“Free holidays for BTR customers”October 2019
"Free holidays for our BTR customers"; now there's an offer! Or maybe just, "Don't pay while you’re away". Are we going to see these kinds of inducements being offered by BTR operators in what is likely to become a hard-fought marketing battle to secure new customers?
Sounds a bit far-fetched and far too costly when you first hear it but a few modern-minded intermediary companies who are experienced in hospitality and rooted in the Proptech world think this is far more than a reality; it is a revenue generator for landlords and occupiers alike. Let’s call these guys the ultra-short let (USL) operators.
The phenomenon of the Ultra-Short Let
You’ve heard plenty about the growth of the “sharing economy” driven by the wants and needs of the millennial generation. Airbnb started as a business in 2008 to service the lodging needs of the new “digital nomads” whose flexible, remote working habits and desire for travel experiences gave rise to the demand for a whole new short term lodging experience – not in a hotel. Flip this coin and you see that those nomads that have long-term rentals also wanted to monetise their own space when they are out of town.
This phenomenon has seen Airbnb’s penetration grow to now take 20% of total lodging bookings and, with competitor HomeAway, secure a third of the total market. Airbnb now lets more rooms than the Hilton chain and is chasing down Marriot. In terms of listings, it was offering 4.92 million rooms in Q1 2019, nearly four times Marriot’s offer and more than the total offer of the 5 largest hotel operators.
Lavanda, one of the USL operators say that 300,000 companies now use Airbnb for business travel – up from only 250 in 2015 and 42% of users have switched directly from using hotels. So the demand for non-hotel related lodging is growing rapidly.
Analysts, Inside Airbnb, identify 33,000 private rooms in Central London on the platform so supply is clearly rising to meet this demand BUT many of these rooms are, themselves, let on AST’s meaning a lot of this short-let activity is likely to be in breach of the lease or possibly even planning. Given that most new BTR leases follow the AST model, how can this possibly work for BTR?
How can ultra-short lets work in BTR?
If you let your flat for a limited period of a month, or individual weeks or even a series of short, multi-night stays, you should achieve total revenue well in excess of your normal monthly rent; attractive to both landlords and occupiers alike.
In most cases the Assured Shorthold Tenancy that gives you the right to occupy your flat restricts you from sub-letting or sharing your flat with others. So the ability to short let is only available to the landlord.
One of our favourite BTR catch-phrases at Geraghty Taylor is “Happy people give you money! So landlords can make their occupiers happy by giving them the right to short-let their flat. Some even argue that this is an added amenity.
Surveys show that some 50% of PRS occupiers in the UK are “millennials” and that this almost perfectly matches the profile of customers who book on Airbnb. In a survey Lavanda conducted of their own clients’ occupiers, 35% said they would be keen on renting their flat out on the short-term rental market when they were away, so offering this benefit should create a lot of happy people.
What about the other side of the story, though? Is this compatible with developing the so highly valued BTR community within the building? On the face of it this should be a complete anathema to the BTR operator; all these new faces popping in and out, using the facilities with no stake in the community.
But couldn't this be a positive contributor to the atmosphere? Vacationing guests are far more likely to take advantage of facilities keeping them vibrant. And they are so much more likely to want to meet and interact with willing residents in the shared spaces eager to learn more about the location and all in a positive buoyant mood.
Clearly considerations will vary across buildings and brands. Limitations and restrictions will be paramount and control of usage of amenities to support the occupiers is crucial; as is the initial decision on just how much of the building to allow to use ultra-short term lets.
...and what about the management hassle?
It may make some sense but think of the management headache of all this. Well the USL operators have. They typically offer a range of solutions. Either adopt their software system and use it within your own operation, so maintaining your own brand and identity or take on board the USL operator as a partner to manage this facet of your BTR business on pre-agreed terms. It could be as simple as agreeing to allow occupiers to short-let through the operator.
Staykeepers, another leading USL operator, take a fee for achieving the letting, vetting the customer in advance in line with agreed policy, meeting and greeting them on arrival and servicing the flat after their stay; all with the help of sophisticated software apps that inform them and their landlord clients. They claim to be able to increase the yield on your residential investment by an additional 1.5% by increasing occupancy and revenue through ultra-short lets.
The additional revenue generated could be shared with the flat’s occupier, either by waving his rent while absent or even by sharing the premium achieved – so paid holidays could be a potential offer.
... hospitality informing residential investment
Let’s remember that the cornerstones of BTR are service and customer experience. These are fundamentals in the hospitality business too so it shouldn’t really surprise us that residential investors are eager to identify where hospitality can inform their business model.
Residential investors are using USL systems to regulate short-letting in their buildings and legitimise occupier activity. Some introduce it at day one of lease-up to achieve stabilisation faster, create community quicker and offer “try before you buy”; something Lavanda have done with Europa Capital and Atlas residential at Anaconda Cut in Manchester.
Paradoxically, ultra-short lets can also lead to longer lease lengths as occupiers will be more willing to commit if they can see they can offset their rental liability when they are absent through a consented short-let policy.
...and there’s so much more to come
As with many areas of real estate at present, watch this space. Millions of dollars are being invested in new ventures to capture a piece of this sharer-economy residential marketplace; often by players from the hospitality world teaming up with traditional real estate investors.
Brookfield plan to invest $200 million in a joint venture with Niido, the multifamily development partner of Airbnb. Niido fully embraces the concept of short-letting in their schemes in Nashville and Orlando, offering hotel-style service to the guests of their occupiers. Their website even leads with a calculator showing occupiers how much of their annual rent is covered by listing their apartment for so many nights per month! Daydream Apartments follow a similar strategy and acquired their first building in Denver for $304m in May. Nearer home, The Collective is now offering rooms available to rent by the night.
Dubai Asset Management has announced its venture into the short-term rental market space by partnering with leading holiday home operator, HiGuests. This coincides with Expo 2020 being held in Dubail expecting to attract 17 million international visitors over the six months it is on.
Together Airbnb and Niido plan 14 home-sharing complexes by 2020. Expedia has bought two start-ups, Pillow and ApartmentJet to help landlords turn apartments into short-term rentals.
With all this activity in the alternate residential space, we might even get a little concerned at what this might mean for the supply of “conventional” BTR!? BTR is competing with the familiar for-sale development and increasingly senior living and care homes. The increased demands of alternate hospitality might mean that BTR providers need to look at USL operators very seriously to maintain their bidding competitiveness.
From a design perspective, Geraghty Taylor has worked on projects where unit layouts have been conceived with the flexibility to easily accommodate splitting and sharing.
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