Regulations are an important feature of the short-term rental industry. They encourage fair operation, and can benefit businesses overall – if properly balanced and implemented. But are they defined or policed well? Below we examine the change in property manager sentiment towards regulation over the past couple of years and across different regions. Subsequently, we analyse the impact of certain regulations on the local vacation rental market.
Short-term rental regulations
Growth in short-term rental supply and demand has increased the significance of the industry across the board. To stakeholders (owners, operators or investors) and competitors (hotels) alike, but also to residential availability and affordability, and residents themselves, the impact of STRs has changed, and this has led to regulatory measures being hewn. This picture looks different in different areas of course, so in addition to evolving through the sector’s maturation, rulings have also adapted to market-specific pressures. For those reasons, both regulation and sentiment vary from place to place.
The most common goal of regulation is to protect residential interests in a region, city or tourist spot. This has been necessitated by this success – the growing arbitrage between long term rental returns and that of a short-term rental. If a property owner can make 30% more per month on Airbnb than you can via a long-term tenant, it’s obvious where the majority will fall. This in turn depletes residential inventory and drives rent up, pushing locals out and, in extreme cases, can cause housing crises. Restrictions implemented globally have varied from:
- Limitations on the number of booked short-let nights per year
- Numbered licences, registration and/or fees for short-term rentals
- Requirement for a permanent resident to be present (no entire home listings)
- Geographical restrictions by postal code
- Rules based on property types such as those with a dedicated entrance
And implementation similarly varies in nature, consequence and also success. While in some markets OTAs are held accountable for supply following rulings, in others it is left to the discretion of operators. Also, fines are common in certain countries but not others, and so on. It’s a fragmented situation, so what can we learn? Let’s look first at the change in feeling around regulation this year versus at the beginning of 2022.
How do property managers feel about short-term rental regulations?
The chart below states the percentage of property managers who agree with the given statement. First – looking at sentiment towards regulation in 2023, the top 2 opinions are that restrictions should be relaxed and better enforced. In keeping, the assertion with the lowest level of support is ‘More regulations should be introduced’.
And so the feeling amongst property managers is very much consistent – the focus should be on improving or reducing current regulations rather than imposing more. Reassuringly, a significant proportion of management companies still echo the idea that regulations are a positive imposition, with 51% believing that regulations are having a negative impact. This, however, represents a significant change; with just 45% of PMs believing in 2022 that there was a negative impact, we have crept over the threshold to a majority 51% as of this January. Indeed, all sentiments have moved in favour of fewer, better enforced rules as of 2023.
2023 regulation sentiment by location
Establishment and growth of vacation rentals have of course varied across world regions, and so too do the pressures in different markets. Reliance on tourism versus residential or business hubs create specific surges and vacuums in supply and demand. Additionally there’s the reality of political intervention varying from place to place. And so, the upshot is a global patchwork quilt of regulation and so too sentiment towards that regulation.
Interestingly, while only 17% of North American property managers believe that more regulations should be introduced, that number is up at 44% in Latin America. In Europe, sentiment is not so decisive between the need for more or fewer regulations, but on the other hand, pretty emphatically feels that those regulations should be better enforced. As in Europe, in Latin America the need for augmentation or reduction of regulations is up for debate, and the majority of management companies in both regions feel that regulations are not negatively affecting their operations. This strikes a contrast against North American PMs, who largely feel that restrictions are becoming a negative presence and very strongly favour their relaxation or reduction.
Clearly both regulation and sentiment will be more nuanced within these regions, but this breakdown serves to exemplify the variation.
Local impact of short-term rental regulations
So, whilst there is a clear solidarity in the belief that regulations need to be better enforced, short-term rental property managers are less sure about impact to their business. Feeling on this matter is of course dependent on the type of stock managed, the location of that stock, and often the duration of operation. So, whilst the aggregated sentiment gives a good indication of how those dealing with regulation first hand are experiencing them, it is very useful to juxtapose performance data surrounding regulation implementation.
In January 2017, Amsterdam issued their first limitation of vacation rentals. It was decreed that any full-apartment rentals that have hosted 60 overnight stays would be automatically delisted until the next calendar year (enforced by Airbnb). Then, in July 2020, Amsterdam went one step further in its efforts to restore the balance between visitors and locals. The decision was taken to ban Airbnb and similar holiday rental platforms from three districts in the city, and elsewhere require a permit and limit renting to tourists for a maximum of 30 nights per year.
So what impact has this more recent July 2020 decision had on the local short-term rental market? The first metric to consider is supply. Logically we would expect that a move from 360 days potential revenue to 60 days, and a further halving down to 30 days, to cripple the numbers of owners partaking. Indeed, property count in Amsterdam has reduced by 70% since January 2019, and 61% since the latest regulations in July 2020.
Moreover the business case for owning properties to let on a short-term basis is completely limited, but in turn, the need to extract the maximum value from those permitted 30 days is greater. Thinking as an owner, where the possibility to garner booking momentum, or efficiently market and operate your property for maximal return on optimal rental days is limited, why not hand it over to a professional? And, while we see a dip in the percentage of professionally managed stock just ahead of the regulatory change, no doubt as owners question their involvement in general, the chart below also shows gradual professionalisation (13% increase in proportion of professionally managed stock between 2019 and 2021).
Where ADR is concerned, things get interesting. A noticeable dip occurs as the restriction approaches and owners strive to build occupancy. However, since then, nightly rates are 24% higher in the last 6 months than they were prior to introduction (also noting that worldwide vacation rental rates have increased off the back of COVID). The increase is clear but also logical - if owners are to disrupt longer tenancies for 30 days of a full year, the returns have to be worth it.
In one further example, following many years of discussion, Edinburgh City Council has established a short-term lets control area, where any property that is not a primary residence will require planning permission to operate as a short-term let unless it has operated for at least ten years without it. This legislation was introduced as of October 2022, and in the 2022 months preceding the introduction, Edinburgh's short-term rental supply had ballooned 27%. On the other hand, since introduction, inventory has so far reduced by 7%.
Where do we stand?
So regulation is a contentious and varied subject. On the face of things, fewer regulations would bump STR revenue potential so it makes sense that management operations might favour their reduction. However, almost half of PMs also believe that the overall impact of legislation is not negative.
In fact, when properly implemented and enforced, rules can increase dependence on professionals and protect the quality of supply as their friction 'cleanses' suppliers of those less committed. Moreover, as this supply condenses, operators are able to command higher price points in stable demand. So too, with carefully defined geographical regulations, tourist footfall can be spread, benefitting an area or businesses as a whole.
And so we come back to that one theme that endures across geographies and instances - the need for legislation to be better enforced.
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