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Long Vs Short Term Rentals: Where’s The Next Frontier for Growth in Real Estate?

ON THE SPOTLIGHT

Real estate industry in Kenya has become increasingly popular over the last decade and is now a common preferred investment choice for many people who wish to create wealth. This has been attributed to its reliable and consistent returns which happen to be the highest among comparable asset classes. However, it is important to point out that the capital outlay is pretty steep for ordinary people but concepts like Real Estate Investment Trust (REITs) are now providing retail investment options.

While investments in the overall real estate industry continue to grow by leaps and bounds, the focus is now shifting to the level of profits attainable in various property market segments. For a long time, developers have concentrated on long-term rentals owing to the consistent and reliable income. This guaranteed income has offered comfort and peace of mind for the investors, a hue and cry for many. Currently, Nairobi City County, Kenya’s leading real estate market has the highest number of long-term rentals. This is indicated in the data released by the county government which puts the target for housing development in the city at between 150,000 to 200,000 units annually. However, amidst the comfort enjoyed by the investors of the long-term rental, the high supply of units has led to a reduction in rental income. According to the latest Hass Index Report, Q4 2017, asking rentals across all property dropped 1.2% in the last quarter and overall recorded a fall of 3.9% in 2017. Apartment rents fell highest by 14.4% in Lavington followed by Kileleshwa at 13.2% in wake of continued oversupply.

Owing to the drop in performance of long-term rentals, short-term rentals are turning out to be the next frontier of growth in Kenya's real estate market. In current times of low rental yield, more investors are looking at alternative ways to maximize rental returns. The short-term rental has proven to deliver better returns due to the ability to dynamically change the price according to the supply and demand of the market. A research report by a leading insurance company shows that short-term rentals like serviced and furnished apartments are offering higher returns with rental yields of over 14%, way ahead of long-term rental yields which range between 4%-7%.

From the foregoing, indeed short-term rentals are proving their worth over the long term rentals. Airbnb, an online hospitality service that allows people to lease or rent short-term stays, has demonstrated the great potential of the short-term rental model that till date hasn’t been fully tapped in Kenya. However, a few developers in Kenya are exploring this model like Sultan Palace Beach Retreat, a project in Kilifi which sells holiday homes and allow owners to rent them out. They intend to apply the same concept in Nairobi’s Kilimani area where they are soon launching luxurious serviced apartments that are responsive to today’s urbane lifestyle.

There are several advantages of investing in short-term rentals and made the model a success. One is that as an investor you will get increased income since the unit will be able to host several short stay tenants who pay a premium. Secondly, there are consistent occupancy ratios since agreements are shorter and more manageable, vacancy rates can be much lower. A third advantage that closes the top three list, is that as an owner of a short-term rental, you will have reduced damage risk. When homes are rented for longer than six months, the threat of damage increases for a property owner. Since a short-term contract applies to one renter at a time, there is less of a damage risk to the unit.

Indeed, the growth of short-term rentals has shown the best prospects yet and investors in the market segment should explore synergies in the marketplace to tap into the growth potential. This comes on the background of increasing demand for short-term accommodation in Kenya with Nairobi accounting for almost 30% of all searches. One of those collaborations is working with travel agencies who handle thousands of tourists annually, both domestic and foreign. Other ways would be partnerships with conference organizers.

Granted, short-term rentals like serviced apartments will be the next frontier of growth in Kenya’s real estate market as investors look for ways to build up a passive income in the housing industry and at the same time looking for fast lane lifestyle. However, we will still have activity in the long term rentals segment but attention will turn to low-cost housing given the fact that population is growing rapidly coupled with increased rural-urban migration.

AUTHOR´S NOTE:

The views expressed here are of the author and does not necessarily represent position of Sultan Palace Development Ltd and as such does not warranty any particulars. Click here to read our Terms & Conditions.