Short-term rentals can be ideal for private equity looking for a new asset class

Skift grip

The smarter money seems to be warming up to the emerging asset class of short-term rentals and professionally managed vacation rentals. But it’s probably too early to expect a “STR REIT,” or short-term rental real estate investment trust, this year.

Sean O’Neill

Some of the biggest names in private equity firms, hedge funds and alternative asset management are seeking investments in short-term rentals and vacation rentals as new assets to diversify their portfolios.

Experienced and well capitalized investors such as Blackstone Group, Davidson Kempner Capital Managementand Harrison Street wants to build exposure to alternative accommodation, according to people with knowledge of their research.

While commercial real estate companies have entered into transactions involving short-term rentals for years, traditional institutional investors have not.

Institutional investors are working to create funds that invest in debt backed by managed properties like short-term rentals, vacation rentals, or related housing.

The next step will be to build instruments that echo real estate investment trusts (REITs) that specialize in short-term rentals and vacation rentals. But setting up a fund could take a year or two.

Two insiders said that hotel REITs would themselves see the short-term sector as a complementary asset class.

This news comes as no surprise to some of the branded property management companies in the travel segment.

“Private equity firms, hedge funds and others are definitely jumping into the space,” said Jason Fudin, CEO and Founder of WhyHotelwhich offers high-end apartments to travelers for varying durations.

Sector “Sleep away from home”

One of the headwinds for institutional investors has been ensuring that the underlying real estate assets are of high enough quality to weather the downturn. It’s been difficult for property managers to step up the process of persuading high-end homeowners to rent to travelers with high availability. High-end properties may have a larger margin cushion to withstand a cyclical downturn.

Private equity firm Alpine’s Monday acquisition of short-term rental data firm AirDNA was a small but apt sign of the industry’s growing recognition.

AirDNA’s private equity acquisition this week follows news in February that BeforeStaya short-term rental operator, had closed a 500 million dollars round table to create a company holding its real estate assets, with Saluda qualitya real estate advisory and asset management firm, which backs the fund.

Andes STR, a property manager for short-term rentals, recently began working with Chilean investment firm WEG Capital to buy U.S. units, the The Wall Street Journal reported.

Last month, private equity firm Durable Capital Partners led a $100 million fundraising round for To evolvea vacation rental property management service.

Private equity has already dabbled in vacation rentals

Certainly, at the height of the pandemic, private equity giants Silver Lake and Sixth Street Partners bet $1 billion on Airbnb. But it was a short-term bet on Airbnb’s hiccups ahead of a potential initial public offering rather than a long-term bet on short-term rentals as an asset class.

Before the pandemic, Bain Capital, KKR, Blackstone and CVC were outbid by Platinum Equity for Wyndham’s vacation rental portfolio in Europe in a $1.3 billion deal.

Among the companies that are still private, those with rapid growth Sykes Holiday Cottages UK-based is backed by a private equity firm Vitruvian Partners.

One factor that improves the visibility of institutional investors in the sector is the professionalization of data analysis services, the benchmark figures of which could help institutions underwrite debt-based transactions.

So far, only small investors and residential and commercial real estate moguls have used analytics services such as AirDNA, Transparent (just acquired by OTA Insight), All bedrooms, Airbtics, Key dataand MashvisorComment.

Other ways for institutional investors to play the category

It can be difficult for private equity funds to play in the property management market. Funds tend to last only about a decade before being disbanded. This might not leave much time for the funds to benefit from long-term appreciation in property management fees and property appreciation.

Some are instead looking for other ways to be exposed to the perceived benefits of alternative housing.

In recent months, institutional investors have expressed their initial confidence in the sector by investing in the shares of companies aiming to rise by professionally managing inventory.

Vacasa, a manager of branded vacation rental properties, is a notable holding of private equity firms Level Equity and TPG Capital. Other institutional investors, such as PAR Capital Management and Guggenheim Partners, also took low single-digit percentages of Vacasa’s outstanding common stock.

Sonder, a professional manager of licensed rental or hotel apartments, has so far been less attractive to institutional investors. At the end of December, Blackrock held 189,769 shares, a modest stake of $900,000, according to financial filings.

Looking outside of North America and Europe could also reveal some of the biggest opportunities. For more context, Skift Research subscribers can read this month’s report: Short-Term Rentals: Focus on Asia-Pacific.

Overall, institutional interest in short-term rentals is still in its infancy. Other large, seasoned investors, such as pension funds, endowments and sovereign wealth funds, have yet to join the category.

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