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Vacation Rental Market Growth: Eye-Watering Projections

A 10min read about the astonishing vacation rental market growth projections over the next five years.


The vacation rental market is enjoying a boom. Myriad factors (Web 2.0, advances in technology, the rise of the sharing economy) have created a climate in which the market can flourish, and a consumer base which confers value on the unique, the bespoke and the individual shows signs of eschewing the more traditional hotel for the independence offered by the self-catering vacation rental.

This climate has been driven by technological innovation, whilst other factors have allowed growth to continue unchecked. The smartphone has not only changed the way we do business - it has changed the way we perceive business. Business conducted and transactions made on a smartphone are subconsciously deemed ‘less serious’ than those made on a laptop or tablet, and online marketplaces such as Amazon have enjoyed unprecedented growth by gearing their business towards impulse purchases with the convenience and ease of a ‘one-click purchase’ option. Once we are conditioned to expect this level of convenience from one vendor, we begin to expect it from every aspect of our personal spending - hence the spread of quick and easy-to-use apps such as Uber.

And as these transactions become easier, they become more informal, and therefore we expect them to be more personable. We start to place a premium on services which seem lived-in. This is part of the psychological drive behind ride-sharing apps such as Uber or Lyft. These sites ostensibly foster a human interaction - they place a face and a name to each transaction. There’s something personal about riding in the same vehicle the driver uses for their own errands, as opposed to a black cab seen as an investment, in much the same way that we make a distinction between booking a stay in someone’s home, replete with family photos, idiosyncratic decor choices, and personal effects, and staying in an impersonal hotel room.

The rise of the folksonomy has been built on the human need for the familiar - and the self-catering holiday rental as an accommodation type is ideally suited to benefit from this. Which is why growth in this market currently vastly outstrips commensurate strides made in the hotel sector - a hotel is perceived as faceless and staid, whereas a home, whether you call it a holiday property, a vacation rental or refer to it (God forbid) as ‘an Airbnb’ is seen as infinitely friendlier, more welcoming, and more human.

The Last Five Years of Growth

Despite attempts to frighten people away from travelling, the industry is not only surviving but thriving - Lauren Volchaff Atlass: Exec. VP of Global Sales at Tourico

The past five years have seen the beginning of this vacation rental boom. In fact, growth in this time was so rapid that it can best be understood by splitting these five years into two periods: 2011- 2014 and 2014-2016. For example, according to an IBIS study, year-on-year growth in the vacation rental market has averaged 3.6% between 2011 and 2016. This figure does outline consistent growth, but crucially it does not differentiate between growth seen between 2011 and 2014, and the higher rates of growth experienced with the introduction of new industry technologies between 2014 and the third quarter of 2016.

Likewise, although Homeaway’s November 2014 Economic Impact Report concluded that: ‘Tourists in the UK choose increasingly to stay in holiday rentals rather than hotels or bed and breakfasts’, and calculated that the vacation rental market in the UK alone accounted for £4.5 billion in expenditure, these figures are now out of date, and growth currently outpaces this.

Holiday lets are now the fastest-growing sector of U.K. tourism, with even the CEO of hotel group Priceline, Darren Huston, acknowledging that the vacation rental market ‘is growing faster than our core business.’ In fact, the transactional value of the European short-term rental market grew more than 220% between the first quarters of 2015 and 2016.

If you’d like to read more on vacation rental market growth between 2011 and 2016, you can read my extended analysis here.

Projections for Industry Growth

All reputable projections for the immediate future of the vacation rental market have one thing in common - they all predict immense growth within the next two years.

An industry last year valued at $100 billion dollars is predicted to reach a worth of $167.9 billion by 2019 - a statistic verified by the findings of the most recent Serviced Apartments Summit.

So, Where is all This Money Coming From?

Good question.

The first thing to understand is that growth is being valued in terms of market share relative to the hotel industry.

According to data outlined in the 2017 Global Hotel Trends Report published by Tourico, the world’s fastest-growing wholesale travel brokerage company with over 80, 000 hotels across 4,500 locations, the number of hotel room nights booked for 2017 represents growth of 28.7% relative to this time last year. Meanwhile, LATAM shows growth of 43 per cent year-over-year, whilst Asia-Pacific reports growth of 23 per cent year-over-year.

According to data supplied by Trade Arabia, a portal for business information and trade news covering the Middle East and Arabian Gulf countries, year on year growth across global regions in the hotel sector relative to nights booked can be broken down as follows:CountryYear-On-Year GrowthAustralia12%U.S.A.26%Brazil31%Mexico37%U.K.38%China52%Canada55%U.A.E.65%Sweden112%

How Does The Vacation Rental Market Growth Compare Across The Same Period?

Another good question.

2016 data indicates that hotels still account for 87% of the U.S.A.’s 6.4 million available lodging rooms.

However, even though hotels accounted for 87% of available room inventory in the U.S.A. in 2015, they only accounted for 34% of inventory growth. Bear in mind, with the rapid scaling-up of growth year-on-year, once more data comes available it should reflect an even greater disparity in inventory growth between the two markets in 2016 and 2017. For example, hotels added 139, 000 rooms in North America in 2015, whilst Airbnb alone added 229, 000 lodgings in the same area in the same period, even scaling growth in mature markets with a high proliferation of existing Airbnb lodgings. I will be covering Airbnb’s growth relative to the hotel sector in terms of inventory, market share and venture capital funding later in this article, but the main takeaway is that Airbnb is growing its inventory far quicker than the hotel industry can add new rooms. This is partly why the company is deemed so valuable relative to the hotel sector, and has attracted such high levels of venture capital investment.

But whilst Airbnb may the most prominent name in the business, it’s far from the only one gaining funding and notice from the major players in the hotel sector. Expedia’s $3.9 billion takeover of Homeaway grabbed plenty of headlines back in November 2015, whilst in February 2016 the Choice Hotels Group launched a vacation rental platform that deals exclusively with holiday rental management concerns, and entirely bypasses owners. This is an increasing trend, with one-third of inventory in the European short-term rental market now controlled by management services, rather than rent-by owners. In April 2016 the French hotels group Accor went one further when they saw so much potential in the market that they bought loss-making luxury holiday rental operator Onefinestay for $170 million, buying out the company’s institutional investors, including Index Ventures, Intel Capital and hotel chain Hyatt, and pledging a further £50 million into an aggressive growth strategy. These investments place perhaps the most important values on the vacation rental market's growth.

Airbnb: A Case Study

Because where else would we start?

Airbnb has become so ubiquitous that it’s not only become a common noun (e.g. ‘We just stayed in an Airbnb for the week’), but is now increasingly used as a verb (e.g. ‘Should we just airbnb it?’, or ‘I’m airbnbing it to Macedonia this weekend, to finally set up the moped rental’).

And Airbnb’s growth is simply unprecedented. An inventory of around 3000 lodgings in 2009 has surged to over 2.3 million rentals in 2016. This represents compound annual growth of a whopping 153%, but even this statistic doesn’t reflect the sheer magnitude of the Airbnb boom. Perhaps a better statistic is the fact that Airbnb’s monthly active users more than doubled between the first quarters of 2014 and 2016. U.S. bookings grew 45% in the first quarter of 2016 when compared to the same time one year earlier. Use of the company’s mobile app also doubled between 2014 and 2016.

As of 2015, Airbnb was the most valuable accommodations company in the world - valued at $25.5 billion, it was worth 25% more than Hilton, its nearest competitor. This is because, between 2009 and 2015, Airbnb amassed an inventory spanning 190 countries. By contrast, it took the Hilton group nearly a century to grow to 690, 000 hotel rooms (across roughly 4200 hotels representing 11 different brands) across 93 countries. Overall, Airbnb’s revenue leapt 89% as of July 2016 relative to the same time the previous year.

Investment in Airbnb and Future Growth Of The Vacation Rental Market

According to July 2016 filings, Airbnb had recently secured an additional $850 million in venture capital funding - an investment which brought the company’s total value up to around $30 billion. This is an increase of $5 billion from just 13 months earlier, when the company was worth 25% more than its nearest competitor. This in turn, was far more than double a 2014 valuation of $10 billion after an April funding round that saw them secure a venture capital investment of $500 million. This was despite forecasting a loss of $150 million for 2015, according to a PrivCo report.

As of July 2015, Airbnb estimated that by 2020 their revenue would reach $10 billion, and by this time they would be profitable. A month previous to this they had reported it was on course to hit $900 million in revenue for 2015. Independent estimates in September 2016 placed revenue projections for that year around $1.7 billion.

Independent projections estimate that at this point Airbnb could be responsible for between 3.6-4.3% of total inventory - a projection which seems low based on their rapid inventory growth so far. It’s worth pointing out that these projections cite 2015 research, and Airbnb’s immense growth in the last year, in inventory, revenue and market share, has outstripped most 2014-2015 projections.

Is There a Bubble and is it Going to Burst?

First of all, it’s crucial to remember that these things don’t exist in a vacuum. And there are plenty of external factors affecting travel across the globe right now. Sales of inbound flights to the U.S.A. have tanked following Trump’s inauguration, immense unrest in Turkey has led to a precipitous drop in tourism, and the whilst the full impact of Brexit on UK tourism isn’t currently as easy to quantify as some had expected, predictions for future growth are not optimistic. If we’re taking Airbnb as a model, then their reliance on Western markets could hamstring growth amidst continued global malaise.

It’s also worth bearing in mind that Airbnb skews young, and skews urban. And as rents continue to rise in our cities, the calls for greater regulations of peer-to-peer rental networks grow louder, amidst fears that they contribute to a market that pushes millennials out of urban centres.

But the main problem with Airbnb’s unchecked expansion is that growth in inventory and consumers has exceeded the establishment of any underlying infrastructure. A JP Morgan Chase & Co report identified Airbnb as a ‘capital platform’, and furthermore as one in which property is perceived as a liquid asset. The report concluded that growth would eventually plateau, as expansion in inventory could not continue exponentially. Eventually, this growth must slow and a framework must be put in place, to underpin a suddenly immense business, and shore up the cracks in the foundations.

Airbnb’s projections for profitability and $10 billion in revenue by 2020 rely on continued expansion, and may not sufficiently account for potential obstacles in the next five years. If growth is perceived as slowing, and this deadline is pushed back, venture capital may not be so forthcoming - the ramifications of which on other peer-to-peer rental marketing platforms would be drastic.

But the benefits of the self-catering vacation rental still remain - personality, independence and flexibility are the small-to-mid-size management company’s selling points, whilst major conglomerates and accommodation concerns can bank on greater inventory growth relative to hotels - as least for the next few years.

Tags: vacation rental market, airbnb growth, vacation rental industry, homeaway, expedia, hotels, holiday rental growth

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