What does the OpenRent deal mean for letting agents?

Some commentators have argued that the takeover of OpenRent by private equity group CVC reflects a step change in the landscape for letting agents in the UK.

By Tom Entwistle, LandlordZONE

CVC, one of the world's largest private equity investors, has taken a majority stake in OpenRent, an online platform that claims to account for around 20 per cent of UK tenancies. 

The deal has been read in some quarters as the ultimate proof that landlords are abandoning traditional high street agents for online alternatives. But the available evidence is said to point to something different, to be precise, and more useful to working landlords, the Renters' Rights Act is not driving a wholesale flight from the high street agent to online. 

However, it does evidence a splitting of the letting agent market into those who can add genuine compliance value and those who don't necessarily do that. The deal possibly says more about compliance than about “online vs high street”

Under the deal, funds managed by CVC are taking a majority stake in OpenRent, with founders Adam Hyslop and Darius Bradbury remaining significant shareholders and staying in charge to manage the business. The financial terms have not been disclosed, and the transaction is subject to regulatory approval, but completion is expected later this year.

This article covers the position in England. It is intended as general information for landlords and letting professionals and does not constitute legal, financial or business advice. Landlords should take professional advice before entering or terminating an agency

DIY letting platform

Founded in 2012, OpenRent operates as a DIY lettings platform, handling advertising, tenant search and referencing, contracts, deposits and rent collection, while leaving the landlord as still the point of contact. 

CVC says the new investment will fund product development aimed at reducing administrative complexity for landlords and tenants, rather than expanding into full management.

The online threat

Research by the lettings CRM provider Alto, cited in coverage of the deal, found that among agencies with fewer than five branches, one-third identified DIY platforms such as OpenRent as a significant competitive threat. 

But among larger firms, the picture was different. More than 50 per cent dismissed online lettings services as minimal competition because they said they could offer a wider range of services than could smallest agencies. There appears to be no solid evidence of a uniform shift away from high street agents generally.

What changes has the Renters’ Rights Act brought for agents?

There are several pressures reshaping the UK agent market as a consequence of the Renters' Rights Act. Traditional agents who previously ran “introduction-only” contracts, finding a tenant and then stepping back, have increasingly withdrawn from that model. 

The reason is straightforward, landlord non-compliance further down the line potentially carries penalties and therefore risks for both agent and landlord. So, agents operating on a “light-touch” basis carry some risk further down the line if things go wrong, whether that be reputational, or in some cases, practical exposure to the regulations for a property they’ve introduced but do not manage.

Loss of income

The move to continuous (periodic) tenancies has also removed a reliable source of income for traditional agents. There is no longer a need for renewal fees tied to fixed terms. So, most agents have responded by restructuring how they charge. 

Specific examples have been reported. One large London agency reportedly now charges landlords a fee for additional financial statements, while others have introduced compliance-audit charges of up to several hundred pounds. A separate paperwork fee has also appeared for administering rent increases under the new Section 13 procedure in some instances. 

Survey data produced by the lettings technology firm Goodlord found nearly a quarter of landlords reported paying higher agency fees since the Act took effect. Further research data shows that most agents described a sharp rise in their administrative workload. 

Rent increases and challenges through property tribunal case volumes are as yet an unknown quantity but recent reports say cases have risen substantially following the reforms. All this adds substantially to the workload agents will now have to price into their fees.

Goodlord’s research findings reveal that many landlords were already unhappy with increased agency costs and the perceived value for money they were getting. The majority were already citing high fees and poor value as their main frustration even before the effects of this new legislation. 

The case for using an agent now

Despite these fee pressures, the direction of travel on the use of traditional agent services points towards an increase. Polling conducted for the National Residential Landlords Association (NRLA) found that the proportion of privately rented housing administered by a letting agent in some form had reached its highest level in at least two years. The NRLA claim the rise in the number landlords seeking agent help is to navigate the intricacies of the Renters’ Rights Act. 

The NRLA has warned that there is an underlying risk with this trend. Rising demand for agent services, it argues, risks pulling unqualified or poorly trained operators into the market. This underlines the importance of landlords scrutinising a prospective agent's qualifications, training and its compliance capability – not all agents are created equal.

The NRLA says:

“Reputable agents should belong to recognised industry bodies that protect both landlords and tenants. Key organisations include The Property Ombudsman which provides independent dispute resolution and compensation where appropriate, and Propertymark (formerly ARLA) which ensures agents meet professional standards and hold Client Money Protection. Membership shows that an agent operates transparently and follows industry best practice.”

Other professional bodies agents might belong to: The UK Association of Letting Agents (UKALA), Safeagent (formerly NALS) and The Royal Institution of Chartered Surveyors (RICS). 

Professionalism

Where agents are well-prepared, they are in a good position to convert the extra pressure to their advantage. One commentator who has worked in the property sector for over 35 years, has said that agents with robust compliance processes have had good success turning introduction-only clients into full management contracts.

This has largely been achieved by pointing to the financial exposure landlords now face from maintenance-related penalties. Some are going further still, pitching for proactive asset management contracts rather than reactive repairs. They will carry out safety and condition assessments, regular inspections and recommend those improvements with a high probability of generated excess returns for the landlord..

What is the case for self-managing? 

Self-management remains a genuine option for many landlords, and for smaller portfolios the cost and control advantages are real. But landlords need to factor in the compliance load that self-managing entails. 

Gas safety certification, electrical inspection, energy performance requirements, Right to Rent checks, deposit protection, the tenant information requirements and the Section 13 rent increase procedure all fall to the landlord directly.

Landlords need to have a good understanding of the new regulations and the time needed to apply them correctly. This is usually not beyond the ability of most landlords, but it boiled down to do you have the will to do it vs the money you will save in agent’s fees. See: The Good Landlord Handbook: The Definitive Landlord's Guide to Success Under the Renters’ Rights Act

Councils have been given expanded powers to investigate landlords and agents alike, including entry to premises in certain circumstances, which raises the practical risk cost of getting any of this wrong.

There is conflicting data on how many residential landlords in England actually self-manage. Some suggest as high as 40 to 50 per cent and data obtained from NRLA research shows that tenants in landlord-managed properties had reported markedly higher satisfaction with repairs than tenants in agent-managed properties, 73% against 59%. 

Is there a two-tier market?

The agent market picture that emerges is a market splitting into two tiers rather than one migrating wholesale from high street to online. On one side you have an automated, compliance-focused, lower-cost service of the kind OpenRent provides. This suits landlords who want structure and reduced administrative risk without paying for full management. 

On the other hand sits enhanced full-service management, increasingly priced to reflect the full compliance workload created by the new Act. For landlords who want to pass on the risk to someone else and are willing to pay the cost, full management is the way to go.

The segment potentially being squeezed is agents in the middle ground. Introduction-only services that offer neither the low cost of a DIY platform nor the compliance protection of full management are most at competitive risk. 

Private equity group CVC’s stated rationale for its OpenRent investment is in reducing administrative complexity and the costs for landlords and tenants. It reads like a commercial bet on that specific niche, rather than a claim that full management is being abandoned.

Choosing between the two

For an individual landlord, the decision comes down to a number of factors: portfolio size, geographic spread, available time and appetite for self-study and carrying compliance risk personally. 

Whichever route is chosen by a residential landlord, the most useful question to ask any prospective agent, apart from their qualifications, training and their fee structure, - whether online agent or high street - is how specifically they would handle a Section 13 rent increase. Also, ask about the delivery of the tenant information sheet, and record-keeping in a form that would satisfy a local authority inspection. 

In conclusion

- Ask the above questions and the qualification and training the agent has undertaken, along with membership of a recognised professional body. Review the agency agreement carefully and check for new compliance-related charges. 

- Don't assume “online” is weaker on compliance support, or that “high street” has automatic protection. Carefully check the specific service level on offer.

- If you are self-managing, study up on the new rules and build a compliance calendar covering all of the necessary regulations: gas safety, EICR, EPC and deposit protection deadlines.