Deposits have been a contentious issue since the late 1990s when the then Labour government woke up to their widespread misuse by rogue agents and landlords.
Despite a report in 1998 by Citizens Advice that documented widespread pilfering of deposits, it took until 2007 for regulations to be introduced.
It’s a system that has worked well for 11 years. But more recently the high cost of renting means deposits can run into thousands of pounds and put even wealthy renters under financial strain.
No government is likely to subsidise deposits, so an ‘alternative protection’ industry has been readying itself to provide a solution including early pioneers Dlighted and Reposit.
Both these and subsequent launches have offered tenants insurance or membership-based products that insure, or guarantee to pay, the landlord after a tenant moves out should any rent or damages be outstanding.
But are these ‘no deposit’ products what tenants, letting agents and landlords need or want?
Anecdotal evidence suggests there is plenty of tenant demand; the different schemes spoken to by DealMakerz claim between 50% and 80% take-up among tenants who are offered their products.
And estate agents are queuing up to sign partnerships with the leading suppliers including Foxtons, Acorn and YourMove with Zero Deposit, and SpicerHaart with Flatfair.
Canopy has a different strategy and has signed up several large employers and Build-to-Rent companies including John Lewis.
Getting landlords to sign up is a different matter. Distribution deals with estate agents are one thing, but branches will have to overcome resistance from the UK’s conservative buy-to-let investors.
Chris Norris, Director of Policy and Practice at the National Landlords Association, says: “During our conversations with the government, which is looking at these schemes and the providers, we’ve made it clear that although traditional cash deposits don’t work very well for quite a lot of tenants, they do for landlords.
“What we haven’t seen yet is how these companies will approach handling claims. It’s all very well saying that a £100 policy will replace a deposit of £1,000, for example, and will cover the landlord for up to £10,000.
“But I think we all know that insurance companies don’t stay in business by paying out on every single claim.”
“After thinking about we concluded that this kind of product is an amazing opportunity for renters to help their cash-flow and makes life easier for them, plus it’s good for agents because it gives them something beneficial to distribute to tenants. And it’s good for landlords because it broadens the pool of potential tenants available to them – Katie Marrache, JamJar Investments.
What’s more important for landlords is security, and this is the most crucial part of the likely success of these schemes.
Landlords need to feel that these products are as secure as cash deposits.
One of the more high-profile of these alternative products, Zero Deposit, agrees that claims handling is central to the success of the sector.
“The barriers to entry to the alternative deposit protection market are very low but the barriers to success are very high,” says its co-founder Jon Notley (pictured, above).
“I think it’s really clear that one player is going to win this market because people want safety and they won’t tolerate anything that doesn’t provide equal security to cash in the bank. We’re fully underwritten and FCA regulated.”
Zero Deposit offers tenants an insurance-backed guarantee that they pay for which insures the landlord – but not the tenant – against lost rent or damage to the property.
For example, if a tenant leaves a flat in a mess then the cost of cleaning it is, after being investigated in-house, reimbursed to the landlord. The tenant is then chased for payment by Zero Deposit and, if it’s contested, TDS steps in to arbitrate.
“We’ve had our first claim already,” says Notley. “It was for £950 after a tenant finished a tenancy early; the evidence was sent to us and our internal team realised it was clear that the tenant knew the rent was payable. We paid the landlord, and the tenant paid us a few days later.”
Some of the early pioneers such as DLighted and Reposit have enjoyed varied success but the recent explosion in proptech investment means the next generation do have a chance of more widespread take-up.
“We’re excited by the fact that everyone wins,” says Katie Marrache of JamJar Investments, which is backing Zero Deposit.
“After thinking about we concluded that this kind of product is an amazing opportunity for renters to help their cash-flow and makes life easier for them, plus it’s good for agents because it gives them something beneficial to distribute to tenants. And it’s good for landlords because it broadens the pool of potential tenants available to them.
“Whatever angle you look at it from, it makes sense.”
Other investors agree, including those backing two other key players, Flatfair and Canopy, which offer deposit alternatives as part of larger tenant packages.
Flatfair was launched in March this year by co-founder and former Google employee Daniel Jeczmien. He believes that insurance-backed products are potentially misleading to tenants because, unless it’s made very clear, many believe they are personally insured against damaging the property, when they are not – it is the landlord and the product provider who are the beneficiaries.
“We’ve created a tech-based facility that enables landlords and agents to negotiate and facilitate the transfer of funds from the tenant at the end of the tenancy in a simple way,” he says.
What this boils down to is the tenant agreeing to sign up to an online system that enables any smaller sums owed to the landlord to be paid automatically, overseen by an adjudication service provided by Hamilton Fraser.
For larger sums, Flatfair buys the debt from the landlord and then chases the tenant to recover the funds.
One key benefit claimed by Flatfair over its competitors is that, because it’s not FCA regulated, landlords and agents are less worried about the kind of miss-selling issues that have dogged some insurance-based products in the past, most famously PPI.
Jon Pitt, Chief Commercial Officer at Canopy and formerly Head of Lettings at Hamptons, has a different approach.
Canopy is a ‘tenant passport’ platform that makes private renting easier including deposit replacement insurance underwritten by Hiscox and plus a robust referencing system.
Like Zero Deposit, Canopy has been around long enough for the first claims to be made. Pitt says so far none of them have been for rent arrears which he claims shows its passport ‘pre-checking’ approach works.
“I was very conscious with Canopy that there was a benefit for all the parties, so our route to market is through agents although the majority of traction we’ve got in the market has been through half a dozen Build to Rent operators such as Atlas and Get Living.”
Demographics play another key role in deposit alternatives. All the schemes initially presented themselves as helping ‘generation rent’ secure properties they might not otherwise be able to afford the deposit for.
But more recently most have also wanted to embrace the wider market in order to attract more agents and landlords.
For example, Zero Deposit recently hosted a party for agents including Knight Frank, Connells and Foxtons, whose tenants can afford London’s high deposits, but would prefer to spend it on a skiing holiday, presumably.
One of the agents at the gathering, and one of the first to trial the service, was Acorn’s Residential Lettings and Property Management Director, Paul Deveney, who has so far signed up 300 tenants.
“We got involved because the market’s changed over the past year and there’s been a big focus on making renting easier for tenants,” he says. “But it also gives landlords security plus a way for tenants to access property without an additional cost burden.
“There may be some agencies who see this as a potential fee income opportunity, but for us it’s all about delivering the right product and making sure our landlords are protected and that it ticks all the boxes for them. And it’s got to work for our tenants too.”
But deposit alternatives don’t tick all the boxes for the sector’s detractors. They argue that they aren’t ideal for tenants who move around a lot. These products are usually charged per tenancy, so renters need to stay put for two or more years to make them worthwhile. Several of them offer loyalty discounts to tenants, it should be noted.
The other downside is value for money. Most deposit alternatives charge tenants approximately a week’s rent, which can be hundreds of pounds in London and the South, and the NLA is unsure about their true value.
“Of everything we’ve seen so far I’d be hard-pressed to say they are value for money but we are self-selecting in our views because we represent to good landlords out there, and in most cases the among they deduct very little from deposits and the vast majority is returned to tenants,” says Chris Norris.
“Good tenants who keep up with the rent, don’t damage the property and stick to the tenancy agreement are paying money they will never see again.”
But it’s early days. The current pack of entrants have only been going 18 months or so. Whether they can persuade enough tenants to embrace their products remains to be seen.