As New Laws Pile Up, What’s The Future of Short-Term Lets?

As we mentioned recently, the rental market is in a period of unrivalled flux. Nowhere is this more true than in the short-term let (STL) market and especially where Airbnb is involved.

The proliferation of short-term lets in city centres over the past decade and a half. Airbnb was founded in 2008 and although the idea wasn’t new, the effect on the market was dramatic.

As experienced professionals dealing in buying and selling investment properties, short-term lets are not a core part of our business. However there is no doubt that this has become a hot topic recently.

Since some of our clients may have mixed portfolios which include STLs, we would be remiss if we didn’t acknowledge what’s going on in the market.

Let’s dive into this high-profile area of the private rented sector (PRS).

Short-terms lets are far from new

The idea of STLs is hardly a new one; there is a long-established history of properties being let out for holidays in blocks of one week at a time. We doubt you need to, but search for ‘holiday cottages’ if you want confirmation.

Even the concept of letting out a spare room to holiday makers isn’t new, it’s been done for decades both here and around the world.

What happened in 2008 was the marriage of the reach and convenience of the internet and these established rental models. As travellers increasingly built their holidays online themselves, STLs really took off.

Initially they were a cheap and attractive option compared to hotels however as the market soared so did opportunities for investors to buy properties specifically for short-term lets.

These investments were providing excellent returns, albeit at the price of fairly hands-on management and they proliferated. But as they did, concerns were increasingly being expressed about their effect on cities and the PRS.

The up and downs of the STL

Like the advent of buy-to-let mortgages twenty-five years ago, the ‘webification’ of short-term lets unleashed, and in many ways re-defined, the market they sought to serve.

The result in both cases was almost unfettered growth aided by a shortage of applicable regulation and an understandable ignorance of unexpected consequences.

The UK government commissioned a research paper on the subject, ‘The growth in short-term lettings (England)’ which goes into the subject of STLs in great depth.

It covers changes and proposals in Scotland and Wales as well, and is an excellent read if you’d like to discover more about this issue, and its findings have influenced government policy with regards to the STL market.

The ups

The growth in short-term lets has been nothing short of spectacular. “Since 2014, there has been a 571% increase in the number of entire home listings, with nearly 45,000 entire properties available to rent”.

That is nothing short of jaw-dropping, and these figures refer only to whole-property lets, taking no account of the single spare room model on which Airbnb was founded.

STLs are generally more profitable than longer-term lets, which partly explains why they have increased exponentially. That’s good for landlords, and good for the exchequer – assuming all taxes owing are paid.

There is a 90-day per year letting limit in place in London, however this has proven unenforceable and seems not to have had any impact on this burgeoning market.

For prospective landlords, or ‘hosts’, this model allows them to generate income from an asset they already own, their home, without the investment required for an entire property.

Granted, landlords of STLs will find that there are ongoing costs, cleaning for instance, which are not shared by their longer-term colleagues, which will eat into that income.

This has also contributed to the massive rise in the popularity of STLs, making it an easier route into property investment for many. This article in the Guardian highlights the benefits, as well as some of the downsides.

The downs

Short-term lets have proven massively popular over the last decade, however that hasn’t thrilled everyone. With new regulation, some are proclaiming that the future of short-term lets is far from bright.

Increasingly STLs are being accused of ‘hollowing out’ communities, driving up long-term rental costs, reducing the stock of properties and leading to an increase in anti-social behaviour. None of this is good, but is it true?

Anti-social behaviour

There is no doubt, and plenty of anecdotal evidence, that having a revolving door of guests in the midst of established households can lead to issues.

If someone is using a STL for a long weekend and is determined to have fun, they’re not going to give a damn about the welfare of neighbours they’ll never see again.

Sadly, there are limits to what a landlord can do about this as they’ll generally learn of it after the fact, and there is no empirical evidence to show that this affects more than a small percentage of lets.

Hollowing out communities

This accusation revolves around the assertion that where STLs proliferate, they create a void in a neighbourhood with no permanent residents in those properties, fundamentally altering their very nature.

In some instances this is possibly true although it’s hard to determine exactly what effect this is having on neighbouring residents.

Effects on rental properties and rent levels

This is one of the greatest criticisms of the STL market, and one which probably contains some truths but exists within a greater and more relevant whole.

The argument posits that a property which is let as an STL is one less property for either owner-occupation or long term let. Which is demonstrably true.

Where the argument starts to hold less water is when the STL market is solely blamed for the lack of long-term rental stock and the consequent increase in average market rents, especially in desirable locations.

This is palpable nonsense – neither the PRS nor the STL are responsible for wider housing problems.

The underlying issue – the systemic failure to build sufficient properties to meet demand – predates Airbnb by several decades and while short-term lets have some effect, they are unlikely the sole factor.

Advice from the property pros

As we stated at the outset, the short-term letting market is not our principal business focus, but what happens here could impact other areas of the PRS – so it matters.

In Scotland, STL licensing is now a fact as may be the need to apply for change-of-use planning permission from residential to commercial. Despite the considerable wailing, this is far better than what’s happened in New York.

If current STL owners in the UK decide to quit the market the properties will either go into the owner-occupier market, or will be bought up by investors in the PRS, probably for longer term lets.

But like the PRS, the short-term let market isn’t going to disappear. It will become more difficult, and a bit more expensive for landlords but in prime tourist spots the demand will remain.

Where there’s a demand, there will be landlords willing to do what’s necessary to meet that demand.

In summary…

We wouldn’t want to suggest that the STL market has maybe been a bit ‘wild-west’, but there’s definitely a new sheriff in town. There will be regulation, but it’s a relatively light touch at present.

Mandatory licensing will identify landlords and (although we would never suggest any wrongdoing) ensure that taxes aren’t forgotten in all the excitement.

Short-term lets provide a valuable service, despite all the criticism levelled against them in certain quarters. They also generate a reasonable tranche of tax revenue for the exchequer.

Overall, that’s a win-win. So, don’t take the tales of an imminent and terminal crash without a large pinch of salt. The sector will survive and move forward despite the new rules.

So, back to our question; what is the future of short-term lets? We suspect that once the dust settles, we’ll all find that the future is still pretty bright.

Written by Chris Wood, MD & Founder of Portolio

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