If you’re a real estate agency owner in Victoria at the moment, you should be very, very worried.

And if you’re an agency owner in other states, you should be very, very watchful – because your state government is watching the Vics on this.

There is little doubt that we’re in a crisis of affordability within the rental market, the causes of the problem are widespread and entrenched so bold moves are required to resolve this as quickly as we can for all concerned. The rental market’s challenges need a well-considered strategy that emphasises increasing housing supply. By adopting a measured approach that addresses both investor interests and rental pressures, our leaders can create a rental market that benefits both tenants and investors, and ensures a solid future for all stakeholders.

However, the amount of reporting in the media on the prospect of a freeze on rental increases and the amount of cheering on of it by the Greens and parts of Labor have put a shudder through the investment community. Whilst government is yet to make their position known to us, the general view seems to be that this might be a fait accompli – and this should worry everyone.

I’ve already written about the wider impact of any freeze on the renting community, so today I want to spend some time in an analysis of the business impact on agency.

Anyone who has talked to me even briefly will know that my view is that Property Management is a business and business unit of its own and that Property Management divisions should be self-funding their operations, they should not be supported by revenue from the sales arm of the traditional agency model, nor should their revenue be used to prop up a sales division – especially when we’re in a market where sales revenue has fallen due to the quietening of demand through higher interest rates.

There are a couple of observations that I’d like to make before we dive a bit deeper.

First, we’ve already seen a much higher than usual number of landlords selling property – in a recent AFR report, it was noted that ex-rental stock comprised upwards of 30% of the available sales stock nationally (in Victoria it’s a few percentage points higher apparently), which is up by double on the long term average due to the increased burden of both interest rates hikes and regulatory compliance, with the majority of these properties then removed from the rental market as they become owner occupied in some form, so the pool of income producing property has decreased already – this has consequently created a strain on an agency’s divisional income.

Second, if this mooted freeze is implemented, more landlords will choose to leave the market – further squeezing the profitability of rental divisions across the state.

And third – and more importantly for the sake of this discussion – as the larger part of the divisional income in an agency is derived from managing property and this is tied as a percentage of rent collected, any freeze on rents will have the same effect on agency management fee-revenue.

Effectively, agency income will be locked at current levels for the period of any freeze and will only rise at the rate of any mandated future rent increases (if this is a part of the raft of changes).

This means that purely from an inflationary perspective, agency income will go rapidly backwards and therefore limit the ability of real estate management divisions to fund increases in outgoings of any type – this includes salaries, increased staffing complement, and technology among the wider costs of business.

The natural impact of this is that the additional revenue loss will adversely impact the provision of better standards of service for clients across the board – and by this, I mean both landlords and tenants, as they are both vital in the rental market and in agency service delivery.

Part of our problem as an industry is that we’ve been engaged in a race to the bottom on fees, so there’s little to no margin in the business to withstand what is already a compression in revenue due to the inability to sell our value on anything other than the “lowest quote”.

We need to immediately move away from discounting our service offering and competing on the basis of “just get the business in the door” and being selective as to our margins. Why some agents still see this as a valid business growth strategy is utterly beyond both me and others in the industry.

I’ve spent years running businesses and now working in the consultancy space, the analyses I’ve done show clearly where the waterline is and I’m still staggered that agency principals continue to believe that “any business is good business” regardless of the profitability of it – these principals are (I think) about to get an almighty shock.

Any owner of any business will know that you cannot support an unprofitable business and unless something changes to the positive, decisions will have to be made about the viability of the firm.

This could mean a range of things depending on the business and its position in the marketplace.

For instance, in the Property Management example we’re already in an environment where the pendulum has swung in favour of the candidate and salaries have increased markedly due to competitive pressure to either reward and retain current staff, or entice new ones; so one consequence may be that departing staff are not replaced, are replaced on a parttime basis, by an external staff member, or by increasing the tech-stack – and it goes without saying that Property Management salaries are also facing the same freeze as rents if this gets through.

There is also the distinct likelihood that businesses which don’t start to economise and therefore can’t find their way through the profitability maze will be forced to look to mergers of operations to get economy of scale, selling the business or purely the Property Management division and focusing on sales, or start to take on work in other areas which might have higher yield without the regulation.

If agency mergers and sales become more commonplace, this is going to place the focus squarely on profitability and viability and put extreme pressure on the multiplier for Property Management businesses or agencies who have taken the easy path earlier and gone after the cheap fee option as a way of increasing their rental division while quite probably having the inverse effect on higher revenue rent rolls – we may well see a two-tiered market emerge for rent rolls with better fees getting a far better sale price, hence the shock for low-fee operators I mentioned earlier.

To overcome this, we need to move very quickly to protect our business revenues and increase fees on as many properties as possible (sorry landlords, I know you won’t like me saying this, but it’s economic fact – we’re in business to stay in business too… and profit is not and should not be a dirty word).

The larger factor in this though is that we need to very strongly and very clearly make our objections known against any proposed freeze in rents – both at a local level with our state parliamentarians in our neighbourhood electorate and through the media. 

It’s all well and good for regulators and governments to say “oh well, these are the risks in running a business” but I wonder when the problem reverses as it eventually will and rents start to drop, whether the government will then legislate to put a floor under rents…

I think we know the answer to that without asking them.