The Knight Frank lettings chief explains how he’s steered the division to a second consecutive record year, offers his thoughts on the big challenges facing the industry right now, and tells us why Jon Hunt was the first person he called when he made Partner…
You’ve been working in the London lettings market since 1991; what prompted your first move into the industry, and what keeps you motivated 27 years on?
I did not go to university and instead went travelling around Africa so I was 22 years old, skint and in need of a job. My brother played squash with Jon Hunt and managed to get me an interview with him. It lasted all of three minutes and I started the next day in Fulham as a lettings agent. From there I moved to Notting Hill, which was my patch for ten years.
Without doubt it is the people I work with that keep me motivated. Creating great teams is the ultimate challenge and lettings moves at such an exciting pace that no day is ever the same. There are always challenges and opportunities that emerge from the second I get in to the moment I leave.
You cut your teeth at Foxtons, rising to Head of Lettings. Many of London’s top property players seem to have a stint at the agency somewhere in their CVs; what were the big lessons you learned from your experience?
When I became an equity partner at Knight Frank, the first person I called was Jon Hunt
Foxtons was the best institution that I could have been a part of at the start of my career. When I became an equity partner at Knight Frank, which has been a life-changing opportunity, the first person I called was Jon Hunt. Without that grounding, I don’t think my career would have progressed in the way that it has. In fact, many of my contemporaries from Foxtons who were doing well at the time have gone on to have very successful careers. We were shown the importance of working hard and making the most of any opportunity given to us.
What makes a great lettings a) Negotiator and b) Manager in your opinion?
Somebody that is articulate, open-minded and has a consistent personality; no dramatic highs and lows. They need to be driven whilst understanding the importance of excellent customer service. Above all, they need to remember who their client is; that is easier said than done when you spend more time with applicants than clients. Degrees are not a pre-requisite – self-awareness is more important.
Managers need similar traits but they also need to be independent and most importantly lead by example. You need to demonstrate to your team that you are prepared to put in the hard yards in order to be a good manager.
I don’t mind if the candidate is 17 or 55, provided they have the core traits that will make them effective as a negotiator or manager.
How hard is it for an agency like Knight Frank to find and retain new talent at the moment?
I think it is harder now than it ever has been. Historically, lettings has been a short-term career. Even with the sales market in flat form, it can be a draw for people who may have started in lettings. That being said, we only ever lose around 1% of our talent to sales within Knight Frank and those that make the move tend to go on to do very well.
We are increasingly less inclined to look for talent specifically from other agencies unless they are outstanding in their field. Diversifying your search is key and we are shifting our focus to people who have excelled in other areas of customer service. This includes industries such as airlines, catering, hotels and entertainment. We have recently employed a former chambermaid and I am sure she will be a great success.
Some have done more deals in their first six months than some of our top negotiators!
One of the biggest eye-openers for us as a business has been the success of our apprenticeship scheme. We have employed a number of 18/19 year olds from complicated backgrounds who have come in without pre-conceptions and have brought an invaluable energy, drive and determination with them. Some have done more deals in their first six months than some of our top negotiators!
The rise of the “super-tenant” has been a big theme in the last few years, with a run of deals agreed at over £20k per week; how are tenants rationalising this, and are you seeing more developers specifically targeting this market?
Absolutely. One of the key changes that has taken place in recent years is that landlords and developers are doing up super-prime rental properties to the same standard as those for sale. Tenants at this price point have exacting demands and in many cases landlords are competing with five-star hotel suites.
Towards the end of 2016 and throughout 2017, uncertainty and falling prices led to an increase in super-prime stock moving from the sales to the lettings market. This gave the growing pool of prospective tenants greater choice. However, developing rental properties to the appropriate standard requires a certain level of understanding and financial commitment on the part of the landlord as ever more legislation continues to be introduced.
These properties still have a rarity about them, which means super-prime rental yields are often higher than the wider market.
There’s also been talk of a “try before you buy” trend, as high-end buyers face far heftier consequences for making the wrong choice; are you seeing much evidence of this on the ground?
Yes, we are seeing a growing number of tenants put clauses into tenancy agreements that give them the first right of refusal to buy at the end of the contract. This generally works well for both sides. Tenants get the ability to ‘test-drive’ the property and neighbourhood while landlords benefit from an income stream during a period in which they may not feel ready to sell. I think the reason we have seen more of these clauses in recent times is that tenants sense the sales market is bottoming out and whilst they don’t fear missing out today, they might tomorrow.
Vast sums are being ploughed into the BTR sector at the moment; what effect is this having on supply levels, and the market in general?
Delivery of rental units in the burgeoning build-to-rent sector is beginning to rise. This is an exciting development in the market, as the management of these rental units will be highly professional, potentially raising the bar for the rest of the market. Compared to the £1.4 trillion value of the private rented sector across the country, the build-to-rent sector is still relatively compact, but it is set to grow rapidly, offering the potential to boost the delivery of new homes in areas of high demand.
Which prime locations are seeing the most activity right now, and have there been any notable geographical shifts of late?
Developers are now building high-quality new-build schemes with top amenities in formerly peripheral areas and tenants are gravitating towards them
As more rental stock has come onto the market over the last few years, there has been downward pressure on rental values. This has opened up previously less affordable areas of London to tenants. For example, some have been able to live more centrally than in previous years. The other factor influencing demand is that the market has become far more product-driven in recent years, so generalising about particular neighbourhoods has become a less accurate way of reading the market. Developers are now building high-quality new-build schemes with top amenities in formerly peripheral areas and tenants are gravitating towards them. At the same time, the traditional demand drivers are still strong, as our Tenant’s Survey shows. Renters still want to live close to good transport links – and there will be no shortage of those appearing in London over the next few decades.
Where would you suggest looking for the best yields in prime London in 2018?
While it has become more difficult to generalise about the market by neighbourhood or postcode, it remains broadly true that the further away from the centre of London you are, the higher the yield will be. Therefore, a property with a low void risk in a more peripheral area will appeal to some landlords from a yield perspective. However, given that some central areas are now showing signs of being closer to recovery mode than parts of outer London, landlords may find their total returns are better in zone 1 than zone 6.
KF’s Lettings division has just posted a second consecutive record year; what’s been driving the success, and how have prices and transaction volumes been performing in general?
Rental values have bottomed out due to lower levels of supply in the lettings market. The decline is due to a series of recent tax changes that have affected landlords and falling supply has put upwards pressure on rental values. As a result, we expect annual rental value growth to turn positive in prime central London this year. Some landlords also feel that it is an opportune moment to explore a sale as pricing in the sales market appears to be bottoming out. Transaction volumes in PCL were down 5% in the year to May 2018 compared to the previous 12-month period, LonRes data shows. Knight Frank outperformed the market over that time and recorded a 3% rise.
As a former ARLA President, which would you say are the biggest challenges facing the a) the UK rental market and b) UK lettings agencies right now?
The pace of change; be it UK Government legislation, global forces on the international stage, new business models, changing markets or an increasingly diverse and demanding client base. The world is changing faster than it ever has before and unless agents chart a safe course they will end up falling behind.
An impact statement released with the Tenants’ Fees Bill earlier this year estimated a cost to the UK lettings industry of around £157m in the first year alone; what are your views on the Bill and the effects it will have on the sector?
ARLA Propertymark commissioned Capital Economics to undertake an economic assessment last year and the estimated cost came out higher at £200m. Its stance is that the provisions of the Tenant Fees Bill will not enable any of the Government’s objectives to be delivered.
A ban on letting agent fees will have a profoundly negative impact on the rental market
A ban on letting agent fees will have a profoundly negative impact on the rental market and it will not deliver a fairer, more competitive, or more affordable lettings market. It will also not give tenants greater clarity or control over what they will pay. Currently, tenants know and understand what they are committing to at the start of the tenancy. A ban will reduce the services that letting agents provide and cost the sector jobs. It will make buy-to-let investment even less attractive and ultimately result in the extra costs borne by landlords being passed on to tenants.
If you could bring in one policy change to improve the way the industry works, what would that be?
Industry regulation. Two decades of piecemeal legislation has not worked. Professional agents and landlords have complied whilst the criminal contingent continue to operate under the radar without consequence. An appropriately regulated, professional market would remove the need for most of the legislation that exists and create the level-playing field that ARLA Propertymark and its members have been advocating for 20 years.
Recent changes affecting landlords have included the reduction of tax relief on mortgage interest, the loss of the wear-and-tear allowance and a 3% stamp duty levy for buy-to-let investors; are you seeing many landlords heading for the exit?
Landlords are certainty scrutinising their portfolios more closely and some have decided to sell. Knight Frank figures for existing homes show that landlords accounted for 14% of all prospective buyers in May 2018 compared to 21% recorded in May 2014 and a look at the lower levels of buy-to-let mortgages issued in recent years tells the same story. The UK housing market has quite rightly become a focus for politicians in recent years but tackling problems with blunt instruments comes with its own risk. The lettings market plays an increasingly important role in the UK’s overall tenure make-up and, as we have seen in prime London markets, lower levels of supply have pushed up rental values.
How has the behaviour of tenants changed in recent years in terms of finding a property? How important are high street branches to Knight Frank in the age of the property portal?
The behaviour of tenants has not necessarily changed but the type of product that is on offer is very different. 15-20 years ago, it was mostly second hand Victorian conversion flats. Now there are many more state-of-the-art apartments with a gym, swimming pool, parking and concierge, which is a very different product.
In the early days of my career, you could file an agreed tenancy within half an hour
For the negotiators, there is much more legislation to be dealt with than there ever has been which makes their job harder but even more essential. In the early days of my career, you could file an agreed tenancy within half an hour. It now takes closer to three or four hours which puts a huge demand on their time.
Not a day goes by without some new proptech start-up promising to disrupt the lettings sector; are there any in particular that have caught your eye?
There aren’t any in particular that stand out, partly because a lot of the bigger players are focusing more on sales than lettings. The likes of Upad, rentmyhome and OpenRent have established a presence and some may punch through but it will be interesting to see at what level of the market that ends up being.
What it has highlighted to us is that we need to be very adaptable with regard to the development of our own in-house software in order to offer real efficiency for ourselves but also our applicants.
Are you seeing much competition from the online agency contingent, and could you ever see Knight Frank offering or investing in an online-only platform?
Potentially in the future. However, we are finding that the most important aspect for clients, applicants and tenants alike is superb customer service and our focus is on delivering that.
What’s the best property you’ve ever had on your books?
We have recently launched the most incredible property in the Old Deer Park in Richmond called the Kings Observatory, commissioned by King George III in 1769 for astrologists to track Venus crossing the sun. Rental properties don’t tend to come much more prestigious than that.