Have you travelled on business or vacation and booked yourself into an Airbnb room instead of a hotel? Have you heard about how homeowners have significantly increased their monthly income by listing their homes on sites like Airbnb rather than traditional rentals? Have you wondered how HNIs are participating in investment properties across the most lucrative and glamorous cities of the world? These three growing trends encapsulate the short-term rental phenomenon that has transformed the hospitality sector over the last few years.
What are short term rentals (STR) though? These are fully furnished homes or apartments that are rented out for short stays, offering travelers a spacious a nd convenient alternative to hotels. No company better represents this seismic shift in hospitality than Airbnb, which now has properties in over 65,000 cities across 191 countries. In 10 years, this tech startup has overtaken century-old competitors like Hilton and Marriott with a valuation of $31 billion. With CEO Brian Chesky's revelation of the company's vision to host 1 billion guests by 2028, adds further ambition to an already rosy forecast for the overall segment that is estimated to add $56 billion in the next three years alone. Therefore, it is the perfect time to do a deep dive into why this segment is changing the way we travel, rent out our homes, and profit from global real estate.
Underlining this STR revolution is the changing nature of how people wish to spend money. World over, economies are growing, and more and more people are becoming at least moderately affluent. These newly affluent people value experiences over things and travel is one of their most desired experiences. The Travel & Tourism sector was accounted for a full tenth of the global GDP and amounted to $7.6 trillion in 2016.
The current generation of travelers are prioritizing authentic experiences that allow them to live like a local in immersive settings over the standardized fare offered by hotels. Travelers are also starting to realize that renting an entire home allows families and friends travelling together to have a more enjoyable stay than being split in to separate hotel rooms with no shared space for social interaction. While a significant factor in the runaway success of this segment is the convenience of technology platforms that companies like Airbnb offer to both travelers and homeowners alike, there a host of drivers fueling the sustained growth of short-term rentals.
Airbnb has created a hospitality marketplace of unprecedented scale, with more than 4 million properties currently. The internet is the critical enabler, bringing several solutions from listings, online bookings, payments, etc., without which this would not have been possible. More broadly, this is another man ifestation of the sharing economy, which is estimated to reach $335 billion by 2025 in just its five top sectors. What Uber has done for transportation, short term rental platforms have done for travel, democratizing asset ownership and hugely increasing the number of transactions that occur, to the benefit of all parties.
For investors, this presents an exciting new asset class. Hospitality has traditionally been one of the asset classes that are most out of reach for an investor - buying a hotel is only possible for a select few or institutions. But short-term rental assets are typical homes, and therefore much more comfortable to participate. Besides, unlike a large hotel that does not allow one to create a diversified portfolio easily, short-term rental portfolios can easily be a diversified set of properties in different cities.
The end-consumers - travelers, have gained hugely with this new model. The scale of the marketplace has vastly expanded the choice that travelers have while offering a rich variety of offerings catering to every segment of tourist or business traveler. What's more, offerings in each segment represent tremendous value compared to hotels. An upscale 3-bed property may cost on average $500/night, which is less expensive than the cost of booking three separate rooms in an equivalent hotel. In terms of luxury, function, and space, short-term rental properties are often far superior to hotel rooms, with large living rooms, dining rooms, kitchens and, often, even games such as pool tables at the property.
As disposable income rises across the world, and society evolves in the things that it would most like to spend this disposable income on, the hospitality industry is rapidly adjusting to both the enormous opportunities as well as the new requirements.
Real estate investors have only begun to scratch the surface of this asset class and its unique role in building high return portfolios. Today, an investor sitting in India can participate in the lucrative cash flows of real estate in Las Vegas through a portfolio of short-term rental properties. Across the most profitable travel destinations of the world, these portfolio opportuni ties are popping up and offering savvy investors an unrivalled chance to tap into hitherto inaccessible markets and enabling them to build highly profitable and diversified portfolios. Short term rentals have established their credentials now and are poised to become an essential part of the portfolio of HNIs.