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Short Term Rentals (STR): Understanding Serviced apartments & Airbnbs

Global outlook

  • Short term rentals refer to furnished accommodation that is let on short term duration, ranging from days to a few weeks.
  • Types of short-term rentals include:
    • Vacation homes: Refers to stand alone properties e.g. houses, cottage or villas designed and furnished for short term stays.  They are mostly located in popular tourist destinations.
    • Serviced apartments: These are 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): These are small establishments mostly operated by the owners. They offer limited rooms/suites within a private residence, with breakfast included in the stay package. The are popular in rural or scenic areas, offering 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 guest 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 a 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.
  • However, the pace of expansion varies from one location to another and over time. 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.
  • The travel industry, like many others, has been profoundly impacted by technological advancements, including the influence of social media and mobile technologies.
  • 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, capitalizing on the platform’s high visibility to attract more guests.

Local outlook

  • Airbnb specializing in short-term homestays and serviced accommodations and 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.
  • Over the past decade, the number of furnished apartments and houses available for short-term rentals has grown substantially.
  • To put this into perspective, 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, leading some property owners to convert vacant units into short-term rentals.
  • 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.
  • As such, 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. The increasing demand for short-term rentals in these areas has notably bolstered the real estate industry, evident in the numerous construction projects underway.
  • Furthermore, Ruaka is emerging as a rising star in the realm of short-term rentals. This is primarily due to its attractive pricing and the quality of housing it offers. Additionally, its strategic location in close proximity to the prestigious Gigiri “blue zones” makes it an ideal choice for those seeking short-term accommodations.

Financial assessment of Airbnbs: Cost and performance metrics

  • Starting an Airbnb business is a relatively straightforward endeavor. All that’s required is a room or house equipped with the essential amenities to ensure your guests’ comfort.
  • However, it’s essential to bear in mind that there are additional costs associated with establishing and growing this venture. These costs encompass various aspects. For instance, 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. Given these price points, 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. As a general guideline, 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: This metric gauges the ratio of rented days for the units, revealing the number of days in a month the unit was occupied by a guest. It holds significant importance in informing the pricing strategy. 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. An analysis can help you make appropriate adjustments.
    • Average Length of Stay (ALOS): ALOS, or the average number of nights, is 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 staff organization. It enables effective planning for cleaning and maintenance around guest stays and can inform strategies to encourage longer guest stays, which can lead to lower administrative costs.
    • Average Daily Rate (ADR): ADR is 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): RevPAR, more commonly associated with the hotel industry, is 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, allowing you to develop fresh ideas for upselling services.
    • Net Operating Income (NOI): 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, emphasizing the importance of adopting cost-effective strategies.
  • By carefully monitoring these metrics, Airbnb hosts can not only gauge the performance of their rentals but also implement strategic adjustments to optimize their investment and deliver a top-notch experience for their guests.

Considerations for investment into Airbnb

Location

  • Selecting a strategic location is a fundamental consideration when venturing into the world of Airbnb hosting. The location must align with the specific clientele targeted.
  • Guests often seek out accommodations that either provide a unique experience or offer affordable hospitality that complements their business or leisure activities.
  • For instance, if the target audience is tourists, it’s essential to position an Airbnb in popular tourist destinations like the coast, Mt. Kenya, Naivasha, and similar areas.The high demand for lodging in these locales, coupled with potential shortcomings in hotels (such as limited space, inadequate service, or high costs), creates a prime opportunity.
  • Conversely, if you’re targeting business travelers and urban visitors, consider locating your property in upmarket neighborhoods within bustling towns. Factors like the availability of taxis, proximity to airports, railway stations, and home offices must be considered.

Cost

  • While short-term rentals generally generate higher revenue compared to long-term arrangements, it’s important to recognize that this doesn’t necessarily translate to lower expenses.
  • Short-term rentals come with additional costs beyond standard expenditures such as property taxes, insurance, booking/listing fees on platforms, utilities (water, electricity, internet, cable TV), bathroom and kitchen supplies, furnishings, décor, and cleaning services after each guest’s stay.
  • Therefore, investors should meticulously analyze the costs involved and implement strategies for cost-saving.
  • Notably, in Kenya the Airbnb platform imposes a 3% commission on all listings, and, due to the digital service tax and with VAT on online businesses, an additional 16% VAT is deducted.

Safety and security

  • Prioritizing this is paramount and requires implementation of measure like working smoke detectors, fire extinguishers, and reliable lock systems.
  • Regular property inspections are key to identifying and addressing potential hazards. Furthermore, the unit should be situated in a secure neighborhood, potentially with security personnel in place.

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

  • This involves ensuring that the property exudes a welcoming and homely ambiance for guests.
  • Activities like cleaning, decorating, and equipping the space with essential amenities are vital. Investing in attractive furniture, art, and quality utensils can enhance the property’s appeal.
  • Consulting with an interior designer can make a significant difference. 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 for enhancing the user experience and reducing the likelihood of prospective guests seeking accommodations elsewhere.
  • Creating a compelling listing description is essential and should highlight the unique features of the property and its proximity to attractions, amenities, and public transport.
  • High-quality photographs, preferably taken by a professional photographer, can significantly aid in marketing the property. Listing on multiple platforms, particularly those with high traffic, maximizes the visibility of the unit.

Legal and regulatory compliance

  • Before listing your property as a potential Airbnb, it is important to take note of  local regulations, zoning laws, and tax requirements.
  • Obtaining the necessary registration and licensing documents is a prudent step before commencement of operations.
  • In Kenya, for instance, registration with the Tourism Regulatory Authority (TRA) is required for various types of Airbnb facilities which applies annual licensing fees
  • Airbnb facilities as provided in the Ninth Schedule of the Tourism Act, 2011 include serviced (furnished) flats and apartments, villas, homestays, condominiums, tree houses, floatels, bandas, beach cottages, holiday cottages, tented camps, and timeshares.
  • The following documents must be provided for registration and application of the license:
    • A duly filled application form;
    • Proof of payment (The original deposit slip/advise for the application & license fee)
    • Tariff/rack rates;
    • A copy of Title Deed/Lease Agreement for the premises;
    • Copies of ID’s/ passport for an individual or a Certificate of Incorporation for a Company;
    • A copy of the applicant’s PIN Certificate.
  • Other documentation required include:
    • NEMA license- owner of an Airbnb to procure an environmental impact assessment license (NEMA license) over the premise.
    • Single Business Permit- Airbnb is an income-generating business hence the host is required to obtain a business permit from the County Government.
    • Home Insurance-It is important to obtain home insurance to insure the premises and all the belongings in it against risks such as damage, fire, theft, natural causes, or other losses.
    • Tenancy agreement rules: Incase the host is letting the unit, then understanding and abiding by rules/regulations spelt out in the leases, co-op rules, or other rules established by tenant organizations is necessary. The host must also ensure the guest abide by the same rules.
  • For successful registered and issuance of a license by the TRA, a one-off application fee of Kshs. 1,000/= and an annual license fee for each unit owned (the rates are provided below) must be made.
Facility type Rate
Serviced flats & apartments, villas, holiday cottage Kshs. 26,000/= per year
Beach cottages, tree houses Kshs. 21,000/= per year
Hostels and guest housesKshs. 11,000/= per year

Merits of Airbnb

  • The Airbnb model offers a significantly higher return on investment compared to traditional rentals. This is due to the willingness of clients to pay a premium for the convenience and amenities that Airbnb accommodations provide.
  • Flexibility is another key benefit; property owners can opt for shorter rental periods, granting them greater control over their income.
  • From the guest’s perspective, Airbnb offers a seamless and efficient experience. Unlike traditional hotels, Airbnb provides guests with everything they need during their stay, encompassing not just lodging but also essential amenities like Wi-Fi, kitchen appliances, and more. This eliminates the need for guests to purchase or bring additional items as everything is readily available.
  • Additionally, the booking process is both user-friendly and secure. Clients can easily search for available properties, peruse reviews from past guests, and complete their bookings online. Payment transactions are conducted through the platform, ensuring a secure process for both clients and hosts.

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 for the investor/host.
  • 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.
  • Behavior: This is a multifaceted challenge, particularly for hosts who do not own the unit but rent out. Unruly guests can lead to various issues, including high maintenance costs and potential evictions by landlords. Such situations often occur in Airbnb units located within complexes with long-term tenants. Complaints from these residents could result in the eviction of the host and a loss of business. The fundamental premise of the Airbnb model is that guests treat the space as they would their own homes, but this isn’t always the case.
  • Theft and Property Damage: Incidents of theft of household items or the replacement of items with inferior ones have been reported. To mitigate these risks, investors furnish their units with basic utensils and furniture to minimize potential losses. 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 grow going forward. the market for vacation homes, bed and breakfasts and other tourist accommodation offered on the online platforms the likes of Airbnb is expected to grow due to the convenience offered as well as the of consumer patterns with regards e-commerce. Advancement in technology, however, may also result in the decline in demand for serviced apartment or accommodation for business travelers as virtual work spaces and avenues continue to advance.
  • The take-off of an AirBnB is affected by two things in addition to the item mentioned in the overview:
    • Discounts that are offered at the onset of a listing, which 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. The online platforms provide a client with the ability to rate a unit usually determined by the presentation/decor, location, customer service and ambience of the space. The higher the rating the more probable one can increase and price and also get more traffic thus higher returns. The opposite also prevails.
  • 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

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