Letting fees days are numbered as radical reforms announced
Decision could obliterate small Property Management Companies
Uberisation of Property Management inevitable
Who would have thought six weeks ago that we were facing the prospect of a change of government?
Lifeless Labour was limping to an election defeat with its worst poll rating in modern history and the prospect of a Labour lead government seemed like a huge improbability. Then all of a sudden, Andrew Little resigns and Jacindamania was born, replicating trends we have seen in the U.K. and Canada where there has been a huge swing to the left, particularly amongst younger voters. This has evolved due of inequality and the widening gap between the haves and the have nots, largely demonstrated in rising house prices.
A change of government is now a real possibility.
Housing was always going to be the main battle ground for this election with Ardern making no secret that she was taking the side of the tenants. In her campaign launch, Ms Ardern stipulated that ‘Climate change’ is the nuclear free moment of our generation. Here at Real iQ, we translate this as a statement of intent to improve the efficiency and quality of housing in New Zealand, particularly for the under privileged and vulnerable. Where better to start than targeting rental properties. No doubt we will also see the introduction of a capital gains tax in an attempt to reign in property speculators and control house prices.
Bye Bye Letting Fee!
On Sunday September 3rd the Labour party made a major announcement with reforms to tenancy legislation in New Zealand. With nearly 50% of the country now renting, a change was inevitable. The Labour party announced the following.
- Increase 42-day notice periods for landlords to 90 days to give tenants more time to find somewhere else to live.
- Abolish “no-cause” terminations of tenancies.
- Retain the ability of landlords to get rid of tenants who are in breach of the tenancy agreement with 90 days’ notice, or more quickly by order of the Tenancy Tribunal
- Limit rent increases to once per year and require the formula for rental increases to be specified in the rental agreement.
- Give tenants and landlords the ability to agree tenants on a fixed term lease of 12 months or more can make minor alterations.
- Require all rentals to be warm, dry, and healthy for families to live in by passing the Healthy Homes Bill.
- Give landlords access to grants of up to $2000 for upgrading insulation and heating.
Many of the proposals are progressive and will benefit the nation as a whole but one change could be catastrophic for many small to medium Property Management companies, and that was announcing the banning of the letting fee.
"Letting Agents charge the letting fee because they can" Phil Twyford
Here at Real iQ, we have been warning that the days of the letting fee are numbered for over a year now when the former leader of the Green’s Metiria Turei submitted a reform bill that would remove letting fees. Also, earlier this year Housing Spokesperson for Labour Phil Twyford announced his disdain for the letting fee making the comment ‘Letting agents charge the letting fee simply because they can’. This was insulting and inaccurate as he implied that our industry was price gouging. Nothing could be further from the truth Mr Twyford.
By banning the fee, small companies will suffer the most.
As a percentage, their operating costs are generally higher than the larger operators and to many companies, the letting fee is the difference between being profitable and running at a loss.
Larger companies are in a more stronger position where they can absorb the costs and still retain a strong profit margin.
The obvious solution is to pass on the costs to the landlord. If the entire industry does this then there will be no problem. Landlords will absorb the costs and then demand rent increases and ultimately the tenants will eventually pay. However, trying to get an industry to agree to do this is highly unlikely, especially following some high-profile cases in front of the commerce commission that involved a number of large real estate operators.
Many Smaller Companies may sell
What we believe will happen is that the larger companies will absorb the costs putting pressure on smaller ones to follow suit to remain competitive. Once smaller companies do this they will be forced to review costs and this may result in job losses and outsourcing to remain profitable. The standard of service may drop as there is more pressure on Property Managers to manage more.
One positive aspect of the decision is that it will tidy up an industry where we already have too many companies competing over scraps.
At the start of the year, one of Real iQ's predictions was that more properties would be managed by fewer companies and all the evidence is pointing in that direction. As more and more legislation is thrown at Property Management companies, with up to 15% of revenue being removed, many small to mid-size operators may decide that enough is enough and sell up. Who can blame them?
Automation and Outsourcing, the Uberisation of Property Management
Innovative Property Management companies may see this as an opportunity to reform the industry by developing a low fee, low-cost model that relies on running the business lean with very few overheads.
I am often asked my opinion on outsourcing, especially to overseas markets such as The Philippines. Although I can understand why a business owner may want to do this, I personally struggle with it. Real iQ's vision has been to improve the industry in New Zealand through training and promoting it as a viable career option. Having your daily reconciliation run in Manilla may be creating jobs in The Philippines, but does little to promote the industry here.
However, I am not naïve enough to believe that this will not happen in some form or capacity and we are already starting to see the impact of it.
We believe that we will soon start to see a new budget form of Property Management where rent is entered into an interest-bearing account and is administered by a central hub without street presence. No office will be required for Property Managers as Tenancy Agreements will be signed digitally with remote tenant inductions taking place. The Property Managers will be mobile, working either from home or at low rent offices such as shared spaces, keeping overheads to a minimum.
Many tasks have already become automated and more will follow such as rent arrears, tenant selection, and inspection notification. The Property Manager will be managing in excess of 200 properties and will focus purely on letting, inspections and approving maintenance. All other tasks will be automated or outsourced. Chatbots will become the way landlords will communicate when they need assistance and eventually, artificial intelligence will predict when things will break down and need repairing.
For the rest, a new breed of Property Management must evolve, catering for the investor needs and helping them grow their portfolio. This service will become more personalised and will require a higher skill set offering pre-emptive service and unique insights to help investors make the right decisions to grow their wealth.
Never, have I seen so much change in our industry. It is hard to predict what will happen in the future but one thing is for sure, Real iQ will do our utmost to keep you informed.
Thanks for reading.