While the demise of Upad caught many market observers by surprise, in hindsight the signs were there last year when the company changed its pricing policy. As we mentioned in an earlier article, the disrupter has eventually been disrupted by those who crashed through the door that Upad managed to open. So, this prompts the question, is the low-cost online letting agency business model dead?
Value for money
Whether looking at private rental properties, services or retail, customers want to pay as little as possible for the best services. It is fair to say that recent years have seen the balance sway in terms of price over quality. The old adage “you get what you pay for” has never been more apt than in today’s online market where costs are often slashed to the bone. However, if we take a look at private rental properties there are two main groups:-
We could also call these two groups experienced and inexperienced which will impact the type of services they are looking for.
Hands-on investors take a more active approach to their property assets and rental arrangements. They will pick and choose from the array of services available but because of their own knowledge and experience they will likely look for the bare bones in a service at a rock bottom price.
Hands-off investors are happy to secure properties but then outsource as much of their additional requirements as possible. They will obviously look for value for money but in many ways the property management angle comes before cost considerations.
Low-cost pricing model faces challenges
When Upad decided to reduce its initial charge to customers, to attract more business, and depend upon premium services further down the line, alarm bells began to ring. Hands-on investors may decide to take on the most basic of services, at rock bottom prices, but are often unwilling to pay premium prices for “premium services”. Therefore, we can assume that this type of client might be potentially loss-making or at best marginally profitable under the low-cost online letting service pricing model.
While hands-off investors would not necessarily be as aggressive when it came to pricing, they just want a simple service. They want to join, tick a few boxes and ensure that their properties are managed, rents collected and tenant issues resolved as soon as possible. It is also worth noting that this group of investors have traditionally had the smallest profit margin because of their preference for outsourcing management services. The fact that property taxes and regulations have increased of late has reduced margins significantly, leaving many struggling to make a decent return.
You get what you pay for
While there will always be a role for low-cost basic services, the ongoing increase in taxation and running costs for private landlords has reduced profit margins significantly. As we touched on above, a reduction in entry costs for low-cost landlord services is all good and well but paying a premium further down the line for additional services may not be possible.
Low-cost online letting agencies have been squeezed by hands-on investors, looking for “value for money” and deciding against signing up for premium services. Then we have the hands off investors, who have historically been the “bread-and-butter” of low-cost online letting agencies, struggling to justify increasing premium service costs against shrinking profit margins.
The end result is that low-cost one-stop shop letting agencies have been hit on both sides, by hands-on and hands-off investors. There is also the threat of niche market players offering “better value for money” and a more focused approach to issues such as regulations and legal protections. All in all, the next few years could be challenging for low-cost letting agencies.