New York City real estate players are scrambling to understand the implications of the ban on tenant-paid rental broker fees, a week after the state’s decision caught much of the industry by surprise.
Across the pond in England, a similar ban called the Tenant Fees Act was also implemented, but only after lengthy deliberation. The private rental sector there was given over two years to prepare for the ban on “letting fees” — their version of rental fees — which finally went into effect last June.
The U.K.’s then-chancellor of the exchequer, Phillip Hammond, first announced plans to eliminate letting fees in a statement to parliament in November 2016.
“In the private rental market, letting agents [rental brokers] are currently able to charge unregulated fees to tenants,” said Hammond, a member of the Conservative Party. “We have seen these fees spiral, often to hundreds of pounds. This is wrong. Landlords appoint letting agents and landlords should meet their fees.”
In the following years, studies were commissioned by both the private and public sectors in England, to argue against or in favor of the proposed bill.
Their conclusions could help provide a sense of how the broker fee ban in New York might play out.
England was the last of several European countries to introduce restrictions on rental broker fees over the past decade. To the north in Scotland, “premiums” for brokers were technically illegal since 1984, though enforcement of this rule only began in 2011 following a government clarification.
New York’s ban led to an immediate backlash from brokers. On Monday, a judge granted a temporary restraining order, preventing it from taking effect.
The English way
England’s version “primarily implies a redistribution from letting agents and landlords to tenants — a transfer of costs or benefits from one group to another.” That was from a 2018 impact assessment from the Ministry of Housing. In that case — like the New York version — the landlord and not the tenant would have to pay the agent the fee.
But as real estate pros in New York City have been saying since the Department of State’s new guidance was circulated last Tuesday, a portion of a tenant’s savings in fees will be replaced by increases in rent. A complete pass-through of costs from brokers back to tenants seems unlikely.
According to a 2017 impact assessment from a London-based consultancy, the firm said it did not “believe that agents or landlords will be able to pass through the entirety of the costs” due to market competition. The report was commissioned by the U.K.’s Association of Residential Letting Agents, the industry lobbying group.
The study concludes that brokers will likely be able to pass on about 75 percent of the cost of the ban to landlords, who will then be able to pass on 50 percent of that to tenants in the form of rent hikes.
The Ministry of Housing’s study goes further, arguing that many agents “may currently rely on overcharging or double charging in order to maintain their profits,” which means they will be able to pass on even less of those costs, given landlords’ relative stronger market position compared to tenants — more landlords may simply opt to not use brokers, an option that tenants did not have.
The U.K’s ARLA study warns that as many as 4,000 of England’s 58,000 residential leasing jobs would be lost following a ban — a loss that the Ministry of Housing seems prepared to accept.
“Those agents losing business are likely to be those most reliant on supernormal profits, benefiting from market failures, and in turn who are not able to adapt their business models effectively,” the Ministry of Housing assessment argues. “If it is the most inefficient agents that leave the market, then in turn market efficiency would improve.”
In the roughly six months since the Tenant Fees Act went into effect, some of those predictions have come true. In a survey conducted by U.K. rental platform Goodlord in January, more than 80 percent of rental brokers reported declines in revenue. About a quarter of the respondents reported drops of more than 20 percent.
Before the ban, U.K. rental brokers derived about 20 percent of their revenue from letting fees, the ARLA study noted.
The study argues that the impact of the Scottish ban was “ambiguous,” and that the German experience — where the market was not significantly impacted — is “not reflective” of the English situation because long-term renting is far more widespread in Germany.
Similarly, the impact of a broker fee ban across England is not directly comparable with its impact on New York City. But given the similar dynamic between brokers, landlords and tenants, it seems likely that brokers will take the biggest hit, while only a fraction of those costs will go to rent increases.