In order to predict the future, it’s always good to study the past. In this article, Simon Lehmann, co-founder and partner of AJL Consulting, talks about why the short-term rental industry is ready for M&A activity. – Editor
As we all know, over the last few years, the short-term rental market has grown substantially. The founding of Airbnb created a wellspring of opportunity for property management companies, technical solutions and service suppliers. Property management companies, supplying the increased demand generated by Airbnb, have mushroomed.
In addition to this growth, existing companies have continued to grow and flourish. Private equity firms like Platinum have shown great appetite with both Awaze and Wyndham. We’ve also witnessed in the last year, Softbank back OYO, Virtuvian get behind Sykes and also Vacasa become a unicorn thanks to many investors.
As well as PE interest, Venture Capitalists have invested a lot of money in the sector. We’ve seen this not just with tech, but also with the hybrid urban property managers, like Guestready, Hostmaker and Airsorted.
What are some of the elements that are at play at the moment influencing the industry? Firstly, there are a lot of buyers circling, attracted by the market conditions.
The challenges presented by short-term rentals are some of the core reasons why investors are interested in the sector and why mergers and acquisitions are a fertile ground at the moment.
One of the core challenges is the fragmentation of the market. The second challenge is the hyper localisation.
According to industry data from Transparent Intelligence, the 20 largest PMCs are managing just 1.28% of the global supply of properties (under 400,000 homes). The growth in smaller managers continues with over 6500 managers in Europe with a portfolio of fewer than 20 properties. On the other side of the market is the hosts. We predict that if the top 20% of hosts maintain their current growth rate, they will control more than 11,500,000 listings by 2024.
Many property management companies are looking to sell at the moment and want to do this before a potential downturn in the market. The ‘long tail’ is consolidating because of margin compression by the OTAs.
In order for a property manager to make decent money today, it needs scale. In addition, the distribution landscape is in flux. VRBO/Expedia is hurting, Airbnb will do an IPO and we are seeing Booking getting stronger. All of this results in potential threats to the small players.
Larger property management companies are also feeling the profits pressure. Combined with keeping up with the need for increased technology and the complexity that surrounds this, they are also looking for exits. With the buyers here and the money here, a lot of PMCs feel that now is the time to sell.
The same is evident for the tech companies which have raised a lot of venture capital. Competition is huge. Customer acquisition costs are high and not many of the tech companies make money or can see the light on the horizon. Therefore they are looking for buyers and fresh opportunities like the Greater Sum Ventures/Insight Venture Partners roll up we witnessed last year.
We are also seeing increasing ‘outside’ players entering the vacation and short-term rental space. Hotel companies like Marriott are making waves. Google has become more active, which adds additional uncertainty. The same disruption and uncertainty is also happening around the master lease model. Whilst Sonder is already a unicorn, everybody now wants a piece of the ‘master lease pie’.
The short-term rental industry is a tough nut to crack. This is exactly why investors are looking very closely at the opportunities. For both management companies and tech providers, now may be the right time to consider your options for exit.