Short-term rentals, including the luxury vacation segment, can expect a cash infusion from high-yield demanding investors this year, especially in the light of rising mortgages and flattening home prices in the U.S.
Exactly a year ago Skift reported private equity chasing investments in short-term rentals and vacation rentals. At the time though, a short-term rental real estate investment trust (REIT) seemed distant.
In October last year, luxury vacation rental brand Wander launched what it called the industry’s first vacation rental REIT named “Atlas” — with an attempt to attract investors with high yield-passive income promising eight percent annual returns and 14 percent targeted total return.
More an exception rather than a rule, a hospitality REIT-like trust for short-term rentals is yet to become mainstream. But short-term rentals are definitely growing as an asset class for deep and shallow-pocketed investors all alike. And the number of companies selling short-term vacation rentals as an attractive investment opportunity is on the rise — Pacaso, Voyax, Here — to name a few. This shouldn’t come as a surprise as U.S. short-term rental owners, investors and hosts generated over $62 billion in 2022.
The newest entrant with an offering is reAlpha, an real estate technology and investment company, which launched its fractional ownership platform for short-term rentals on Tuesday. The first vacation rental available for investing on its platform is a five-bed, 4.5-bath property located in Orlando, Florida. Fractional co-ownership of vacation rentals is not a new concept — German startup MYNE does it in Europe.
Those in the industry expect a lot of cash to come into short-term rentals this year, with falling home prices and rising mortgages. And await many more REITs.
Short-Term Rentals, a Long-Term Investment?
February, which is known as a low-demand month, saw short-term rental guests tally 12.9 million nights stayed this year — up from 18 percent last year. And the revenue per available room rose by four percent to $183 million, according to AirDNA analysis.
And the macroeconomic climate is favorable too — retail sales in the U.S. rebounded in January, and this bodes well for the short-term rental industry. Consumers still have the confidence to spend, and a lot of them are prioritizing travel — future stays bookings were up 15 percent in February compared to last year.
“Short-term rentals are the most robust way to invest in real estate today,” said Corey Ashton Walters, founder and chief executive officer at Here, a Miami-based vacation rental investment company. “ And we want to unlock the ability for everyone to invest in the sector.”
Walters takes pride in his company’s offering being available to all investors without accreditation — with minimum investment amount being $250. The platform, Walters said, has 85,000 users on its platform and the property value ranges from $400,000 to $900,000. And there can be anywhere from 500 to 1500 investors on a property.
Here manages every property and owns shares in each one of them, and is in the process of figuring out how to set up a REIT based on its portfolio.
Something for Everyone
As more companies emerge, their offerings differ only slightly from one another to merit distinction. Some double up as real estate agencies underwriting and owning assets, while some others resolve to be asset-light and just commit to managing revenue from the property for a fee. And with more players come newer emerging models for investing in short-term rentals.
“COVID showed us that short-term rental assets are stable, albeit operation-heavy,” said Charles Centauro, founder and principal at Montreal-based Villa Rental Partners. The company positions itself as a boutique real estate management and investment firm focused on luxury real estate. “We’re starting to see REITs in vacation rentals now, even though they’ve been around in other segments of real estate for a while. They’re only becoming more professional.”
But Centuaro’s strategy for his company is different: The number of deals his company makes are intentionally capped at four per year and the deals are structured with a focus on individual clients and individual asset performance.
“When it comes to luxury real estate, it is easy to spend a lot of money but harder to make that money,” said Charles Centauro, founder and principal at Villa Rental Partners. “ In luxury real estate, value is not created in a spreadsheet, but at an individual asset-level.”
Villa Rental Partners works with private investors who want to either own or want to invest $1.5 million to $15 million in luxury real estate. And though Centauro believes that the cash-rich investors will incentivize the rise of more REITs, he doesn’t think it’s a strategy that would work very well in luxury.
“A lot of big money is trying to get into the market in a big way, but a lot of investors and bankers do not understand how to create profit in luxury,” Centauro said. He noted it will be difficult to pull off REITs in luxury, because traditional strategies that work well in other segments don’t work well in the luxury segment.
Diverge to be Different
Michael Friedman, chief operating officer at luxury rental company Onefinestay, shares a similar line of thinking. He expects to see more REITs in the budget segment or “everyday homes.”
London-based Onefinestay, which was founded in 2009, launched in New York City with 16 high-end rental homes for 30+ nights,as well as launched a luxury villa collection in Provence, France this year.
“For anyone looking into luxury real estate would have to generate a substantial amount of revenue,” Friedman said. “More and more individual investors and institutional investors have capital and want to be in this business, but funds and REITs make more sense for budget homes because you can buy more assets, and can scale in a larger way.”
And Friedman believes that the divergence in short-term rentals will bring more investors into the segment. “Within vacation rentals, there will be different elements of the business — there will be luxury rentals and there will be the commodity-like product that the average consumer can afford and that will always be bigger.”
That said, there is strong investor interest in luxury vacation rentals in the U.S. And globally, the luxury sector in vacation rentals is expected to be valued at $82 billion by 2031, registering a growth of 13 percent this decade (2021-2031).
New York-based Rove, which buys, sells and manages luxury properties partners with homeowners, who want to monetize their assets. Founder Jonah Hanig suspects REITs will emerge even in the luxury segment as operators scale and vacation rental brands grow.
“We are finding it is a popular time even in the luxury segment,” Hanig said. “We have homeowners who are renting our properties for the first time now, especially when it’s not the time to sell.”
REITs or not, the securitization of short-term rentals is here. And both individual and institutional investors want in — Last February, short-term rental property operator AvantStay which started out as a booking service, created a $500 million fund to bring institutional investment to short-term rentals.
It is, however, noteworthy to look at how vacation rental companies are performing overall. Publicly traded companies Inspirato, Sonder and Vacasa all announced staff cuts. Inspirato’s supply outgrew the demand, Sonder registered a loss of $54.8 million and an increasing number of properties are leaving Vacasa.
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Photo credit: A three-bedroom property in the Hamptons, NY listed on Rove. Source: Rove A three-bedroom property in the Hamptons, NY listed on Rove. Source: Rove