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By Tom Walker

Director, StuRents

OTHER FEATURES

All-Inclusive Rents: a blessing or a curse?

All-inclusive rents have exploded in popularity in the student rental sector over the past few years, but the rampant surge in gas prices may lay waste to a trend born out of 2018’s Data Protection Act and 2019’s Tenant Fees Act.

Selling convenience to students

The notion of wrapping unlimited utilities into a tenancy agreement had previously been a matter of practicality for Purpose Built Student Accommodation (PBSA) providers, whose tenants would share communal areas and therefore be allocated a share of the associated lighting, heating and other overheads. Prior to 2018, most letting agents and landlords marketing and managing traditional student houses, or Houses in Multiple Occupation (HMO) stuck to tried and tested rental agreements, with tenants contractually responsible for organising and maintaining utilities for their properties. However, some trailblazing property managers in the HMO sphere recognised the hassle that utilities caused students – particularly the long waits that many of their clients had to endure before the likes of Openreach would connect them to the internet – so seized an opportunity to differentiate themselves in an otherwise commoditised sector. 

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By grouping gas, electricity, water and broadband costs into an all-inclusive rent payment, these entrepreneurial property managers moved away from just marketing properties and instead started selling convenience to students. Naturally, the properties had to be highly desirable to help justify the higher-than-average rents resulting from the utilities; but students seeking relative luxury and convenience were not overly concerned about wringing every drip of value from their bank accounts. As a result, a healthy margin was on offer for those property managers who could implement the administrative rigor needed to stay afloat of the torrent of bills that accompanied a large student portfolio. 

More hassle (and money) than its worth?

Juggling the payments and paperwork whilst also serving as the customer support line for issues like broadband outages is no mean feat and even spawned an entire niche of bill-inclusive aggregators like Glide and The Bunch. However, many property managers who sat on the side-lines looking on at these perceived mavericks questioned where the incentive was. Why bother managing utilities in-house when you can sell tenant data to an industry of cold-callers? Even without selling data, there was plenty to be made from tenancy fees levied against tenants, so managing bills seemed like nothing short of folly.

This perspective started to crack when GDPR rolled out in May 2018, with the realisation that tenants’ data was no longer a pot of gold. A year later, and the Tenant Fees Act gutted many property managers’ revenue models as lucrative agent fees were outlawed. Suddenly, utilities were seen by many in the business as one of the last bastions of a previously economically attractive industry. 

Shock to the system

The wholesale shift towards bundled rent offerings that ensued saw some property managers hunting the lowest energy tariffs to ensure their perceived risk-return trade-off was as favourable as possible. But the demise of sought-after discount tariffs offered by fledgling utilities companies eyeing market share or variable-only tariffs, like those offered by Bulb, have now left those property managers grappling with rapidly rising energy costs and no recourse to demand greater compensation from their tenants. 

In defence of those offering bills-inclusive rents, the unprecedented hike in wholesale gas prices experienced since the start of 2021 has been nothing short of a black swan event, even catching analysts and experts in the energy sector off-guard. The resulting administration of no fewer than 25 utility companies is testament to the extraordinary unravelling of the UK’s energy security.

 

Assessing the risk

If the collateral damage from the energy crisis can be contained and property managers’ fingers are spared from the flames currently ravaging the energy sector, then there is a future for this business model. But for those engaging in bills-inclusive rents, a more considered approach that can better weather volatility in wholesale energy prices is required. Ultimately, if the objective is to deliver convenience to tenants whilst reaping the associated economic rewards, then the risk needs to be priced correctly. 

We now live in a world with more extreme weather events that place unpredictable strains on consumption and renewable energy generation; a shifting energy mix that makes national forecasting more challenging as well as considerable geopolitical risks with energy exporters. All this makes for a very complicated assessment of the risk of assuming the utility liability of hundreds, if not thousands, of tenants. 

A promising compromise

A more refined, but still inherently risky, approach to utilities demands fixed rate tariffs secured with heavyweight energy suppliers; but even with this risk mitigation against short-term pricing shocks, a sizeable margin of error needs to be priced into the rent to hedge against the possibility that the utility provider goes bust. Whilst the returns will be larger with this strategy, the inflated rent may negatively impact the marketability of the property, which runs somewhat against the primary objective in property management, so it becomes a delicate balancing act that demands well-informed management. 

The lowest risk approach, but the approach that probably offers the best long-term expected return, looks more like a referral model. This approach effectively washes a property manager’s hands entirely of risk whilst still allowing them to benefit from the commissions that utility companies are willing to pay. If the tenant is introduced to an all-inclusive utility package at the point they are signing the tenancy agreement, the contextually-relevant placement will underpin a strong conversion rate whilst avoiding any data privacy pitfalls introduced by GDPR. For the segment of the property management community averse to taking on unnecessary risk, this strategy shouldn’t be dismissed out of hand.

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Looking ahead, the lessons learned from this crisis will hopefully result in a more robust and considered approach to bills-included rents and possibly spur on further innovation in a sector that has deftly navigated numerous challenges in recent years.

* Tom Walker is director at the leading student accommodation platform StuRents *

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    This article mainly relates to the student market for the ordinary run HMO landlord which I include myself my approach is to fit prepay electric meters to every room let room.

    From experience this changes tenants behaviour such that they switch everything off off and I find I nearly halve my electric bill between the time I gave fully inclusive electric and then after fitting prepaid electric metres. The income from the prey pay electric metres covers most of of the electric bill.

    You could do the same with gas central heating remove the gas, fit electric heaters to each room and so eliminate the cost of gas central heating

    I do not do this as it would make most hmos very cold lead to damp and mould issues. What I do is provide background heating and if the tenants are not happy they can pay for their own heaters

  • Mark Wilson

    Sounds too bleak!

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    You get what you pay for in this world

     
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    Andrew

    Unfortunately some people go down the freeloading route and are actually defended, even encouraged by others to do so.

     
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    If utilities were included in the rent, what would stop an enterprising student tenant from bitcoin mining 24 x 7 and running up eye watering electricity bills for the landlord?

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    We read the metres every week and any abnormal use would be flagged up

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