By Richard Vaughton
My son said, 'I’m considering buying a two-bedroom holiday rental...what do you think?'
To be frank, as somebody immersed in this space, I was nervous about answering. He also once lived with us, and we owned rentals and property management companies for years. He knows the ropes, having been a software developer in the space, too. Plus, he lives in a popular tourist destination.
What we used to enjoy 20 years ago
Two decades ago, we built a business with a simple website, cheap adverts on sites like Owners Direct, and had support from the local tourist board. It added up to 90% gross margin. There was high demand and no oversupply. Occupancy was 70%+, and we offered short breaks at a higher price per day (even back then). Cleaners were content to be paid average wages and there were plenty of helping hands to be found, plus 60% of guests returned within three years. We also netted off interest on bank loans and made full use of capital allowances and capital gains at exit. It was a true cottage industry.
Fast-forward 20 years
So, in order to help my son, we decided to do a rental analysis to unravel our thoughts for 2025, as owners are clearly becoming very nervous about their investments.
After many loan and mortgage computations, house price predictions, and access to rental data tools, we felt a self-managed business may have broken even starting from scratch – with a lot of hard work. But this was only if the interest payments on the necessary and sizeable mortgage were netted off against the income. However, with changes to the furnished holiday lettings tax regime on the horizon (which negate these benefits), plus oversupply, volatile house prices, OTA fees, the tech squeeze, cleaning challenges, and not to mention the amount of work needed, the answer is...not now. At least, not here in the UK.
STR hosts, we have a problem: data
One thing that became very obvious during our exercise is that data, both locally and internationally, is not what it's cracked up to be in terms of calculating rental income and occupancy. We found word of mouth information a better option for making an informed decision.
During our analysis, virtually no-one we spoke to actually made the daily rates claimed by the tools (either the subscription or free versions) that we used. And it was the same story in terms of occupancy.
There is, no doubt, an endless number of reasons for this – and it is borne out by managers who are struggling to understand why their subscriptions to dynamic pricing services are not performing as expected. I ran a poll on LinkedIn a few weeks ago, based on these comments, asking about dynamic pricing. And although the numbers were very limited, the results were as expected.
We tend to believe that global data has to be correct, as it provides a helicopter view. We have heard reports that 'Airbnbs' have been losing out to hotels recently. However, at the 16th Hotel Data Conference 2024 in the US, this was the headline: 'Share Shift from Hotels to Alternative Accommodations'. This sounds positive until you hear the CEO of VisitCornwall telling everyone that the weather and economy are not helping an industry already on its knees. Meanwhile, the BBC is running stories titled 'Tourism at lowest point for 10 years'. Now we see a mass of homes for sale in Wales, apparently due to poor policy management and no doubt soundbites from 'effluencers' and daily rags.
A quick look at the Civil Aviation Authority statistics will show that cheap airlines are doing their best to rip up the atmosphere while delivering increasing numbers of citizens to sun-drenched European destinations, even if they are unwelcome. Tourism in Spain is 9% up, apparently. The European Union OTA data will no doubt bear out these tourism stats in a few months, with more travel but less spending. Expect more knee-jerk reactions on banning all 'Airbnbs' in certain regions.
The real issue is that we live in hyper-local destinations, and the wide variety of accommodation and budget demographics, combined with large corporate booking objectives and their disdain for scraping companies, makes data (not unsurprisingly) inaccurate.
The difficulty in comparing similar rentals
A two-bedroom, two-bathroom, and identical amenity property is not the same as another. There are many important differences, which cannot be easily distinguished even by the AI tools of the OTAs and their deep dive into guest demographics.
Secondly, a blocked calendar is not necessarily a booking, and the price shown is often not the price charged. With declining tourism pressure comes necessity, and we witness early bird bookings at discounts, extended stays at incrementally discounted weeks, use of properties by family and friends, and winter lets. Not to mention those who shut up for a few months, come back from abroad, or close the properties for maintenance.
Many management companies use these tools to price their properties automatically. Taken at the extreme, if a high percentage use these tools and all the systems are eyeballing each other's properties, it's not beyond the pale to consider that competitive manipulation may be happening too. Extend that thought to Airbnb. If it sees a lack of bookings and only low-value ones being taken in a certain area, it makes sense for Airbnb (if hosts are utilising its tools) to simply drop prices. Slightly less commission for them, but money in the bank – and as a cash machine that needs to keep printing shareholder dividends, entirely necessary.
Getting very accurate data does not seem truly possible at a hyperlocal leisure level, no matter how much AI you throw at it. It is more of a superficial grouped view that may offer trends and high-level indicative pricing and occupancy.
Integrated systems for PMS businesses give more accurate historical data, which may provide better insights when combined with scraped information. However, not everyone uses a PMS or the same ones or subscribes to the services, especially the 4 million+ Airbnb hosts. They don’t even have genuinely accurate data!
Managers often have staff who do little else than daily revenue management to ensure occupancy and optimum pricing, not leaving it to chance and automated systems. This is definitely a 2024 trend.
The solution is to have local collective data supplied through regional gateways via real-time data exchange so everyone can see the reality, and the collective tourism authorities can act accordingly. Whistling in the wind, I’m afraid!
The world is awash with data on car movements, travel insurance, holiday wear purchases, search information, social media noise, sentiment analysis, long-range weather forecasts, and property sales, among other things. We may need an extended set of data to predict prices and occupancy further out, rather than seeing what everyone else is doing (just digitally now), as we did in 1995!
Data businesses are popular with investors. Transparent was acquired in 2022, and more recently, AirDNA was too (but seems to have gone through a recent management reshuffle), and now Keith Breon’s company has acquired Hungry Robots. Here's a quote from Breon, the Co-Founder and CEO of Revnest: "By integrating Hungry Robots' forward-looking projection data alongside our verified historical data, we are taking a significant leap forward in our mission to deliver the most comprehensive and actionable real estate insights for the industry." I'm not sure that US data access rules and EU/UK GDPR will match – but it's a neat idea, as it's the data we want!
Also, just a thought for those owners who don’t care about squeezing every penny out of their properties, which data companies seem to think is the case. Where is the tool that allows you to switch on “wash its face value only”? Also, now we are seeing the question of dynamic pricing surface in the public’s awareness due to Oasis ticket sales. It's not the same, but you can bet it will surface as budgets get squeezed further.
Data is necessary, but needs to be taken with that proverbial pinch of salt!
The stock market looks like the favourite
Back to my son's question. This family won’t be cleaning toilets next summer or firefighting guest demands for new towels daily, or dealing with lost keys, complaints about noisy neighbours, sand in the jacuzzi, and requests to arrive at 10 AM and leave at 6 PM!
Not until interest rates come down and all the other challenges are covered. Oh, and none of us will buy a residential rental property, with the UK government about the outlaw no-fault evictions. We've been there, and that's why we entered holiday rentals in the first place.
Over the last 20 years, the FTSE 100 has returned 5.6% per annum. Last year, it was over 14%. Any sizeable deposit in the stock market will see much better returns and much less stress.
Richard Vaughton from Yes Consulting is a Holiday Cottage Handbook Columnist.
Richard founded rental technology business Rentivo, which was acquired by Situ. He also exited two property management companies with close to 1,000 rentals. Richard currently works as an advisor for a host of businesses in the short-term rentals world, helping them focus on expansion, mergers and acquisitions, and technology efficiencies.
Now based in the UK, Richard has worked in the Middle East, Italy, and Switzerland during his career, encompassing several industries. He was previously the CEO of a Finnish biotech, service, and diagnostic supply company.
Contact Richard via email: richard@yes.consulting.
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