Ready or not, short-term rentals here to stay

/ The Edge Property
May 20, 2016 9:00 AM SGT
The number of Airbnb listings in Singapore has nearly tripled from 2,254 to 6,208 over the last year, according to Airdna, which provides analytics on Airbnb rentals, as more people turn to "sharing economy" sites for short-term rentals.
The growing popularity of sites such as Airbnb is inevitable, given the benefits they provide consumers and home owners. A June 2015 study by The Edge Property estimated that short-term rental landlords would need to rent out their units for only about 20 days a month to net the same revenue as regular landlords. Data from Airdna tells the same story. Top performing Airbnb rental properties fetched average monthly revenue ranging from $3,418 for studio units to $10,230 for units with four or more bedrooms. These properties could fetch between 31% and 84% more revenue compared with a typical long-term rental contract (see chart).
Given the lucrativeness of the Airbnb model, and softening rental market, more landlords are turning to short-term rents to generate rental income. The surge in the number of Airbnb listings despite the existing URA guideline points to the fact that landlords are willing to take the risk in exchange for a slice of the sharing economy pie.
airbnb infographic

Source: URA, Airdna, The Edge Property

Existing roadblocks
Last year, URA sought feedback through discussions with stakeholders on whether private residential properties could be used for shorter-term stays. A URA spokesperson says, “The results of the public consultation were split, with no clear consensus.”
Under existing guidelines, private residential properties, including individual rooms, should not be rented out for less than six months. The intention is to safeguard the living environment and to minimise the adverse effect from the frequent turnover of short-term occupiers, such as noise, loss of privacy, security and misuse of common facilities. There have also been calls for stronger enforcement against short-term stays. According to URA, there were 375 complaints regarding short-term stays in 2014 and 377 in 2015, compared with just 231 complaints in 2013. Offending private home owners can face fines of up to $200,000 and imprisonment for up to a year.
HDB has regulations similar to URA guidelines against short-term rentals of less than six months, as well as other subletting regulations. According to media reports in 2014, HDB repossessed two flats from owners who had rented them out to tourists on a short-term basis. There were also investigations into 106 cases involving short-term rentals of HDB flats in 2012 and 184 cases in 2013.
Airbnb versus hotels
The strongest critic of Airbnb comes from the hotel industry. The average occupancy rate for hotels in Singapore has fallen from a high of 87% in 2012 to 85% in 2015. Revenue per available room has slipped 8% from $226 to $209 over the same period. This is despite a 5% growth in visitor arrivals from 14.5 million in 2012 to 15.2 million in 2015.
A comparison between the average daily rate of hotels and Airbnb rents shows that the latter could offer a compelling value proposition to tourists. The average daily rate represents the average amount paid for each occupied unit in a certain time period. While a mid-tier hotel room with an ADR of $168 is not directly comparable to a two-bedroom Airbnb rental with an ADR of $212, tourists might be willing to pay an extra $44 for a rental property likely to be larger than the hotel room.
Similarly, a group of four travellers could rent an Airbnb for $169, versus two economy hotel rooms for a total of $200 or two mid-tier hotel rooms for $336. Judging from the potential savings, short-term rents are likely to appeal to those who are budget-conscious and willing to trade hotel service for more space, and those travelling in larger groups (see table).
While short-term rentals could be a bane for hotels, an increase in new visitor arrivals who prefer to stay in short-term rentals instead of hotels could be a boon for the tourism industry, owing to the increase in tourist spending. In a May 2015 report, San Francisco’s Office of Economic Analysis estimated that the increase in visitor spending per short-term rental unit per rental day was US$177 ($242).
A URA spokesperson says, “There was important feedback that any change in rules should ensure a level playing field. Currently, regulated accommodation providers such as hotels and serviced apartment operators are subject to regulatory requirements to ensure the safety and well-being of occupants. They are also subject to business taxes.”
airbnb vs hotels

Source: Singapore Tourism Board, Airdna, The Edge Property

Where do we go from here?
Given the growth in Airbnb listings despite the current regulations, the authorities could step up enforcement against law-breaking homeowners. Policing efforts are difficult and expensive, though. For example, there are no straightforward methods to distinguishing short-term tenants from actual guests, which could lead to scuffles and conflicts.
A better solution would be to modify regulations to legalise short-term rentals under a framework that minimises negative implications and allows for tax collection. While it is unlikely HDB will relax its stance, policies adopted by other cities can provide insight into short-term rentals for private housing.
Lessons from abroad
In Germany, Berlin’s "Zweckentfremdungsverbot", or prohibition of improper use of law on private property rentals, took effect on May 1. Under the new law, owners are allowed to rent out only rooms, and not entire flats or houses, on online portals such as Airbnb. Offenders can be fined up to €100,000 ($155,600).
Andreas Geisel, Berlin’s head of urban development, says the new law is “a necessary and sensible instrument against the housing shortage in Berlin” and that he is “absolutely determined to return such misappropriated apartments to the people of Berlin and newcomers”. Rents in Berlin surged 56% between 2009 and 2014, signalling a housing shortage.
The city of Austin, Texas in the US requires all short-term rental properties to be registered for a fee. There is a limit to the number of properties that can be registered under each individual to prevent a cottage industry of commercial hosts who run multiple properties as short-term rentals.
Amsterdam in the Netherlands requires short-term landlords to obtain permits, and caps the number of days they are allowed to rent out their homes at 60 days a year. Airbnb also collects a 5% tourist tax from the bookings on behalf of the city. Various cities around the world also require Airbnb to collect a hotel or tourist tax from each booking. The requirement for registration and permits can be an effective form of surveillance on the number of owners and properties active in the short-term rental market. An increase in government revenue from the collection of fees and taxes could be put towards constructive social spending. In addition, imposing hospitality taxes on short-term rentals would also help level the playing field for hotels.
A cap on the number of short-term rental days in a year could act as a control to prevent a supply glut that will have severe repercussions on the hotel industry. Limiting the supply is also a means of controlling the disamenities arising from short term rentals.
It is in the interest of the authorities and short-term rental portals to collaborate on regulation and enforcement. In exchange for a favourable regulatory environment, the portals will need to assist in the collection of taxes and disallowing unregistered owners and properties from listing on their platform.
Let ineffective by-laws be bygones
Given that neighbours of the short-term rental units are among the worst affected by adverse effects, they should be given a choice as to whether short term rentals should be allowed in the project they are living in. This can be achieved through a poll of owners in each development. A development where a majority of owners voted “yes” would be allowed to rent out their units on a short-term basis.
To compensate for the increased wear and tear on the common facilities from the large number of transient occupiers, a maintenance levy can be collected on each short-term booking. This will be in addition to the regular maintenance fee payable so that the short-term rental units contribute a greater portion of the monies required for the upkeep of the development.
On the issue of security, the rental guests could be required to register with the management of the estate, the way hotel guests are required to check in. This would help security personnel differentiate between guests and trespassers. Registered guests are also more likely to behave.
In the long run, there will be a clear demarcation between developments that allow short-term rentals versus those that do not. Investors are likely to gravitate towards Airbnb-friendly developments, whereas owner-occupiers might choose to stay away. This could result in more relevant by-laws and policies.
Ready or not, the sharing economy is here to stay. Cities should work with service providers to promote greater transparency and efficiency, instead of fighting them.
This article appeared in The Edge Property Pullout, Issue 729 (May 23, 2016) of The Edge Singapore.