Autumn statement: Letting fees are awful, and Philip Hammond is right to ban them

Chancellor Philip Hammond enjoys a private joke somewhere in the Autumn Statement. Image: Getty.

A tragedy, in one graph:

Isn’t that awful? Isn’t that the saddest thing you’ve ever seen? A universally adored brand like Foxtons, losing a tenth of its value in an hour off the back of one bit of bad news? It couldn’t happen to a nicer firm. Perhaps it’s time for the inaugural CityMetric Christmas appeal.

Or we could not do that, on the grounds that banning letting agents fees is a thoroughly good thing, and estate agents are awful.

The move, which chancellor Philip Hammond is announcing in today’s Autumn Statement, will bar lettings agents in England and Wales from demanding tenants pay whatever fees they happen to feel like. (Those in Scotland are already barred from doing so.)

Lettings agents do have costs, of course: reference checks, credit checks, repairing the deliberate damage passers-by do to those minis in examples of what are basically hate crimes. In future, though, they’ll have to recoup them through landlords, rather than tenants.

The whiny, kneejerk, “pro-business” critique of this policy runs as follows. Any attempt to interfere in the operation of the free market will necessarily harm the weakest participants in that market. If letting agents pass their costs onto landlords, landlords will in turn pass them onto tenants. Ergo, the real victims of any attempt to stop lettings agents from torturing tenants any way they happen to feel like it will be tenants themselves.

This critique is, of course, a steaming pile of horseshit, spread about by the sort of people who have no shame about publicly announcing that they’ve not thought very hard about this and probably aren’t actually that clever. For one thing it’s obviously ridiculous. They’re banning parasitical middle men from demanding hundreds of pounds with menaces from renters whenever they have to do some photocopying – and you think that will actually harm renters? Are you high?


But no, let’s be fair to them and destroy their argument using actual logic. Yes, lettings agents do have costs. But there is no evidence that the fees they charge reflect those costs. Occasional CityMetric contributor Alex Parsons put together a report on this, available on the website lettingfees.co.uk. He found that the cost of new tenancy agreements varied from £48 to £450.

Administrative costs clearly don’t vary by a factor of 10: some of those letting agents are charging inflated fees, not because they have to, but because they can. By the time the fee is due, most tenants will have committed to their new home: the agents have them over a barrel. They’re price-gouging, and they should stop.

But there are legitimate costs, of course. Won’t these be passed onto tenants in higher rents? Very possibly – because, while the availability of property won’t change, the availability of money to pay for it will.

Even this is no bad thing, though, since at least they will be passed on consistently. At the moment it’s impossible for tenants to compare the real price of a new home, because are not shown in the advertised rent. Banning letting fees will introduce a much needed measure of transparency to the market.

There are other benefits to a ban. The added costs are likely to be more managable if paid as part of the rent, rather than in a single, upfront lump. It also means an end to unpredictable extra fees, when individual tenants leave houseshares or contracts otherwise need amending.

But if you’re still not convinced, there’s one more way you can tell that the real victims of this policy will be estate agents, rather than tenants. It’s this:

There is a reason that has happened: investors think this policy means that less money will now be going to Foxtons.

It’s a tragedy. A real tragedy, I tell you.

Jonn Elledge is the editor of CityMetric. He is on Twitter, far too much, as @jonnelledge.

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High streets and shopping malls face a ‘domino effect’ from major store closures

Another one bites the dust: House of Fraser plans to close the majority of its stores. Image: Getty.

Traditional retail is in the centre of a storm – and British department store chain House of Fraser is the latest to succumb to the tempest. The company plans to close 31 of its 59 shops – including its flagship store in Oxford Street, London – by the beginning of 2019. The closures come as part of a company voluntary arrangement, which is an insolvency deal designed to keep the chain running while it renegotiates terms with landlords. The deal will be voted on by creditors within the month.

Meanwhile in the US, the world’s largest retail market, Sears has just announced that it will be closing more than 70 of its stores in the near future.

This trend of major retailers closing multiple outlets exists in several Western countries – and its magnitude seems to be unrelated to the fundamentals of the economy. The US, for example, has recently experienced a clear decoupling of store closures from overall economic growth. While the US economy grew a healthy 2.3 per cent in 2017, the year ended with a record number of store closings, nearly 9,000 while 50 major chains filed for bankruptcy.

Most analysts and industry experts agree that this is largely due to the growth of e-commerce – and this is not expected to diminish anytime soon. A further 12,000 stores are expected to close in the US before the end of 2018. Similar trends are being seen in markets such as the UK and Canada.

Pushing down profits

Perhaps the most obvious impact of store closures is on the revenues and profitability of established brick-and-mortar retailers, with bankruptcies in the US up by nearly a third in 2017. The cost to investors in the retail sector has been severe – stocks of firms such as Sears have lost upwards of 90 per cent of their market value in the last ten years. By contrast, Amazon’s stock price is up over 2,000 per cent in the same period – more than 49,000 per cent when considering the last 20 years. This is a trend that the market does not expect to change, as the ratio of price to earnings for Amazon stands at ten times that of the best brick-and-mortar retailers.

Although unemployment levels reached a 17-year low in 2017, the retail sector in the US shed a net 66,500 jobs. Landlords are losing longstanding tenants. The expectation is that roughly 25 per cent of shopping malls in the US are at high risk of closing one of their anchor tenants such as a Macy’s, which could set off a series of store closures and challenge the very viability of the mall. One out of every five malls is expected to close by 2022 – a prospect which has put downward pressure on retail real estate prices and on the finances of the firms that own and manage these venues.

In the UK, high streets are struggling through similar issues. And given that high streets have historically been the heart of any UK town or city, there appears to be a fundamental need for businesses and local councils to adapt to the radical changes affecting the retail sector to preserve their high streets’ vitality and financial viability.


The costs to society

While attention is focused on the direct impacts on company finances, employment and landlord rents, store closures can set off a “domino effect” on local governments and businesses, which come at a significant cost to society. For instance, closures can have a knock-on effect for nearby businesses – when large stores close, the foot traffic to neighbouring establishments is also reduced, which endangers the viability of other local businesses. For instance, Starbucks has recently announced plans to close all its 379 Teavana stores. Primarily located inside shopping malls, they have harshly suffered from declining mall traffic in recent years.

Store closures can also spell trouble for local authorities. When retailers and neighbouring businesses close, they reduce the taxable revenue base that many municipalities depend on in order to fund local services. Add to this the reduction in property taxes stemming from bankrupt landlords and the effect on municipal funding can be substantial. Unfortunately, until e-commerce tax laws are adapted, municipalities will continue to face financial challenges as more and more stores close.

It’s not just local councils, but local development which suffers when stores close. For decades, many cities in the US and the UK, for exmaple Detroit and Liverpool, have heavily invested in efforts to rejuvenate their urban cores after years of decay in the 1970s and 1980s. Bringing shops, bars and other businesses back to once derelict areas has been key to this redevelopment. But today, with businesses closing, cities could once again face the prospect of seeing their efforts unravel as their key urban areas become less attractive and populations move elsewhere.

Commercial ecosystems featuring everything from large chain stores to small independent businesses are fragile and sensitive to change. When a store closes it doesn’t just affect employees or shareholders – it can have widespread and lasting impacts on the local community, and beyond. Controlling this “domino effect” is going to be a major challenge for local governments and businesses for years to come.

Omar Toulan, Professor in Strategy and International Management, IMD Business School and Niccolò Pisani, Assistant Professor of International Management, University of Amsterdam.

This article was originally published on The Conversation. Read the original article.