Airbnb: a game-changer for the commercial property market

Internet access has changed the real estate industry. Airbnb, a San Francisco start-up, is leading the way in the “sharing economy”, much to the distaste of local authorities and hoteliers. The service offers easy-to-use and wallet-friendly accommodation in people’s homes, but protagonists accuse the start-up of forcing up the price of real estate in cities and choking the hotel industry.

Key points:

• 100,000+ listings in Paris, New York, London, Berlin, Barcelona
• strongest growth in lettings and listings in Paris, France
• 57% flats in London’s Westminster rented out via Airbnb
• 6–7% yields on Airbnb rentals vs. 3–4% on long-term lettings
• 34,000 cities in the world with property listed on Airbnb

From digital reality to democratic scandal

Tensions over Airbnb hit a critical moment this year, when unhappy residents of San Francisco, where Airbnb was founded, voted in November 2015 on whether to limit Airbnb in the city. The authors of "Proposition F" contained the following restrictions on Airbnb activity:

• 75-night limit on renting property per year regardless of the property owners' presence. Currently SF limits property rental in the absence of owners to 90 nights per year, with no limit in their presence.
• quarterly tax declarations by landlords on the number of nights the property was rented.

In line with the city’s progressive reputation, 55% voted "no" to the amendments, mostly because Airbnb rentals guarantee high yields in overheated markets like San Francisco.

“Proposition F” aimed to tackle the falling long-term rental property supply caused by the rapid growth of online letting services like Airbnb, which are accused of pushing up rental prices in cities, much to the discontent of local residents. According to Share Better SF action group, 70% of long-term rental flats are now rented out to tourists via Airbnb and similar platforms.

But San Francisco residents are not the only ones to face this new "digital" reality, complaints in Barcelona are mounting too. In August 2015, the city's mayor Ada Colau attacked Airbnb and Booking.com: “an internet platform cannot become a means to thwart the regulations and to shelter illegal tourist apartments. In that case we do have to intervene very forcefully".

There have been several protests against mounting short-term lettings in La Rambla neighbourhood that have priced locals out of the rental market. "The tourist flats are making the area much more expensive. Flats that could perfectly well be rented for €300 or €400 (a month) are being rented for €600 or €700,"claimed spokesman Oriol Casabella for a La Barceloneta residents’ group.

As discontent grows in the ranks of local authorities, neighbourhood associations and industry professionals, outfits like Airbnb and Uber are being targeted as the culprits but are the accusations founded? The answers are in the figures.

Bigger cities have bigger Airbnb markets

Airbnb emerged in 2008 and gained almost immediate popularity with tourists. The website currently hosts listings in 34,000 cities worldwide thanks to a simple and appealing business model: rent a flat or a room on a per day basis. Yields are twice to three times higher than the monthly standard for rentals of 30 days and more.

Paris, New York, London, Berlin and Barcelona emerge as market leaders after listings skyrocketed from nothing to over 100,000 in total over just five years. A key feature explaining the success is the number of tourists that visit a city every year. All these cities, but Berlin, ranked in the top ten destination cities by International Overnight Visitor in MasterCard’s 2015 Global Destinations Cities Index. Berlin was twentieth in the rating.

However, smaller cities are less affected: the share of flats listed on Airbnb is relatively low compared to the total amount of vacant properties to let on the market. For instance, the proportion of flats to rent via Airbnb only compose 6% and 3% of the total vacant rental property in Austin (TX) and Nashville (TN), music meccas for American culture; in New York City, it’s 18%.

What is more, the “Airbnb effect” is located in specific neighbourhoods of cities, typically those near tourist attractions. This is particularly visible in London where Westminster is the capital of short-term tourist lettings, but other areas are hardly affected.

A staggering 57% of vacant property to let in the central district of Westminster is rented out via the online portal, compared to a mere 1% in the less attractive borough of Croydon and 5% in upmarket Greenwich.

Budgets hotels are most at risk

In terms of revenue, Airbnb is a boon for investors. Yields are 6–7% on average per annum, compared to 3–4% for standard long-term rentals, and more in line with yields for commercial property like retail or warehousing.

Research by the Boston University School of Management, revised in 2015, showed that in Texas (where the online portal is particularly popular), Airbnb did not affect business or luxury hotels. However, the budget hotel segment saw revenue cut by 5% over a two-year period (2011–2013). The researchers forecast that Airbnb will take 10% of the budget accommodation segment by 2016.

Airbnb rental property also distinguishes itself by the relatively low-cost investment required in comparison to other property segments. A flat in a central location costs less than a shopping centre or hotel for example, while bringing in returns expected from big commercial investments. Even today, only about one third of the website’s listings belong to owners of two and more properties, who are ultimately the only ones in a position to compete with small hotel businesses.

Laws and taxes are bound to catch up

“Airbnb and similar websites do affect rental property markets in big cities, but we expect lobbying by residents and authorities activity to result in new laws, particularly in terms of taxation. Some of these measures are coming into effect right now. In Barcelona, for instance, Airbnb rentals must be registered with the local authorities, or the owners get a €3,000 fine. So while investors are right to consider this option, they need to keep on top of the law, which could change at any time,” advises Marina Filichkina, director of sales at Tranio.

These digital-era start-ups have set in motion profound changes to society by allowing consumers to deal directly with each other, rather than a faceless company. The appeal is indubitable considering their staggering success. However, beware of backlash as lawmakers and other property industry players around the world mount the revolt, and it will surely include taxation, legislation and restrictions on these new tools to make money in a world that hasn’t yet recovered from the financial crisis.

Ivan Chepizhko, Tranio

Originally published by OPP.com