Communities and Local Government CommitteeWritten evidence submitted by the Royal Institution of Chartered Surveyors

RICS—Royal Institution of Chartered Surveyors—is pleased to respond to the above Select Committee inquiry.

RICS is the leading organisation of its kind in the world for professionals in property, construction, land and related environmental issues. As an independent and chartered organisation, RICS regulates and maintains the professional standards of over 91,000 qualified members (FRICS, MRICS and AssocRICS) and over 50,000 trainee and student members. It regulates and promotes the work of these property professionals throughout 146 countries and is governed by a Royal Charter approved by Parliament which requires it to act in the public interest.

Introduction

The latest UK Residential Lettings Survey1 for the three months to October 2012 shows rising levels of tenant demand driven by the rising number of would-be first time buyers entering the rental market. RICS members expect rents to rise by 4% in the next 12 months and suggest that the lack of available mortgage finance to first time buyers is a key factor supporting the rental market. Demand from tenants rose at a greater pace over the period, with 15% more surveyors indicating demand rose rather than fell. The increasing level of demand is exerting sustained upward pressure on rents, and this in turn is attracting would-be sellers into the lettings market.

Against this background and with 1 in 5 households are predicted to be in the rental sector by 2016 and with some predictions suggesting that by 2020, this could represent 25% of all tenures, the Committee’s inquiry is extremely timely. Government action to deliver better quality rental homes in a fully functioning market is urgently needed to ensure a better deal for tenants and landlords and to ultimately deliver much needed institutional investment into the sector.

RICS Offers Responses to the Committee’s Questions as follows

Regulation of letting agents, including agents’ fees and charges

RICS considers the regulatory framework in the lettings market and the ever-increasing number of registration schemes offers limited protection for the consumer and costs business money, hitting the many microbusinesses and sole practitioners in the sector particularly hard. The sector has changed since 1979 with current regulation perpetuating an artificial distinction between sales and lettings which does not reflect how businesses are now organised or how consumers interact in the sector. This creates more red tape for business and more confusion for consumers. The current arrangements do not target regulation where the risks are greatest thereby leaving consumers poorly protected. For example, whilst residential sales agents are currently required under the terms of the Consumer, Estate Agents and Redress Act 2007 to provide consumers with access to a free redress scheme, lettings agents are not. Lettings agents who are members of the RICS are, however, required to have such a redress framework in place as part of compliance with RICS rules of conduct for firms. The existing legislation is no longer fit for purpose and is hurting consumers and damaging small business.

The following three examples illustrate how the existing legislation is no longer fit for purpose and is hurting consumers—whether they be buyers, sellers, landlords or tenants—and damaging small businesses:

1.Whilst residential sales agents are currently required under the terms of the Consumer, Estate Agents and Redress Act 2007 to provide consumers with access to a free redress scheme, lettings agents are not, so landlords and tenants do not have statutory safeguards that enable them to seek redress if things go wrong in the lettings process. Lettings agents who are members of the RICS are, however, required to have such a redress framework in place as part of compliance with RICS rules of conduct for RICS member firms;

2.A residential sales agent can be forced to cease trading by the Office of Fair Trading for being in breach of the Estate Agents Act 1979 or wider consumer protection legislation, but can continue to trade as a lettings agent, or set up a lettings business instead; and

3.Lettings agents are not required to meet minimum professional standards in order to start trading. As a result, there is considerable potential for consumer detriment. For example, lettings agents not being fully aware of all their responsibilities under existing landlord and tenant legislation, such as the need to undertake annual gas safety checks of their rental properties, with potential fatal consequences for tenants.

Consumers want change. Independent research commissioned by RICS found that:

89% of voters agree it should be compulsory for agents to register with a regulatory body.

87% of renters supporting a single compulsory regulation scheme for all letting agents.

93% support lettings agents being required to meet an industry code of practice.

Three quarters of tenants think it is the lettings agent, rather than the company they work for, that is responsible for the agent’s actions.

At least four out of five renters think that if compulsory regulation were to be introduced there would be:

Better protection for tenants regarding unethical and unfair practices (89%).

Greater consumer understanding of the process involved in renting property (83%).

Levels of trust between the letting agent and renter would improve (80%).

An overall improvement in the level of service provided by letting agents (84%).

RICS recognizes and welcomes the Government’s focus on reducing red tape for business and consumers but cautions that this should not preclude reform to introduce better regulation which introduces a more joined up and less complex approach beneficial to all parties.

RICS would argue that the current situation where there are a number of different landlord and letting agent accreditation schemes emerging in the devolved administrations, London and local authorities is creating confusion, inconsistency, red tape and unnecessary cost for the consumer and business. The nationwide situation is:

The Welsh Assembly is seeking to introduce an accreditation scheme for private sector landlords and letting/management agents.

The Scottish Government recently consulted on a new strategy for the Scottish PRS which included questions on whether regulation of Scottish lettings agents was required.

The Mayor of London is committed to establishing the London Rental Standard which aims to accredit 100,000 private landlords by 2016.

The London Assembly are investigating the potential for developing the regulation of lettings agencies using existing borough and voluntary sector schemes as a model.

Local authorities, for example the London Borough of Newham and Oxford City Council, are establishing their own voluntary schemes with others such as Liverpool City Council consulting on following suit.

The Government does not need to introduce a new regulatory framework to ensure better consumer protection and improved conditions for business. RICS believes that two minor legislative changes will raise standards and expectations to benefit landlords and tenants as well as buyers and sellers.

Amend the definition of “estate agency” in Section 1 of the Estate Agency Act 1979 to include lettings and managing agents, and make associated changes to Section 53 (1) and Schedule 6 paragraph 2 subsection 1 of the Consumer Estate Agents and Redress Act 2007:

This will give the OFT powers to ban sales, lettings and managing agents who act improperly; require all such agents to treat their clients fairly, clearly and promptly, including having separate client money handling arrangements; and, require all such agents to have clear redress mechanisms available free to consumers in the event of a dispute that cannot be resolved through the agent’s own internal complaints handling arrangements. It will also prevent sales agents who have been banned from trading to immediately set up a new business as a lettings and/or managing agent.

Enact the existing Section 22 of the Estate Agency Act 1979:

This will require sales, lettings and managing agents to abide by statutory minimum professional standards before they start trading. RICS considers these standards could reasonably be set at NFOPP/NAEA technical qualification (NVQ level 3) or equivalent, and could be enforced via a relaunched and joint industry standards board. This would create a level playing field for all agents. The industry is ready to work together and with Government to develop these minimum standards and an associated independent enforcement regime.

The first of these two changes formed amendments to the Enterprise and Regulatory Reform Bill tabled by Baroness Hayter and debated on Wednesday 16^th January 2013. These amendments have cross-industry support from RICS, ARLA, Shelter, Crisis, ARMA, CIH, Which?, Federation of Private Residents Associations, BPF, Institute of Residential Property Management, NFoPP, Sir Robin Wales—Mayor of Newham and the NAEA.

Independent research commissioned by RICS to understand the potential costs and benefits of these two legislative changes has found that there is a strong economic argument in favour of introducing them.

This study, which focuses on sales and lettings agents, is not intended to present a full monetised Impact Assessment. Rather, it uses current impact assessment methodologies to present a case for change for further consideration by Government. For example, RICS fully recognizes the need to explore further the potential costs and benefits in relation to managing agents. The summary of anticipated costs and benefits of extending scope of the Estate Agents Act 1979 and enacting Section 22 of that Act are as follows:

Regulation change	Estimated costs
Extending EEA79
One off costs	£41,022,000
Annual costs	£639,000
Enacting Section 22
One off costs	£4,792,000
Annual costs	n/a
Overall costs
Total one off costs	£45,814,000
Total annual costs	£639,000
Total costs	£46,452,000

Source: TBR 2012. Note: figures may not sum due to rounding.

SUMMARY OF BENEFITS

Regulation change	Estimated value
Extending EEA79
Annual benefits	£3,277,000
Enacting Section 22
Annual benefits	£17,796,000
Total benefits	£21,073,000

Source: TBR 2012. Note: figures may not sum due to rounding.

Values associated with costs and benefits are drawn from a range of sources and factors, including costs of implementing systems, procedures, administration, training, professional fees, costs of joining redress schemes, cost of regulation, time savings for tenants, landlords and agents, savings to redress schemes, efficiency gains and productivity gains. This summary analysis does not include the potential consequential benefits associated with improvements in health, education and crime and which may be significant. An illustrative estimate values these at between £2.87 million to £5.09 million per annum.

Drawing on these figures, the payback period of the proposed two legislative changes is 2.2 years. Moreover, using the BIS Impact Assessment Calculator, a Net Present Value of £130 million is returned, when annual costs and benefits are considered over a ten year horizon. This represents a benefit to cost ratio of 2.8:1.

The research suggests that there are many lettings agents who are in favour of the proposed changes. Gaining the support of those who will have to bear the principal costs should prove particularly effective. Likewise, landlords, who may be perceived as having to pay higher fees and so opposed to any change, are potentially valuable supporters.

Against this background of a short term payback of the cost of the change and a clear economic benefit over a 10 year horizon coupled with widespread industry and consumer support, it is RICS’ view that the case for change is overwhelming. RICS and other industry bodies stand ready to work with Government to further make the case for change.

RICS is due to publish this research shortly after the closing date for written evidence (17 January). RICS would be pleased to share a copy with the Committee ahead of publication and would be pleased to brief the Committee and officials on its findings as soon as possible and ahead of the oral evidence sessions.

RICS recognises that there is a great deal of work for RICS, the wider sector and Government to do to improve consumer awareness of their rights when letting property. RICS’ consumer research (ref) found a significant lack of awareness from tenants about what they should expect from their agent which is compounded by a lack of effective regulation. For example, four out of five renters believe lettings agents are required to abide by a government, ombudsman or regulatory body code of practice—demonstrating a lack of accessible information on lettings agent’s legal requirements.

RICS does not believe that SafeAgent offers a workable solution to better protecting consumers and raising standards in the sector. SafeAgent is simply a logo which denotes whether agents use client money protection schemes adding to the confusing plethora of logos that agents already display in their windows or on their website. SafeAgent is not a regulatory body, a standards setter, a disciplinary body nor a redress scheme and therefore provides no protection to the consumer. RICS stand ready to work with other industry bodies and Government to better promote the consumer protection offered by RICS and ARLA qualified agents.

RICS would not support regulation of agent fees as this would be a restriction of the market. Fees are for the market to determine through competition. However, fees should be transparent and easily accessible for the consumer so that the consumer can then make informed judgments about whether such fees are proportionate and reasonable. This is a requirement of the RICS UK Residential Property Standards (commonly referred to as the “Blue Book”) and guidance for RICS members.

The quality of private rented housing, and steps that can be taken to ensure that all housing in the sector is of an acceptable standard

For reputable landlords, the quality of properties is generally linked to the rents they are able to achieve and the length of voids between lettings. This provides a clear incentive to maintain properties to a good quality. Quality has generally improved since the end of rent control and has been driven up by tenants expectations although RICS is concerned that current high demand and shortage of properties is leading to tenants accepting lower standards. With renting the only long term housing option for many, more than ever, renters want decent, well-maintained property.

For less reputable landlords, RICS believes that the Housing Act 2004 along with the Landlord & Tenant Act 1985, fire and gas safety regulations and Tenancy Deposit Scheme Rules provide the required legislation to ensure rental properties are maintained to an acceptable standard. The Housing Act 2004 gives Local Authorities the necessary powers to intervene and to carry out works if the landlord will not. Local Authorities need the resources to be more proactive in this area and to apply the Act consistently and with rigour.

The responsibility for enforcing the Housing Act 2004 and the Environmental Protection Act 1990 (where premises are prejudicial to health) is that of Private Sector Housing Officers. It is essential that Officers understand building construction and defects and energy efficiency issues. Cuts in funding to Local Authorities mean that Officers are often not appropriately qualified property professionals with no diagnostic building survey skills and are not capable of executing complex ,technical surveys and writing useful Improvement Notices.

This situation is compounded by letting agents now being legally responsible for serious hazards such as falling boundary walls under HHSRS requirements. As letting agents are not required to meet minimum professional standards nor are subject to any form of licensing regime, many letting agents will be unaware of their legal responsibilities and may therefore let housing of an unacceptable standard.

Levels of rent within the private rented sector—including the possibility of rent control and the interaction between housing benefit and rents

RICS would be strongly opposed to any introduction of rent control. Rent levels are market driven and any attempt to interfere with this would reduce the number of properties available for rent and result in institutional investors abandoning sector as they will be unable to make the required returns. RICS has anecdotal evidence that investors are already struggling to obtain average yields of 5%—any restriction on rents will make this impossible and lead to an exodus from the sector. Rent control would reduce choice and availability. This is precisely the opposite outcome that the Government is seeking to achieve and that is required to house the growing numbers of people in the sector. The simple solution to solving the issue of rising rents is to build more, high quality rental property on a large scale.

Regulation of landlords, and steps that can be taken to deal with rogue landlords

RICS supports the principle of the registration and/or regulation of landlords. Any scheme must follow Better Regulation principles and be proportionate to minimise additional burdens on landlords, and targeted where the risks are greatest to provide enhanced consumer protection. Registration and/or regulation of landlords would also provide tenants with redress mechanisms. There is a clear need for an educational programme to be made available to landlords who have a duty of care to their tenants but often do not seek help.

The regulation of houses in multiple occupation (HMOs), including the operation of discretionary licensing schemes imposed by a local authority for a category of HMO in its area

RICS members believe a clearer definition of a HMO is required which will provide clarity on where the legislation is applicable. A centrally agreed framework and conditions would provide clarity for consumers, agents and investors. The definition must be suitable for the market, the situation in Scotland where the strict requirements of a maximum of two non-related occupiers in the property is deterring landlords from the market must be avoided.

RICS is of the view that discretionary licensing should be maintained across the board as this gives local authorities the tools to satisfy local needs. For example, discretionary licensing has dramatically improved the housing stock and driven rogue landlords out of Oxford. However, there needs to be consistency between Local Authorities about how they implement the rules, the current situation is perceived as confusing for both valuers and lenders. Consistency and clearer definitions would ensure valuers are more able to accurately reflect value and whether a property is a mortgageable security. A number of lenders want to lend only where there is a ready demand for owner occupation and investment properties not just investment properties. Sections of towns and cities are now no go areas for owner occupiers.

Tenancy agreements and length and security of tenure

RICS members view the existing Assured Shorthold Tenancy (AST) arrangements with a minimum of six months but no upper limit as providing the flexibility that both landlords and tenants generally require. Feedback from RICS members suggests that tenancies last, on average, 12–18 months and are dealt with adequately by existing legislation. However, this feedback also suggested that the average length of tenancy is increasing with tenancies more regularly lasting over 18 months. Members see ASTs giving all parties clarity and certainty for landlords and lenders who are able to get possession if required. Many private Landlords are enforced or buy as investments, they will want to keep their assets as liquid as possible and therefore long lets will be unattractive to them. The current AST arrangements give this reassurance. Providing alternative arrangements with greater security of tenure will potentially result in investors abandoning the market. Furthermore, greater security of tenure will serve to better protect bad tenants.

RICS does recognise that the changing nature of the rental sector means that new groups such as families who may require longer term security are now entering the sector. RICS is committed to working with Government and the sector to raise awareness of the benefits to landlords and consumers of granting Assured Shorthold Tenancies for longer than 12 months. For example, families could be offered three or five year tenancies with rent increases linked to RPI to maximise income for investors by minimising voids and removing market risk.

Many mortgage companies require properties to be let only for a maximum of 12 months on a buy to let mortgage. A number of insurance companies often place similar restrictions on landlords. RICS recommends that Government work with the mortgage and insurance sectors to allow landlords more flexibility on tenancy length in their mortgage agreement. This will provide improved security of tenure for tenants and security of income stream for landlords.

How local authorities are discharging their homelessness duty by being able to place homeless households in private sector housing

The rental sector is keen to co-operate with local authorities but require local authorities to pay rent promptly, not penalise landlords for fraudulent tenant applications for support nor insist on court orders before rehousing tenants. Local Authorities must support private landlords who house homeless households as many are often not properly prepared to house these tenants. RICS members have cited incidences of where Local Authorities have advised tenants to ignore Section 21 notices and in some cases court orders before vacating. This kind of incorrect advice deters landlords from housing these tenants. Social housing must be developed in the rental sector

RICS would be pleased to provide further written or oral evidence to the Committee. Please do not hesitate to contact me if you require further detail or briefing.

January 2013