Advice and Opinion

The changing face of rental agencies

The management of rental portfolios is an oft-neglected discussion in the day-to-day business of real estate agencies. Louw Liebenberg, CEO of PayProp says that traditionally, sales optimisation dominates conversations around innovation, achievement and market movement, but those topics merit more exhaustive treatment.

“The residential letting industry has been undergoing a quiet revolution over the past few years, reaching a level of sophistication that in some respects far outstrips the gains made in advancing the sales process,” says Liebenberg.

As the largest processor of residential letting transactions in South Africa, PayProp manages the payment and process automation of more than 70 000 properties each month, and enjoys a unique vantage point when it comes to observing the dynamics that are changing the face of rentals today.

Below are the top five trends in the market, as witnessed by PayProp:

1. Practically everyone is doing it

Gone are the days when a rental portfolio was considered an add-on to an already successful sales-focused real estate business. Progressive estate agents are realising that rentals provide reliable annuity income that helps sustain businesses through tough times. Many agencies report that having a rental portfolio was one of the key reasons they made it through the 2007-2009 market downturn.

In a recent phone survey of more than 6 000 estate agents, PayProp found that around 60% of agencies are involved in the rental market in some form or another. With the average rental agent managing 80 properties, we estimate that there are about 600 000 residential properties managed by estate agents in South Africa.

2. Expert advice is driving growth

Successful rental portfolios are driven by agencies that understand that their service offering to landlords involves more than just process administration. Landlords need advice on how to price rentals, fix increases and quantify deposits in a fluid market where a landlord’s primary motivation must be to increase income while mitigating risk. Letting agents that excel at this are those that understand the underlying market forces and local realities, and are able to package it in such a way as to add value to the landlord’s decisions.

3. Technologically savvy

Rental administration can be extremely process-intensive and yield comparatively small commissions. Therefore the need to achieve economies of scale while keeping administrative costs down is top-of-mind with forward-thinking letting agents, and the use of technology to automate and reduce manual processing has become potentially even more important to letting than to sales. For this reason, innovative letting agents are more inclined to test and adopt technology that makes their lives easier.

4. Redefining the letting agent’s role as risk manager

In an economy where tenants are under increasing financial pressure, the risk of rental default is real. Considering the catastrophic effect that non-payment can have on the returns generated by landlords, agencies need to avail themselves of effective means of assessing and minimising risk. The most successful agencies use sophisticated tools such as the PayProp Tenant Assessment Report, which was custom-created for the letting industry, to not only understand a tenant’s credit profile, but more importantly also the likelihood that he or she can pay the rental.

Agencies that have made the mental shift from process administrator to advisor and risk manager will be in a much better position to defend themselves from requests to reduce commissions, because they offer a service that the landlord is unlikely to be able to replicate himself.

5. Appreciating the value of scale

We are seeing a definite shift towards consolidation of rental portfolios through buyouts in the market. In a recent review of portfolio profitability we found that rental agencies only really start to feel the effect of economies of scale when portfolios reach 50 properties, and only optimise efficiencies once they reach 150 properties.

The result has been the emergence of regional ‘super agencies’ that buy up the smaller books around them to be able to extract more profit from their portfolios.

The ‘super agencies’ that have equipped themselves with automated systems and procedures, such as those offered by PayProp, are realising that a key benefit of this is operational efficiency: They are able to absorb new portfolios without having to add resources to the team. Those that have haven’t done so soon realise they can no longer afford to spend time on the manual administration of rental portfolios. A service like PayProp, which automates property management, banking and accounting into a single safe and seamless platform, is the only way to grow without adding cost to the business. In fact, the average PayProp client has grown portfolio turnover by 23% per year, because PayProp does the legwork, leaving agents free to do what they love.