biggest concerns that came out of the Renters' Reform white paper was that. We, as an agency, have obviously had the Tenant Fee Act and we've had to mitigate that. Renewal fees is definitely an area for us that will be the case too.

There is also, probably, a shift towards more fully managed services, to help look after these changes and stay on top of things - are you seeing that?

ME: Yes. Our self-managed landlords are often the ones that get stuck in the legislation trap, where they're not fully up to date, or they only understand part of it. Many are currently with the NRLA, but there's also a good chunk of them that are not with any form of professional body or agents.

Let them come to you, let them talk to you, and explain the benefits. Because, whilst it might not be a full managed option, you've also got rent collection models. Making sure you're working with the right landlords will make sure that your teams aren't pushed to absolute breaking point as well. So it's a win-win for everybody.

What are the positives and opportunities for agents in the current context?

ME: Accidental landlords are the ones that are most likely to leave. When there was stamp duty relief, that was a good time for them to exit the market. Interestingly, this may mean fewer landlords but larger portfolios.

My only downside is that when you have got professional landlords, they're more driven by the pounds and pence of everything. I do think that when landlords are in that position, they're going to be more worried about who they're going to use as their agent, who they're going to spend their money on. This is an opportunity for you, as really good agents, it'll come into our own, it'll be our chance to rise to the top.

We've also got a project [at Haslams] that we're working on called the VIP Landlords. So, when we have, say an accidental landlord that wants to leave the portfolio, we've got a pool of qualified people ready to sweep in and buy those properties, and feed them straight back into our portfolio. Rather than them going to the open market straight away, we give them about a 10-day time period.

It means that landlords often sell them with tenants in situ, so the landlords are getting no void periods, the new landlord's going to get no void periods, and of course, we're benefiting from not losing a property out of our portfolio.

If the property is going to be empty, then obviously the open market is where we've got to go. We've got to be opening up to all the different opportunities. But it is a moment where you can obviously, add another landlord in, ensure you're not going to lose out the portfolio, but of course, if you are working with any ancillary products, like mortgages and conveyancing, it's another opportunity there.

Further reading