Global Outlook
Short term rentals refer to furnished accommodation that is let on a short term duration, ranging from days to a few weeks.
Types of Short-Term Rentals
- Vacation Homes: Stand-alone properties e.g. houses, cottages or villas designed and furnished for short term stays. They are mostly located in popular tourist destinations.
- Serviced Apartments: Fully furnished apartments equipped with all essential amenities. They target travelers seeking an urban experience and are located in residential buildings or complexes within a city or popular tourist hotspot.
- Bed & Breakfasts (B&Bs): Small establishments mostly operated by the owners. They offer limited rooms/suites within a private residence, with breakfast included in the stay package. They are popular in rural or scenic areas, offering a cosy and intimate atmosphere.
- Homestays: These allow guests to stay in a host's home. The host often provides a private room or a shared space within their residence, and guests have an opportunity to interact with the hosts and gain insights into the local culture and way of life.
In 2007, the concept of Airbnb was conceived by a trio of recent college graduates — Brian Chesky, Nathan Blecharczyk, and Joe Gebbia — who grappled with the challenge of affordability of their shared apartment in San Francisco. Coincidentally, during this period, the Industrial Designers Society of America hosted a conference in San Francisco, and due to high demand for accommodations, hotel rooms were in short supply. In response, Chesky and his team devised an innovative solution by inflating air mattresses in their apartment, providing a more economical lodging option.
This ingenious idea eventually evolved into what we now know as Airbnb, a platform boasting over 6 million listings across the globe. The widespread emergence of the sharing economy on a global scale has brought about a transformation in consumer behaviors and service delivery. Peer-to-peer platforms, made possible by digital technology companies, facilitate the temporary exchange of goods and services, with Airbnb serving as a prime example, allowing individuals to share their homes. This shift gained significant traction following the economic recession of 2008.
Serviced apartments have gained considerable popularity in recent years, originating in the United States and subsequently spreading to Europe, Asia, and Africa. These accommodations offer a personalized and spacious "home away from home" experience, bridging the gap between traditional hotels and long-term rentals. These serviced apartments represent a blend of residential living and hotel amenities, excelling in generating higher profits due to their cost-effective operational model, offering fewer and less frequent services in comparison to hotels.
Airbnb, a prominent peer-to-peer accommodation platform, has disrupted the traditional lodging industry. It operates as a fully interactive digital platform, seamlessly connecting property owners with travelers. Airbnb's entry into the tourism accommodation sector has triggered intense competition among established providers. Some hotels have resorted to price reductions and enhancement of their online booking systems to remain competitive. In a surprising move, smaller hotels have even chosen to collaborate with Airbnb, capitalising on the platform's high visibility to attract more guests.
Local Outlook
Airbnb, specializing in short-term homestays and serviced accommodations, has established itself as a market leader in the homestay sector. Additionally, Booking.com, VRBO, and Agoda are comparable platforms in the market that offer similar services.
In Kenya, Airbnb has experienced a surge in popularity, providing a seamless experience for both local residents and international travellers seeking fully furnished homes. Interestingly, the term "Airbnb" in Kenya has become synonymous with short-stay serviced accommodations, typically encompassing privately-owned houses, apartments, and other residences listed online for temporary rentals.
The influence of Airbnb on the real estate landscape in Kenya is palpable. Real estate investors have enthusiastically adopted the Airbnb concept, leading to a significant increase in properties specifically tailored for Airbnb purposes. Up until 2015, there were only 1,400 Airbnbs in Kenya, with around 700 in Nairobi. In 2015, Brian Chesky, one of Airbnb's co-founders, visited Kenya as part of a business delegation accompanying then-US President Barack Obama. This visit significantly enhanced the company's visibility, and by 2018, the number of Airbnb listings in Kenya had surpassed 6,500. As of 2023, there are more than 6 million listings worldwide and over 4 million hosts globally, with Kenya boasting over 10,000 listings on Airbnb.
The growth of Airbnb has coincided with a backdrop of decreasing rental prices in Nairobi's uptown estates. Data from Hass Consult reveals that the average residential rent decreased by 1.2% in March 2023, marking the sharpest decline since 2018 when prices fell by 2.5%. Detached homes experienced the most significant price drop at 2.5%, followed by semi-detached homes with a 3.2% decline.
The trend of increasing Airbnb offerings is expected to persist, fueled in part by new serviced apartment projects in development as well as the rising number of foreign visitors, particularly from West Africa and South Sudan. Additionally, the younger generation's growing preference for Airbnb accommodations for vacations and leisure activities further bolsters the industry's expansion.
In Nairobi, the most coveted neighborhoods for short-term rentals include Kilimani, Kileleshwa, Lavington, and Westlands. These neighborhoods are highly sought after for their upscale housing options, close proximity to the city center, shopping centers, and robust infrastructure. Furthermore, Ruaka is emerging as a rising star in the realm of short-term rentals, primarily due to its attractive pricing, quality of housing, and strategic location in close proximity to the prestigious Gigiri "blue zones."
Financial Assessment: Cost and Performance Metrics
Starting an Airbnb business is a relatively straightforward endeavor. However, there are additional costs associated with establishing and growing this venture. Furnishing units may cost anywhere between Kshs. 200,000 to Kshs. 500,000 for a one-bedroom unit and up to Kshs. 2,000,000 for larger accommodations. Additionally, there are expenses like rent (if the host doesn't own the unit), advertising and listing fees, as well as housekeeping costs.
When it comes to pricing, the daily rates can fluctuate between Kshs. 3,000 and Kshs. 15,000 per night, while monthly rates range from Kshs. 80,000 to Kshs. 450,000. Investors can yield substantial income from their Airbnb units, with the key being to ensure that the unit is occupied for at least 15 days each month. Around ten nights should be adequate to cover operational expenses, encompassing rent, cleaning, and advertising.
Investors can employ specific metrics to evaluate the performance of their investment:
- Occupancy Rates: Gauges the ratio of rented days for the units. If your occupancy rates are notably higher than neighboring rentals, it may signify that your rental is either very popular or too affordably priced compared to the market.
- Average Length of Stay (ALOS): Calculated by dividing the total number of nights booked by the total number of reservations. This metric is vital for efficient operational cost management and enables effective planning for cleaning and maintenance around guest stays.
- Average Daily Rate (ADR): Computed by dividing one unit's total revenue by the number of nights it was rented. A closer examination of the ADR can highlight opportunities for upselling or cross-selling additional services.
- Revenue per Available Room (RevPAR): Calculated by multiplying your ADR by your occupancy rate. It offers a comprehensive view of your short-term rental performance and can be employed to assess the overall success of your rental business.
- Net Operating Income (NOI): Represents the revenue generated by a property after deducting all operating expenses. This is a pivotal metric for evaluating profitability and identifying avenues to enhance the efficiency of your business model.
Considerations for Investment into Airbnb
- Location: Selecting a strategic location is fundamental. Guests often seek accommodations that either provide a unique experience or offer affordable hospitality that complements their business or leisure activities. For tourists, position the Airbnb in popular destinations like the coast, Mt. Kenya, or Naivasha. For business travelers, consider upmarket neighborhoods in bustling towns with proximity to airports and home offices.
- Cost: Short-term rentals come with additional costs beyond standard expenditures such as property taxes, insurance, booking/listing fees, utilities (water, electricity, internet, cable TV), bathroom and kitchen supplies, furnishings, décor, and cleaning services. Notably, in Kenya the Airbnb platform imposes a 3% commission on all listings, and an additional 16% VAT is deducted due to the digital service tax.
- Safety and Security: Prioritizing safety requires implementation of measures like working smoke detectors, fire extinguishers, and reliable lock systems. Regular property inspections are key to identifying and addressing potential hazards.
- Pricing Model: Effective pricing strategies are vital. Investors should conduct thorough market research to develop a competitive pricing model, and rates should be adjusted based on demand fluctuations and seasonal variations.
- Aesthetics: Ensuring the property exudes a welcoming and homely ambiance is crucial. Investing in attractive furniture, art, and quality utensils enhances the property's appeal. Small personal touches like fresh flowers, welcome baskets, or personalized notes can create a lasting impression.
- Communication and Marketing: Maintaining a quick response time is crucial. Creating a compelling listing description that highlights unique features, proximity to attractions, and high-quality photographs can significantly aid in marketing the property. Listing on multiple platforms maximizes visibility.
- Legal and Regulatory Compliance: In Kenya, registration with the Tourism Regulatory Authority (TRA) is required. A one-off application fee of Kshs. 1,000/= and annual license fees apply:
- Serviced flats & apartments, villas, holiday cottages — Kshs. 26,000/= per year
- Beach cottages, tree houses — Kshs. 21,000/= per year
- Hostels and guest houses — Kshs. 11,000/= per year
Merits of Airbnb
- Significantly higher return on investment compared to traditional rentals, as clients are willing to pay a premium for convenience and amenities.
- Flexibility — property owners can opt for shorter rental periods, granting them greater control over their income.
- From the guest's perspective, Airbnb provides everything needed during their stay — lodging, Wi-Fi, kitchen appliances, and more — eliminating the need to purchase or bring additional items.
- The booking process is both user-friendly and secure, with payment transactions conducted through the platform.
Demerits of Airbnb
- Risk of Unwanted Individuals: The platform lacks comprehensive background checks for clients and guests, which can pose a risk to hosts. Hosting strangers may lead to property damage or other issues, resulting in financial losses.
- Inconsistency in Guest Flows: Like the hotel industry, Airbnb's business is significantly influenced by seasonal fluctuations. Occupancy rates are not guaranteed, with peak seasons witnessing high demand while low seasons can lead to significantly reduced occupancy rates.
- Unruly Guest Behavior: Particularly challenging for hosts who rent rather than own the unit. Complaints from neighboring long-term residents could result in the eviction of the host and a loss of business.
- Theft and Property Damage: Incidents of theft of household items or the replacement of items with inferior ones have been reported. Unruly guests and their behavior can lead to property damage, further impacting the host's bottom line.
Our View
The market for short term rentals is expected to have a two-fold effect going forward. The market for vacation homes, bed and breakfasts and other tourist accommodation offered on online platforms like Airbnb is expected to grow due to the convenience offered as well as the shift in consumer patterns with regards to e-commerce. Advancement in technology, however, may also result in a decline in demand for serviced apartments for business travelers as virtual workspaces and avenues continue to advance.
The take-off of an Airbnb is affected by two additional factors:
- Discounts at onset: Discounts offered at the start of a listing offer affordability to clients. The discounted period may run anywhere from one month until enough traffic to the unit is seen.
- The effect of ratings: Online platforms provide clients with the ability to rate a unit, usually determined by the presentation/décor, location, customer service, and ambience of the space. The higher the rating, the more probable one can increase prices and get more traffic, thus higher returns.
While investing in Airbnb properties offers a range of benefits, including higher returns and flexibility, it's essential to be aware of and prepared for the potential challenges such as unwanted individuals, inconsistent guest flows, unruly guest behavior, theft, and property damage. Effective management and careful consideration of these factors can help Airbnb hosts navigate these challenges successfully.
Source: Business Daily, Nation, Kenya Homes and Sterling Real Estate Advisory