A planned new regulatory system aims to raise standards in a rapidly changing marketplace
Is competency finally going to be as important as competition in the UK residential estate agency market?
When in 1979 the Estate Agents Act was introduced, one key section was excluded from implementation. This was section 22, which set out that minimum standards of competency would be required of all those operating in the sector, at levels based on experience and/or professional qualifications.
Successive governments in the intervening 40 years have never seen fit to implement this section, preferring to rely on competition within the market to drive up standards, because of concerns over increasing the barriers to entry and excessive regulatory burdens.
In the late 1970s the private rental sector did not exist as it does now, so letting agents are not defined under the legislation and are exempt from it anyway. This means that, as an estate agent, you could commit a heinous crime in the morning, be banned from ever being an estate agent again at lunchtime, and yet open as a letting agent in the afternoon. Clearly a nonsense.
Despite competition, advances in technology and the introduction of redress and ombudsman schemes, there has been little real innovation in the estate agency model until recently. Things started to change only in the last decade with the emergence of the so-called online estate agencies – a low-fee, execution-only model much criticised by traditionalists. Having gained some traction through extensive marketing, it now accounts for about 5% of all property sales across the UK.
The next-generation estate agency model may be one where an individual agent operates under the wing of a larger, hub-based operator with which it shares its fees (usually 70:30 in favour of the individual agent). This is more akin to models in the US, from where a number of the players now in the UK market originate. Examples include Keller Williams, Exp Realty and Century 21.
In the meantime, traditional high-street estate agencies are generally in decline. Pressures of competition, increasing regulation (particularly in lettings), high fixed costs and low transactional volumes mean that businesses are struggling to survive, with consolidations and closures occurring on a daily basis.
The online sector is not immune to the pain of low transactional volumes. When added to the high acquisition cost of customers through the rush to gain brand recognition and market share, it has all been too much for some. We have already seen many of the early names in this sector disappear into oblivion, such as Hatched, House Network and several other smaller players, while Emoov and Tepilo (which became part of Emoov) came close to a similar fate before returning this year under new ownership.
A few weeks ago, one of the operators in this sector, HouseSimple, announced it would start selling property for free, making its fees purely from commissions and referral fees on additional products.
This surprising decision was announced this summer – just as the Tenant Fees Act was introduced and Trading Standards and the redress schemes tightened their requirements on agents being transparent about these additional sources of income. If the estate agency industry fails to comply adequately with these requirements, it is reasonable to expect the government will legislate to ban such practices. It has already – ill advisedly – issued a ban on fees charged to tenants, which is likely to result in tenants paying higher rents. I believe something similar will happen on other income sources – using a sledgehammer to crack a nut, with many unintended consequences. HouseSimple may find it has created an unsustainable business model for itself.
Meanwhile, the Regulation of Property Agents (ROPA) working group, made up of industry and consumer experts, has been busy examining the options for raising standards across the sector. Its report, published this July by the Ministry of Housing, Communities and Local Government, calls for the industry to raise standards, and its recommendations – subsequently accepted in outline by the government – are for all those operating in the sector to be professionally qualified (to differing levels dependent upon their role), along with the creation of a new industry regulator and licensing of individuals and firms.
In principle all this sounds like a good idea. The proof of the pudding will, however, be in the eating.
With only around 20% of those operating in the estate agency sector having any form of industry qualification, it will take a massive amount of work to agree the appropriate educational and knowledge standards and then arrange for everyone to achieve them. A new regulatory regime and licensing structure will also need to be created.
Consumers will benefit only if standards do increase as a result, and for this to happen will require robust enforcement – in other words, licences to operate must be taken away from those who fall foul of requirements. We already have many and varied regulations, but the subsequent inconsistent policing of these means many are getting away with poor service, poor compliance and, in some cases even dishonest practice.
A higher-quality, more tightly regulated and licensed sector would, in my opinion, be a good thing. It will undoubtedly contain fewer operators – I can see the number of players halving over the next five to ten years – but fees are likely to increase significantly. In my view it will not be possible, even with the best use of technology and marketing, to deliver the quality demanded without receiving fees to match.
