The Rise of Short Term Rental Businesses

Improved transport connectivity, cultural awareness, a growing economy and digitization have encouraged people to spend their disposable income and time to travel to new places, making travel and tourism one of the largest contributing sectors of the economy.

A report by the World Travel and Tourism Council finds that in Southeast Asia, the sector contributed 11.8 percent to the GDP ($301.bn) in 2016 and is forecasted to rise by 5.7 percent by 2027.

Recognising the potential, the short-term rentals segment has flourished in the last few years, dominating the growth in the hospitality sector. The segment alone is estimated to add $56 billion in the next 3 years and reach $194 billion by 2021. Market leader Airbnb has rapidly scaled up to more than 4 million properties in over 65,000 cities, which more listings than the top five major hotel brands combined.

What are short term rentals?

Short term rentals are furnished homes, apartments, hostels or homestays rented out on a short period basis like a week or a few days. Airbnb, for example, acts as a platform that allows owners to list their properties in a certain location and travelers to rent them.

How have short term rentals redefined hospitality?

The concept flourished on the potential that a majority of the world population, especially the youth, is looking for unique and affordable experiences during their travels. The short rental services also advertise "home-like stay" and a "live like a local" experience that are attractive to the leisure travelers looking to explore new cultures and make their trips memorable. Unlike hotel stays, these also give visitors a chance to make business contacts with the locals.

The concept may have flourished on the cheap rental products but they grew on quality service. Apart from significant presence on seamless online platforms, they provide additional services like itinerary management, ride-rentals, photography, etc. They also put security provisions in place for the travelers as well as house owners, thus addressing many of the concerns that people first had with these rentals over traditional hotel rooms.

How have they influenced real estate?

Traditional hospitality businesses involve building and maintaining properties along with providing services like housekeeping and meals. In a saturated hotel industry, the short-term rental concept also allows residents to make an earning from their disposable house as and when it is available.

With much lesser investment, customer-centric services and maintaining a standard in quality, short-term rental companies like Airbnb were able to penetrate into 191 countries in less than a decade, which hotel chains took a century to.

The concept reduces the need for capital investment in ownership and maintenance of properties but rather focuses on customer experience and efficient utilization of assets.

The Chinese government is even encouraging house rentals over ownership especially in cities like Beijing, to tame rapidly rising property prices. Startups, as well as big names like Alibaba are looking to enter into the home rental business (both short and long-term rentals).

The idea of home-ownership is being rewritten by short term rentals, both from the perspective of enjoying the best yields from one's property, as well as capitalizing on the decentralization of real estate assets in general across industries, especially hospitality.

How have short term rentals redefined investments?

The sharing economy (the model that allows renting another's belonging) is flourishing. With more and more people choosing temporary relocation, especially the younger population, they prefer renting homes, furniture and vehicles.

A PwC report suggests that nearly 20 percent of Americans engage in sharing economic activity of some sort and would fuel the economy to grow to $335 billion by 2025 in travel, car sharing, finance, staffing, and streaming segment.

On an average, a spacious 3 BHK homes will cost $200 a night in the short rental scheme. This would be the same as the cost of a 5-star hotel room.

Emerging economies in Asia are recognising the potential that short term rentals business hold. Holiday homes fetch far more revenue than long term rentals, which is why, in the beginning of April, Dubai's tourism department launched initiatives to develop the time share market. Though it has a healthy long-term occupancy trend, Dubai is seeking to accelerate the slow growth in hospitality.

Airbnb too has established itself in China, where it has made arrangements for the convenience of users. It has launched a professional website in Chinese language and allows users to pay through local payment modes like Unionpay. The company had recorded a massive 700 percent growth in outward bookings in Asia-Pacific.

Cities like Singapore and Hong Kong, that are known as the most expensive cities in the world, have a great potential for cheap short term rentals. Similarly, Indonesia (Bali) and India have seen travelers from the west, looking for "exotic" or authentic experience in interior areas of the country. With a global global reach, underutilized properties in these areas have ample growth opportunities.

This is why real estate investment giants like SmartOwner, Asia's leading property marketplace, are now introducing investment opportunities in short term rental portfolios.

By offering a globally diversified exclusive portfolio of luxury properties, offerings like the SmartOwner STR Series are changing the landscape of real estate investments by allowing individual investors a once in a lifetime opportunity to own a stake in a portfolio of properties in the hottest destinations and fastest growing regions of the world.

Gone are the days of investing in real estate the traditional way. Investors get quarterly returns that substantially beat the market, from the income generated by these short term rental properties.

These generate much higher rents than the traditional rental model, and the profitability is further enhanced when portfolios like this are managed professionally and optimized with algorithmic pricing and superior services. Savvy investors who are informed of the transformational change in the real estate industry will be able to recognize the value of capturing the tremendous opportunity in this trend before it becomes less exclusive.