Communities and Local Government CommitteeWritten evidence submitted by the UK Association of Letting Agents

Background

1. The UK Association of Letting Agents (UKALA) exists to protect and promote the legitimate interests of commercial letting and management agents working in the private-rented sector (PRS)

2. UKALA is a non-profit professional association dedicated to promoting a healthy and viable lettings market.

3. In partnership with the National Landlords Association (NLA), it is the only trade organisation committed to working with agents, landlords and tenants to ensure complete peace of mind throughout the rental process.

4. UKALA seeks a fair legislative and regulatory environment for the private-rented sector while aiming to ensure that agents observe and promote best practice in operation of their businesses.

UKALA Evidence Summary

5. Given the nature of its business and the interest of its members, UKALA has sought to limit its evidence to the following areas of inquiry outlined by the terms of reference:

(i)Regulation of letting agents within the PRS.

(ii)Tenure duration and stability.

(iii)Rent levels.

6. UKALA contends that:

The Quality of service and financial protection for landlords and tenants using letting agents can be assured through industry efforts without the need for a new regulator to be established, although Government encouragement may become necessary.

Amendment of tenure arrangements put in place by the Housing Act 1988 is unnecessary to influence stability. The existing provisions are flexible enough to meet current needs if used to their full extent.

Efforts to artificially control private rents would prove damaging to future investment and could therefore create additional barriers to accessing good quality rented accommodation.

(i) Regulation of Letting Agents within the PRS

7. UKALA does not necessarily recognise the registration of letting agencies as an effective tool to ensure standards are met and maintained. Regulation must be proportionate to the issues or problems it seeks to address and it appears that a more targeted response is necessary to challenge the negative experience of some and perception of many in the wider community.

8. Rather, we believe that all of those living and working within the PRS should be able to expect certain minimum standards from professional agents providing letting and management services.

This must include:

professional indemnity insurance;

comprehensive client money insurance;

commitment to professional development;

a robust complaints process with an independent provision for appeals;

transparency and clarity of all terms, conditions and potential charges; and above all; and

excellent customer service.

9. UKALA ensures that its members provide all of these reassurances to landlords and tenants and believes that all other agents should do the same.

10. While we do not believe that a central regulator is essential to ensure these standards are met, we would support moves to make these features a mandatory part of all letting and management services.

11. In practice these elements exemplify the type of practices and security at the heart of most calls for statutory regulation. They also form the core of UKALA’s membership offering to letting agents and that of the other reputable trade associations operating within the PRS. Given the inevitable cost of any intervention intended to provide an assurance of minimum professional standards, it would be beneficial to reduce the cost to be borne by firms in the industry and potentially consumers. Furthermore, it stands to reason that using appropriate existing bodies to deliver positive outcomes should represent better value for money than attempting to construct an overarching regulator.

12. The existing trade and representative bodies working within the marketplace are also able to offer the positive strands of regulation which are sometimes overlooked when identifying consumer detriment. In the case of letting agencies, much of the perceived detriment to landlords and tenants can be traced to ignorance or a failure to keep up to date with changes in best practice and regulation rather than deliberate negligence or malice. Bodies like UKALA are well placed to deliver the informative communications and continued commitment to professional development which will make a tangible difference to the experience of those using agents which are not currently affiliated to such a body. It is arguable that such positive business support could not effectively be delivered by a central oversight body with limited practical experience of providing letting and management services to the market.

13. UKALA would argue that this complete package of support, insurance and assurance would have the greatest impact on the image of letting agents, the experience of their users and the overall functioning of the PRS.

(ii) Tenure Duration and Stability

14. The existing tenure arrangements, established by the Housing Acts 1988 and 1996, provide a considerable degree of flexibility previously absent from the PRS and arguably facilitate the functioning of the marketplace within which UKALA’s members trade. The ability to negotiate a tenancy which meets the needs of both landlords and tenants on an individual basis whilst establishing a contractual agreement underpinned by statute, provides a foundation upon which letting agents provide a useful service for those living and investing in the PRS.

15. It is UKALA’s belief that there is no need for significant changes to the framework provided by these Housing Acts, as the flexibility provides return on investment with the ability to create relative security which does not bind parties to the extent of increasing financial risk. However, it is arguable that the full extent of this flexibility has yet to be fully explored by the market, given a number of limitations and the relative youth of the PRS in its current form.

16. Currently, the majority of tenancies (74.7%1) established by private landlords and their appointed agents are based on agreements for an initial fixed term of no-more than 12 months, renewable or extendable upon expiry—despite the fact that most tenancies run for a much longer period. According to a recent survey of private tenants conducted by the National Landlords Association, 66% of those questioned had been resident in their current rental property for longer than two years2 despite initially agreeing a shorter fixed period.

17. Traditionally landlords have demonstrated limited demand for longer initial tenancies in their dealings with letting agents, although the majority desire reliable tenants who wish to remain in situ throughout multiple renewals. Resultantly letting agents have generally been asked by their clients to negotiate these types of tenancy—perpetuating their status as the default duration. However, this is not to say that there is not a strong case for promoting variation and flexibility where appropriate for all parties. Well-informed, professional letting agents can play a role in educating the market and facilitating acceptance of different arrangements. Many landlords are reliant on their agent for advice on managing their portfolios and may not be fully aware of their options.

18. It should be noted however that many landlords who have bought property with the aid of buy-to-let mortgages are not free to offer tenancies of any duration. In fact it is the norm for lenders to limit tenancies to a maximum fixed term of 12 months. It would therefore be irresponsible of letting agents to promote the offering of longer duration tenancies to landlords and tenants without verification of the terms of any relevant lending. This can become complicated to administer and additionally challenging to match those tenants in search of a long-term tenancy with a landlord able to provide such terms.

19. Matters would be greatly simplified were lenders to remove this prohibitive term across the board allowing landlords and agents to negotiate tenancy terms freely and without concerns about breaching lending conditions.

20. It is also important to be mindful of the risks associated with establishing a new tenancy between parties who have not otherwise done business. It would be argued by many landlords that it is unwise to offer a long-term tenancy to a new applicant without first trialling the relationship. It may be seen as more responsible, or prudent to continue to offer tenants an initial 12 month agreement, with a view to negotiating longer terms if all parties are agreeable at expiry. As such tenancies can be more complex than those of minimum duration, skilled letting negotiators would have an important role to play.

(iii) Rent Levels

21. Rents in the PRS are set according to market conditions and negotiated accordingly. Letting agents have a duty to their clients to obtain the best possible return in relation to what the market can sustain. However, this is not simply a case of achieving the highest possible return on day one of a new tenancy. A responsible letting agent negotiator will evaluate the market on the basis of sustainability as well as what levels of demand will support given local supply. It is important that an agent considers whether demand is likely to remain constant and if the agreed rent is likely to allow a long-term sustained tenancy in the future.

22. It is understandable, given the inflation in rent levels witnessed in some parts of the UK, that there is a desire to increase the affordability of private accommodation. However, in order to adequately assess the value of property and ensure the proper functioning of the lettings market agents require a thorough understanding of local market conditions, the local economy and property availability. Any intervention in pricing levels can lead to instability and a difficulties in planning investment.

23. Realistically, UKALA believes that the only way to influence market prices in a sustainable and responsible fashion is to affect supply relative to demand. As demand is increasing in much of the UK and looks likely to continue to increase over the course of the next decade, a significant increase in supply of private accommodation is required in order to influence the level of rents down-stream.

24. Historical attempts to influence rent levels by means of direct intervention, ie rent control and capping legislation, have caused considerable detriment to the market. Following a series of attempts at regulating rent levels and increasing security of tenure in the PRS to levels which created imbalance between the needs of suppliers and consumers, investment in residential accommodation ceased to represent a viable return. It has taken more than 20 years since the liberalisation of the PRS by the Housing Act 1988 for the proportion of households renting from a private landlord to reach parity with those in the social sector, having hit an historic low of 9.1% of all housing stock in 1991.3

25. UKALA is concerned that a return to intervention oriented housing policies aimed at artificially restricting the ability of the market to set rent levels would deter future investment and introduce enough uncertainty about returns as to erode the confidence of those currently committed to the PRS. Despite the intention to increase access to accommodation this could in fact result in a reduction of overall supply, a contraction in the overall size of the sector and consequently significantly higher barriers to entry which would favour low risk tenants at the expense of those potentially in greater housing need.

26. The effect of a loss of investor confidence in residential rental property would stretch much further than the PRS. According to DCLG statistics, 68% of new household creation takes place within the PRS.4 Furthermore, current government efforts to restart stalled construction projects and increase the overall housing supply are heavily linked with implementation of the recommendations of the Montague Review which seek to encourage large-scale institutional investment. Given the difficulties already encountered in relation to bringing such investors back into the residential market, a perception that policy makers could inject further uncertainty into the PRS could be extremely unsettling and stall new investment. This is particularly concerning in view of the way in which these institutions exited the market following the Rent Act 1965 and its subsequent regulation of the sector.

27. Those investors who remain active in the sector are likely to have their cash flow appreciably reduced resulting in less available funds to conduct continued maintenance and periodic renovation. As witnessed throughout the 1970s and 1980s this represents a serious risk to the quality of housing available privately which has been improving steadily since the relaxation of restrictions provided sufficient return to enable investment.

28. UKALA agents encourage their clients to view investment in residential property as a long-term activity, most landlords plan their portfolios over a 15–25 year period and require relative stability to assess their investments. In many cases this forms the basis of their pension planning, if not their principle income. The type of uncertainty outlined above would sincerely jeopardise the investments made by these individuals and companies without significantly improving outcomes for private residential tenants.

January 2013