Was short-term leasing short-sighted?

Industry News, Property Management,  Property Managers

With Australia now facing stage 3 restrictions and most of the country in some form of lockdown due to the coronavirus pandemic, the travel industry is taking a beating. That includes Airbnb, which has seen bookings tank as people are forced to cancel trips. So what does this mean for the Queensland real estate industry?

In 2009, an obscure company known as Airbed & Breakfast altered its terms to allow hosts to lease their entire living space to guests. It quickly led to a name change to Airbnb followed by a phenomenal shift in the short-term leasing market. In the 10 years since its launch, property investors have flocked to the short-term lease model offered by Airbnb in the hopes of achieving better returns than long-term leasing offer. Whether they’ve been successful in the pursuit of higher yields warrants a whole other discussion, suffice to say 2020 has exposed a glaring weakness in the Airbnb model: its inherent volatility.

A property owner renting on a 12-month lease needs to find just a single tenant every 12 months. If both parties are happy to renew the lease, then that number falls even lower, making long-term leasing pretty much iron clad when it comes to stability. Long-term leasing provides semi-permanent housing to people, and even in times of financial crisis, people still need somewhere to live.

The short-term leasing model, however, relies heavily on holiday-goers and discretionary spending. There are a few outlier reasons for booking a short-term lease, but for the most part Airbnb services travellers who are after something a little bit more personal than a hotel room. This also means that on a per night basis, Airbnb hosts are going to bring in more gross income than long-term letters – but only if they can fill their accommodation every night.

And that’s the fundamental point. An analysis of data sourced by LearnAirbnb found that the average length of stay for an Airbnb property was just three days. That means for an Airbnb host to have their apartment or house tenanted every day for 12 months, they’d need to secure over 120 different guests – compared to just one that a long-term letter needs to find. It might be possible to find back-to-back-to-back tenants when times are good, tourism is booming and holiday bookings are up, but as soon as a financial squeeze takes hold, Airbnb hosts are going to struggle – and both Australia’s bushfires and the coronavirus (COVID-19) pandemic have exposed that instability inherent to the short-term lease model.

Back in mid-February, when just 15 Australians were confirmed to have the coronavirus, the ABC published an article which interviewed an Airbnb host in Cairns – Brian Kovacs. “We’ve got 50% vacancies and we’re struggling to secure a booking,” he said. “This time last year, we were fully booked for February and half of March was booked as well.”

At that time, Airbnb sent an email to hosts recommending they lower their minimum prices in the hopes of attracting more bookings. A month later on 14 March, the company expanded its policies to allow more guests to call off trips and still get full refunds. Sounds altruistic but not was what it seemed as it overrode hosts’ own cancellation policies, leaving many angry that they’ve had to bear the bulk of the financial cost of those refunds. Meanwhile, many investment properties are now sitting empty, generating no revenue.

It’s interesting to note that Airbnb has been trying to strike a delicate balance between the interests not just of guests and hosts but investors too. The chief concern is about Airbnb’s reported losses even before the coronavirus outbreak occurred. It’s now suggested the company’s plans to go public this year will be delayed.

Whether Australia has seen the full impact of this pandemic, only time will tell (although at the time of writing, new cases have decreased from 25-30% per day to 13-15% per day) some hosts who have been particularly hard hit by travel slowdowns will likely be moving their property over to long-term rental. When you consider the vacancy rates along Queensland’s east coast (QMM Sept-Dec 2019: Brisbane 2.7%; Greater Brisbane 2.3%; Bundaberg 1.5%; Cairns 1.7%; Fraser Coast 1.7%; Gold Coast 1.8%; Noosa 1.3%; Rockhampton 1.6%; Sunshine Coast 1.5%; and Townsville 2.1%) – as these figures show, the rental market is tight across most regions so any influx of short-term rentals onto the long-term leasing market will have marginal impact at best.

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