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The Race To The Bottom

  • Why too much competition and lack of regulation is damaging the industry

  • We give our opinion on what needs to be done

Recently, I gave a keynote speech to a group of industry professionals highlighting why our industry is failing to deliver due to too much competition fighting for too few scraps.

There are two major components as to why we now have an oversupply of Property Management companies. The first one was Property Management being left outside of the REAA in 2008 meaning that there were no governing body setting standards that Property Managers had to comply with such as qualifications and standards.

The second major change was when the Residential Tenancies Act was amended in 2010. Prior to this date, only members of REINZ could charge a letting fee. The National Government changed this allowing all companies the ability to charge a letting fee.

These two changes saw an upsurge in startup Property Management companies. We now find ourselves at a point where the market is now saturated with small companies struggling to survive and when companies struggle they start to cut corners. 

The basic rules of economics will tell you that when there is an oversupply of a service the price will drop. However, the price is not the only thing that will drop. Standards also plummet as cheap fees inevitably lead to poor service.

David Faulkner giving his key-note lecture at the RETG Event in Auckland on the 7th April

David Faulkner giving his key-note lecture at the RETG Event in Auckland on the 7th April

Regulation essential for quality to improve

The reality is that many Property Management companies in New Zealand will barely be making enough profit to survive. When we carried out our great Property Management Survey last year, over 50% of companies who responded had less than 200 managed units on their books. The only way you can be profitable with so few properties is to have low operating expenses, to charge a large enough fee to cover the expenses, or to provide a limited service.

Are Cleaners worth more than Property Managers?

Let's have a closer look at what is happening with fees.

When too many companies are fighting for too few scraps we see undercutting rife. This is the only real point of difference that many companies can offer. This is when things start to get messy and led us to come up with the phrase the 'Race to the Bottom'. Undercutting only leads to unprofitable clients and desperate companies taking desperate measures. 

When you break down a number of hours Property Management companies spend working on an individual property in many cases they can be working for as little as $40 per hour. This is on a par with some cleaning companies. No disrespect to cleaners but Property Management requires a lot more skill and expertise.

The only real way to tidy up the industry is to regulate it. This will drive out the cowboys as the cost of compliance with a regulated industry means that many of these companies will either sell or simply stop operating. It will no longer be possible to manage properties at 6% or less.

What can be done?

At Real iQ, we have long been arguing for a regulated industry and with the election fast approaching, this may be the time to try and make it an election issue. Our extensive survey also showed unsurprisingly to many that the vast majority want regulation.

Our Great Property Management Survey showed the vast majority of people want regulation.

Our Great Property Management Survey showed the vast majority of people want regulation.

 

Last week, the brilliant economist Shamubeel Equab gave a fascinating insight into the housing crisis claiming that New Zealand is fast becoming a divided society akin to Victorian England with wealthy landlords and poor tenants. He also identified that home ownership in New Zealand is at its lowest point since the 1950's and many middle-income families will be forced to rent. With approximately 60% of the population of Auckland renting, it seems hypocritical that Real Estate agents are regulated but Property Managers aren't.

What would regulation look like?

  • Property Management to come under the REAA

The fact that the REAA should be the governing body of Property Management is in our opinion, a no-brainer. As Property Management becomes more prevalent in today's society with more and more people renting, it is only natural that the industry will come under more scrutiny. Also, with Property Management expert Liz Nidd on the Board of the REAA, there is plenty of experience to ensure that the REAA has the skill and experience to ensure it can do the job successfully. 

The challenging aspect around this is what do Property Management companies need to do to be regulated and what powers will the REAA have over non-compliant Property Managers or when someone complains.

REAA do not want to get bogged down in petty disputes between disgruntled landlords and Property Managers. If they have to settle disputes around gardens not being tidy or minor disputes around who pays for a broken window, then the REAA will become ineffective around its governance. There should be a minimum dollar amount for disputes that go to the REAA.

The REAA should also have the power to fine and deregister non-compliant Property Managers if they are in breach of standards that are set.

  • Compulsory Qualifications for Property Managers 

The Great Property Management Survey carried out by Real iQ last year highlighted why we have a major skill shortage in our industry. Over 50% of Property Managers had no qualification whatsoever regarding Property Management and only 15% had undertaken the NZ Residential Property Management Level 4 Certificate. 

The good news is recently the qualification has had a major overhaul making it far more relevant to the industry. We believe that this qualification is essential and should become compulsory for all Property Managers who hold no qualifications. Even our most experienced people should do this as many of our longer serving Property Managers become stale and need to evolve. The qualification will also give them recognition for the work that they have done.

  • All companies must have Professional Indemnity Insurance

This is where many companies try to save money. We live in a more litigious world and the need for Professional Indemnity (PI) insurance grows but many Property Management companies do not have it as they see it as an unnecessary expense. The reality is that by not having PI insurance, companies are playing Russian Roulette. Yes,  the cost of PI insurance has skyrocketed in recent years but it is a necessary evil as the risks involved in Property Management seem to increase month by month. 

  • Audited Trust accounts to be compulsory

This is another area where some companies try to save money and by making this compulsory it will clean up the industry very quickly. Many companies do not hold a separate Trust account with landlords rent going into a Trading account. Unknown to the landlords, their money could potentially be used to pay for bills that are the responsibility of the companies that manage their assets.

We also see lots of companies avoid getting their accounts audited believing that it saves them money. These companies are exposed as one individual may do their own daily reconciliation along with month end and have no one monitoring what they do. We have seen and heard of many occasions where money is allocated to fake contractors or removed from the suspense account. 

In Australia, operating a Property Management company without an audited Trust account will lead to serious fines. New Zealand should follow suit.

  • Police checks on Property Managers

Real Estate Agents have to have police checks so why not Property Managers? In some cases, Property Managers may have in excess of a $1,000,000 sitting in a Trust Account. This temptation may be too much for some individuals.

It is not just fraud that we have to be concerned about. We want to be sure that the public has confidence in our industry, especially tenants whom on many occasions allow Property Managers on to their properties without knowing who they really are. Would you feel comfortable if an ex-criminal who had committed a serious crime was looking through the home that you lived in and where your children sleep?

The main aspect of what we offer as a service is trust and consumers have a right to know that the people who work in the industry are trustworthy with no criminal record.

These are just suggestions but the advice Real iQ is giving to clients that we consult and train for is to prepare for regulation. It will happen eventually and with it being election year it may become an election issue. The sooner you are prepared for regulation the more competitive your business will be.