By Mohan Du
It doesn’t matter which side of the fence you sit on, just about everyone will admit that Australia’s housing market has a problem on the horizon – whether it be about first home buyers, supply/demand or affordability. But in particular, I believe the real issue will be in regards to our rental market.
There is no doubt that the present affordability issues in Australia mean more people will be tenants for longer. And with outside market disruptors like Airbnb, our renters may find themselves with even stiffer competition than just other renters – they’ll now also be competing with holidaymakers for apartment availability.
This concerns me on several fronts. And at this moment, I’ll put my hand up and say that I have a biased view on this given my interests in the hotel sector. Competition between 5-star hotels and Airbnb is for another conversation. But what isn’t biased is my understanding of how Airbnb has an unfair advantage on everyone.
People seem to think that Airbnb is only out there to battle the hotel industry. Oh, how wrong they are. Airbnb, without proper regulation, puts unfair stress on our renters, our investors, our owner occupiers and our safety in building standards (short-term versus long-term accommodation). Let’s look at how I think this is going to play out.
1. Supply of stock to market
Yes, I’m a developer and yes, I’m going to moan about how much harder it is to deliver stock to market today because yes, it actually is. So while it’s more difficult to deliver said stock, it will naturally reduce the amount of new property that will be available for lease –it’s as simple as that.
2. Drop in investor activity
When supply and demand forces prices up, it makes it harder for property investment to stack up (unless they perhaps use Airbnb). Coupled with the stamp duty changes being introduced in Victoria, investors will slowly but surely fall out of the market. This means less buyers, which means projects will take longer to meet their sales requirements to get bank funding and get off the ground…there’s that supply issue again.
Investors will generally see a better weekly return on Airbnb than renting their property in the traditional manner. And that’s bad news for renters.
If we look at the average one-bedroom apartment in Melbourne’s CBD, these rent for approximately $400 per week. Over the year that is a $20,800 return for an investor.
So let’s make some assumptions on the yearly income of a property that lists on Airbnb compared with a traditional tenant. Hotels in Melbourne are currently averaging at approximately 85 per cent occupancy. Now for Airbnb occupancy let’s half this figure for argument's sake, leaving us with an assumed 42.5 per cent occupancy rate.
Let’s say on Airbnb a Melbourne CBD apartment lists on average $180 per night, or $1,260 per week. With an occupancy rate of 42.5 per cent, or 155 days of the year, investors are earning a healthy return of $27,900. That’s about a 34 per cent increase in landlord revenue. Great, right?!Now let’s assume the occupancy rate jumps to 60 per cent, or 219 days of the year – investors are making a cool $39,420. That’s nearly a 90 per cent increase in landlord revenue compared to leasing out the apartment traditionally to a long-term tenant.
As you can see, Airbnb is becoming pretty enticing to investors. And what will that do?
Choke long-term rental supply even further, most definitely driving up rents.
Now you may be thinking, what’s wrong with investors making a little extra coin? My answer is there’s nothing wrong with it per se. Except that once this becomes the norm, property values stand to become drastically inflated with the income from Airbnb. Imagine when Airbnb listed properties start changing hands to different investors and real estate agents are advertising 15 per cent rental returns - doesn’t that have consequences for everyone?And I haven’t even touched on the building classification for long-term and short-term accommodation.
When we develop our hotels, there are very different standards to work with on a solely residential building (which is what Airbnb relies on) versus short-term accommodation. This is to do with the high volume stress that short-term accommodation can place on a building.
The building standards are in place to ensure durability and quality of a building. They are there to ensure there are enough lifts to cater for more people coming and going all the time, as well as balancing the rights and needs of short-term guests and long-term residents. These don’t apply to Airbnb listed properties.
It isn’t realistic to hope Airbnb will go away. It won’t and it shouldn’t – it is a truly exciting offer in this economy, which has its benefits. But we need to be mindful as to how we manage the impact of Airbnb on our buildings, on our residents and on the long-term rental market. Right now it’s like the wild, wild west – cowboy town.
The solution isn’t easy, but we can take inspiration from overseas where limits have been put on Airbnb.
London, Amsterdam and San Francisco have limited Airbnb rental periods for whole homes, while Paris has banned investment properties from being used for short-term rental. In New York, the threat for the accommodation sector has seen renting apartments in a multi-unit building for less than 30 days banned altogether (more details here).
Right now, everyone thinks they’re somehow being short-changed and that is good for nobody. And by no means have I touched on everything, we just need a level playing field for all.
Mohan Du is the Founder and Managing Director at Capital Alliance Investment Group.