Historically, short-term rentals have been an unattractive business for the majority of estate agents and property managers. Scarcity of demand from tenants has made for a weak proposition to landlords, with the operational complexity of managing short-term rentals resulting in paper thin margins for the agent. Many actually operate at a loss.
By contrast, today the major online platforms (Airbnb, Booking.com, Homeaway and others) have made short-term renting as easy as booking a hotel. As a result, hordes of tourists and business travellers are now choosing “homestays” as a better value, more spacious and more convenient alternative to the more established hotel and serviced apartment options. PWC estimates UK booking revenue from peer-to-peer platforms to be £3bn in 2015, rising to nearly £30bn by 2025. In London Airbnb alone is growing by 55% YoY. The sector is exploding, posing an existential threat to the hotel industry…and understandably so.
A billion dollar problem
This boom in demand for “super short-term” rentals has persuaded owner-occupiers, landlords and tenants to cash in, monetising any available capacity in their property at highly compelling nightly rates that significantly outperform traditional AST yields. The major insight, however, is that the majority of “hosts” renting out properties via these peer-to-peer platforms are tenants. Whilst exact numbers are hard to pinpoint, well over 50% of the 55,000+ Airbnb listings marketed in London are rented properties. These tenants are categorically all subletting, and thus likely in breach of their tenancy agreement. By subletting without landlord consent, the tenant is essentially profiting from an asset that is simply not theirs to monetise. In so doing, though in most cases no doubt blissfully unaware, they are exposing that asset to an unacceptable level of risk - which only breeds resentment and distrust in the landlord and/or their managing agent.
But does it have to be that way?
Many, if not most, portfolio landlords and property managers must now spend an inordinate amount of time trying to clamp down on tenants who are subletting illicitly on Airbnb. The platform’s seemingly unstoppable growth, however, suggests, to me at least, that this is potentially a short-sighted approach that’s destined to fail. Airbnb’s value proposition has to date simply proven to be too good to beat: wouldn’t you like free money when you’re not using your home?
It’s the strength of this value proposition that has transformed subletting and short-term renting into the undeniable global trend that it is today. As an industry we need to study and understand the motivations that underpin this trend, then work out a way to embrace and professionalise it to the financial benefit of all stakeholders in the value chain; landlords, agents and tenants. Solve this and subletting, “super-short term” rentals and homesharing have the combined potential to shape the future of the private rented sector in the 21st century. This is a billion dollar problem.
Why? Ever increasing property prices indicate that, by 2025, home ownership will be a luxury enjoyed by the minority. Figures show us that the future of urban living is destined to be rented, however the advent of “Generation rent” poses the UK with a number of significant social and economic challenges:
- In our major cities, growing demand for rental accommodation is simply not translating into higher yields for property investors.
- Demand for shorter, more flexible tenancies is rapidly increasing as we become a more transient, globally mobile society.
- Residential developers face the additional challenge of designing aspirational build-to-rent units offering premium tenant services at an affordable price point simply to ensure long-term occupancy. Our buildings must show a deeper understanding of the needs, lifestyles and habits of their target audience in order to remain timelessly relevant.
The uncomfortable truth: subletting creates value
Solving big, real world problems requires us to question and challenge long-held assumptions previously deemed untouchable. Subletting has always carried negative connotations. Almost all of them, however, can be traced back to a misalignment of incentives - something that has historically gone unchallenged by the industry. By addressing this head on, it is entirely possible to professionalise this area of the market and develop it into a fully-compliant, secure and seamless service that creates new value for landlords, tenants and agents.
The new wave of build-to-rent developments will offer fully integrated, professionally managed subletting - and moreover the technology and operation to support it will have been baked into the scheme’s architectural design from inception. This will offer the building’s long-term tenants a more flexible and affordable renting experience, whilst at the same time creating a new layer of value-added technology and hospitality services. The result is a new class of premium rental accommodation that can materially outperform conventional AST market yields by as much as 25%+. And that’s net yield.
What’s next for investors, developers and agents?
Tapping into the “super short-term” rental market should now be a strategic priority for many high street agents. At its most basic level it enables the efficient monetisation of void periods between tenancies or in properties awaiting sale. There is far greater potential, however, for it to power a transformational shift in the private rented sector, delivering a pioneering, high-yield long-term rental proposition to the benefit of landlords and tenants alike.
Given the hugely fragmented, multi-channel and online nature of today’s short-term rental market, profiting from it requires deep technology, data and operational excellence. Hospitality is above all a logistics business - with a lot of moving parts. Property managers looking to capitalise on the opportunity need to be aware of this, and forge strategic partnerships with domain experts who are able to provide a transparent and scalable service that’s a genuine engine for profit.
These are hugely exciting times. The private rented sector needs reinventing, and it is now facing its greatest ever wave of innovation. The winners will be those who are able to read the signs in the market, challenge long-held assumptions and rapidly adapt to this new and exciting landscape.
Guy Westlake is the Founder and CEO of Lavanda