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Commercial Real Estate Agents stable Fees continue to drive movements in the real estate SPPI

The latest edition of the SPPI publication highlights increases in the price of real estate agency services for commercial properties as one of the largest contributors to the aggregate SPPI rate for quarter 2 of 2015. 

The index has shown significant growth over the last two years. 
Does this indicate that estate agents have begun charging significantly higher fees?

Estate agents do not tend to charge a fixed fee for their services. Instead they generally take a percentage of the value of the property sold or of the agreed letting.
Figure A shows a breakdown of the data used in the calculation of the Real Estate SPPI:

Figure A: Services Producer Price Index real estate breakdown

Quarter 4 (Oct to Dec) 2009 to Quarter 2 (Apr to Jun) 2015, United Kingdom

Figure A: Services Producer Price Index real estate breakdown
Source: Office for National Statistics

Notes:

  1. Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December).

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The SPPI intends to measure the price received by service providers. To achieve this for commercial real estate, the index is calculated using two sources of data. The first, represented by the line on the graph titled “Value of properties sold/let”, is collected from the Investment Property Databank (IPD). 




This data is used to represent the value of commercial properties sold and let to businesses in the UK. The SPPI survey then collects data from estate agents that specify the percentage fees that they collect when completing their services. The annual percentage change in this fee is represented in figure A by the line titled “percentage fee taken”.  The figures shown in figure A for both of these measures are weighted averages of the price changes for different types of properties split between those in and outside of London. Figure A also then compares these to the Real estate SPPI.





From figure A it can be seen that the percentage fee being taken by estate agents has barely changed over the last 5 years. The changes being seen in the real estate SPPI relate to the increase in the value of commercial property and the cost to rent these properties. Since the end of the economic downturn, around the beginning of 2010, the growth in the value of commercial properties and lettings levelled off to around an average of 1% between Q3 2010 and Q4 2012. Between 2013 Q4 and 2015 Q2 this increases to an average growth of around 6 - 7%. The real estate SPPI mirrors these movements.
From the data in figure A it seems fair to assume that if the current trend of percentage fees charged by estate agents remaining stable continues, then we can expect to see the value of properties and lettings continue to drive movements in the real estate SPPI.