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Short-Term Rental Accommodation in Australia: COVID-19 Crowned Ultimate Disruptor

Published 2 months ago.

Implications of the novel coronavirus (COVID-19) for the short-term rental accommodation (STRA) sector in Australia: where do I start? On the heels of 'last Summer's devastating bushfires, the 2020 pandemic is giving short-stay platform giants like Airbnb, Stayz, and Booking.com a run for their money as kings of disruption. As someone more eloquent than myself put it, COVID-19 is “disrupting the disruptors”.

To make for easier reading, I’m going to publish my thoughts in 3 separate articles.

The second piece will consider The (Imminent) Return of Short-Stay Regional & Interstate Travel.

And the third will look at How Short-Term Rental Hosts & Platforms Pivot: The ‘New Normal’.

This first one will cover the following:

  • The Australian short-stay accommodation market pre-COVID-19
  • Nobody move: demand collapses everywhere
  • Hosts scramble as incomes dry up
  • Platforms react: Airbnb, Stayz, Booking.com and more

‘Life before’: how things looked in the short-term rental space pre COVID-19

To understand the implications of big coronavirus-related changes like these, we need to rewind to before the end of the world. In 2016, the STRA industry was estimated to be worth 31.3 billion dollars. For the year to January 2018, the sector directly contributed $978 million in revenues to Australian GDP, with indirect contributions reaching over $5.8 billion. ‘Indirect’ includes host purchases of intermediate inputs, expenditure on direct goods and services and visitor spending by both domestic and international guests.

As of January 2020, short-term rentals made up approximately 11.8% of total tourist accommodation in Australia. In terms of market composition, Airbnb had laid claim to about 75 per cent of the short-stay platform channel in 2018, while HomeAway (owners of Stayz) held 17 per cent. When compared with the bulk of the industry - hotel accommodation - it's been found Airbnb listings are priced at least 30 per cent cheaper on average.

Thomas Sigler, an academic at the University of Queensland who studied data on Airbnb for the last two years, also found that listings have been growing by around 2 to 3 per cent per month, with big influxes in summer.

For short-term rental accommodation as a whole, research shows that in the year to February 2019 supply grew 47%.

When reported in February this year, there were almost 350,000 listings on Airbnb across Australia. State-by-state Victoria receives the highest share of bookings, followed by NSW (which records the most nights stayed), with WA and Tassie close behind. Overall revenue generated from bookings is roughly equal between regional and metro areas. And to provide some geo-specific detail, Sydney listings alone brought in $13m this January.

Prior to the pandemic, it was the regulatory environment that was the principal force for platforms and hosts in the short-term rentals space to contend with. And there have been some legislative breakthroughs:

In New South Wales the Fair Trading Amendment (Short-term Rental Accommodation) Act 2018, which came into effect on April 10, now assists owners corporations and hosts to manage STRA arrangements with greater clarity. One key implication is that if a host is renting out of their principal place of residence, any strata by-laws prohibiting short-term letting have no effect (room(s) can be rented 365 days a year with no restrictions). Further, even where the property in question isn’t the principal place of residence, strata bodies can only prevent hosts from renting their space short-term if 75% of the owners are against it. Second properties in regional NSW can be rented year 365 days a year, unless individual councils set a cap (but this can be no lower than 180 days per year). And while there is a 180 day cap for investment properties in Greater Sydney, this cap is very generous compared to other big cities globally, such as Paris where the cap is fixed at 60 days only. Moreover, New South Wales’ regulations are the most restrictive regulations - Victoria, Queensland and other states are more liberal still.

Given that Australia’s national border may remain closed for some time, but there’s talk of imminently easing restrictions on regional and interstate travel, it’s key to ask where historically most short-term stay guests came from pre-COVID-19 - were they domestic or international visitors? This can help show if the market is reliant on overseas travellers, or may actually do fine under the steam of domestic travel for the next 6-12 months.

Were most guests domestic travellers? Can the market be propped up until international borders reopen?

At a fundamental level, domestic travellers make up two-thirds of the visitor economy in Australia. In the very first paragraph of Tourism Research Australia’s 2018-19 State of the Industry report, the sector’s double-digit growth is attributed to domestic travel, with an annual spend exceeding $100 billion for the first time.

International travel certainly is significant - in the year to December 2019, 9.5 million overseas visitors injected $45.4bn into the Australian economy - but it’s actually not the be all and end all.

Australia’s short-term rental industry is, by-and-large, based on local demand: approximately three-quarters of guests are domestic travellers. So, it looks as though the bulk of the market will remain in reach even while international travel remains subdued. Furthermore, 70% of domestic overnight travel takes place within a visitor’s home state. And in New South Wales for example, the number of domestic tourists staying overnight grew by 28% between 2014-18.

So, if you’re a host or a platform awaiting the imminent easing of travel restrictions in New South Wales and other states (and countries: hello Kiwis) - reasons to be hopeful? We’ll address this in the next article.

Nobody move: demand collapses everywhere

Travel restrictions including the national border closure on March 22nd have had huge impacts across the Australian economy. Scomo’s advice to avoid all non-essential travel, including regional, interstate and holiday getaways, has had obvious implications for the short-term stay category: hotels, hosts, platforms and other service providers have all felt the COVID-19-burn. As well as pretty much everybody else...

The global bookings picture

Despite still being a relatively small subsection of global leisure and business travel, short-term rental platforms like Airbnb and Stayz have (as usual) featured heavily in the news. Savill’s emphatic headline from earlier this month - that “Airbnb’s business model appears dead for now” - is a nod towards this zeitgeist. Eye-catching stats have been shared widely, such as those from a report by vacation rental analytics site AirDNA showing Airbnb bookings falling 41-96 per cent in a small selection of cities worldwide between January and March.

While potential guests everywhere have largely been on lockdown, travel restrictions and their impacts for bookings continue to vary within and between countries. The downturn in some markets was more spectacular than in others - for example the 98 per cent drop in reservations reported in Spain. David Jacoby, co-founder of US property management software and digital guidebook platform Hostfully, says their clients (vacation rental management companies) “have gone from 80% or 90% occupancy to 10% or less".

But statements like that of AirDNA saying bookings across several continents dropped by as much as 80 per cent in early March do hide a lot of variation, as virus concentration and response-lags continue to create staggered effects in different places. That being said, cancellations have affected most countries, even those without widespread reports of the virus.

Australia

In Australia, the ABC reported that new bookings dropped from around 84,000 at the start of March to 19,000 in mid-April, a decline of more than 75 per cent.

And at a more granular level, a study assessing impacts on short-term stay listings in Sydney for the period of January to March 2020 found that hosts faced income losses of 70 per cent - or $8 million.

While these numbers are quite alarming, most markets - think beyond travel, property and events - are in a state of flux. Roy Morgan published in mid-March that over 60% of all Australian businesses had been affected by COVID-19, up from just 15% the month prior.

In April The Department of Education, Skills and Employment released a similar report that found 58% of businesses had been affected ‘a great deal’ by COVID-19, with another 22% reporting it affected their business ‘somewhat’. The need to change business practices was identified by 33% of respondents - a category I’d say short-term stay providers fit into pretty well.

Equities - never an uneventful space - have been down and back up (on Monday shares jumped to an 11-week high with investors hopeful about the COVID-19 recovery). Industries from manufacturing to IT, telecommunications and wholesale trade, amongst many others, have experienced significant change.

But as in every story there are many sides - up, down, etc. - and in any fair telling it's not all doom and gloom.

Scrambling: hosts seek support as incomes dry up

As professor Sara Dolnicar points out, one thing the COVID-19 situation has exposed about the travel sector more broadly (if not about most sectors, given radical enough change) - is that income security can be tenuous.

As Airbnb say themselves in the ‘Coronavirus updates’ section of their online Resource Centre: “In many cases, hosts rely on their Airbnb earnings to make ends meet”. This demonstrates how significant impacts on stays are to the financial security of the host cohort, and Australia is no exception. So what about support channels available to short-term rental accommodation hosts?

Government support for hosts

Hosts listing their places on platforms like Airbnb and Stayz do play a significant role in supporting Australia's tourism sector, yet unlike some groups including freelancers and gig workers, many hosts aren’t eligible for certain forms of government financial aid. Hosts also don’t tend to be financially “insulated like hotel companies or big accommodation,", as ASTRA chair Rob Jeffress put it.

In a recent letter, short-term rental industry body the Australian Short Term Rental Accommodation Association (ASTRA), called on the government to support holiday rental hosts losing income by making them eligible for small and medium business financial support.

While the government response remains unsatisfactory for now, there are other avenues for hosts to seek support. Also - for those wondering about deductions they can claim on their short-term rental properties given the COVID-19 situation - the ATO does provide some useful answers to host FAQs.

Short-term rental platform support for hosts

Analysis of the short-term rental industry in the US suggests that platforms policies are generally split in terms of who they’re offering Covid-19 related financial relief to: hosts or guests. While it isn’t black and white - in short, Airbnb and Tripadvisor have tended to side with guests, while Vrbo and Booking.com are often inclined to back hosts. Forbes have done a good breakdown of different platforms’ policies on Covid-19 related cancellations here.

In Australia, Stayz appears to be deferring compensation decisions to hosts, encouraging (but not mandating) they offer credits, work with guests to modify the booking or offer a partial or full refund. They say their “intent is to reward property owners and managers who offer flexibility to travellers” - through additional visibility in platform searches.

Booking.com states that if a cancellation is eligible in terms of dates, destinations and included reasons for travelling (quite a gauntlet to run), the host is obliged “to provide a refund or offer a free date change or a credit for future stay” (emphasis my own). Again, this looks to provide more flexibility to hosts.

Airbnb’s COVID-19 Extenuating Circumstances Policy provides some cover to both guests and hosts in the face of cancellations of bookings made before 14 March. As the situation has unfolded, Airbnb have been quick to modify their policies to try and accommodate (pardon the pun) new developments - for instance: extending their refund window to May 31st; and setting up a $US 250 million relief fund to support eligible hosts. The fund is designed to refund hosts up to 25% of what they would have been paid under their cancellation policies for reservations in the date range. Airbnb put up an additional $US 10 million for “super hosts”, offering grants of up to $US 5,000.

But some hosts around the world have been pretty vocal about their dissatisfaction with the level of cover provided under AirBnb’s in-house policies. Some say “they’re getting nothing or comically small payments” from the relief fund, others that they’re generally the last to see compensation, and others that it’s just too little, too late.

It’s not the first time hosts have been concerned about not being covered by the protections afforded by the short-term rental platforms where they list their space.

In Australia insurers have been warning Airbnb hosts they may not be covered for a while, as the needs of participants in the sharing economy grew and became more complex along with the industry itself.

But COVID-19 has really brought home the reality of risk for independent suppliers in the short-term rental accommodation sector, and they may be more wary about returning to the market without more comprehensive and personalised financial and property cover.

Regardless, when you’re in the situation where “Everything is cancelled, basically until Christmas” as one US host put it, it’s pretty hard not to feel helpless. But, at least in the Australian context, there may be more cause for optimism than the last couple months’ booking calendars have people to believe.

Scrambled: uncharted waters for platforms like Airbnb, Stayz, Booking.com

COVID-19 times have so far been very challenging for hosts, and the platforms themselves - like Airbnb - have been hurting financially too.

For a sector used to growth of supply at the level of up to 30 per cent year-on-year, it’s a rude disruption indeed.

Just 11 years after its founding as a private company, Airbnb was valued at about $50 billion. Towards the end of 2019, Airbnb announced plans for a 2020 IPO and had signed a $US 500 million sponsorship deal with the Olympics. The platform had more than seven million short-term stay listings in 100,000 cities around the world.

In May Airbnb announced it was laying off 25% of its employees. Other emergency changes already reported by Reuters at the end of March include: a freeze on most new hires; suspension of all marketing activity for 2020 ($US 800 million worth) ; a 50% pay cut for executives; and zero salary for founders for the next 6 months. Airbnb is projecting 2020 revenue to be down a whopping 54% compared to 2019. At the start of April, Airbnb lowered its internal valuation by 16%, and some large investors have made 30% reductions to their valuations of the company since then, with some media outlets reporting its valuation has shrunk to by almost half.

The contrast between these two pictures couldn’t be more stark.

Airbnb had raised $2 billion in debt by the end of the second week of April, in an attempt to at least start to navigate this newly pressurized environment. This comes off the back of a raft of urgent policies and initiatives the platform has rolled-out, from cleaning and health-related protocols, to bans on certain forms of posting, and efforts to support housing key workers.

In March Airbnb released “Cleaning guidelines to help prevent the spread of COVID-19” that applied in Australia. As of the 5th of May, Airbnb were looking towards releasing a new “Enhanced Cleaning Initiative” for hosts to differentiate themselves as travel restrictions begin to be eased around the world. The program will be rolled out in the US first before other markets, and mandates stringent cleaning procedures in exchange for some kind of host badge. Hosts who can verify they’ve implemented the new protocol will still have to maintain a minimum 24-hour buffer after a guest checks out (applied automatically through the platform), whilst those who want the badge but can’t implement all the cleaning measures will need to maintain a 72-hour buffer.

With Australia’s mandatory 14-day quarantine from 28th March, Airbnb also had to deal with certain forms of host-response to booking drop-offs that posed health risks to communities. ‘Self-isolation packages’ and related offerings began popping up in soon after the quarantine announcement. In April, Airbnb updated their Content Policy to ban listings that make reference to “COVID-19, coronavirus, or quarantine” in their titles, or otherwise incentivise booking for COVID-19 related reasons. This helped quell the ‘remote isolation-suite’ marketing surge that did present risks to regional hospitals and communities.

Perhaps because of this drama, a New South Wales Minister had to come out in early April to clarify that short-term rental accommodation had not become illegal. There isn’t a ban on short-term stays, and in fact short-term options like those offered on Airbnb have been crucial for some cohorts with unexpected accommodation needs - like emergency nurses and healthcare staff, students, and other key sector workers.

Furthermore, Airbnb’s ‘Frontline’ initiative involves a direct effort to facilitate subsidised housing and waived fees for key workers, with the aim of supporting hosts to house 100,000 Covid-19 responders around the world. It’s good to see this offer of support as one of the platform’s first responses in a trying time.

Beyond these (necessary) quick responses to problems presented by the pandemic, Airbnb are also looking towards the future, and longer term strategies, including a potential pivot to incorporating longer-term stays. I write more about that in my third article.

But right now, the Australian short-term rental accommodation sector (We're thinking about all the hosts out there as well as platforms and all the knock-on business - exciting) face the imminent prospect of a return to regional and interstate travel! From this coming Monday (would you believe it?!). We’ll be publishing our thoughts on that next week.

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