“Economics” (definition): “a social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services”
From a slightly more relevant perspective, I would like the definition to simply include the premise of “the relationship between supply, demand and price.”
Nox Rentals is one of the largest luxury villa management companies in Cape Town with around 150 properties under management. We specialise in renting homeowner’s investment or leisure properties in the short term space. We’ve been operating for 15 years, and have enough data to make valid assertions regarding the state of the market.
As of the end of 2017, there are a number of market forces at play, specifically on the supply side. The marketplace has formalised over the past 3 years, primarily through the introduction of AirBnB which has brought approximately 17,000 listings onto the platform in Cape Town alone. Added to this, there are 1,500 hotel rooms and apartments being brought into the market in the next 5 years whilst inbound international tourism numbers have been growing steadily at around 15% YOY.
Considering AirBnB’s official launch in Cape Town was in July 2015, one can safely say that the private accommodation space has now become an “accepted” form of travel for guests, and in certain cases, a lucrative investment opportunity for property owners.
But, like any trend or “gold rush,” there are caveats to one successfully benefitting from the new opportunity. With excess supply entering the market, and a notional increase in demand comes a reduction in price. We’ve received some calls over the past few weeks from homeowners saying “it’s much quieter this year.” Our stats indicate that inbound tourism demand isn’t necessarily slower, but occupancies are not as strong as they were last year because of excess supply. This is a natural cycle, and, considering economic principles, demand levels will increase in due course:
We’re currently in the bottom right-hand side quadrant of the above image.
So, what happens now?
We anticipate downward pressure on pricing until Summer next year. Occupancies may also be less than last year, but unless there are other macro and political forces at play, we should see a very strong 2018/2019 Summer period. Cape Town’s average daily room rate in the Hotel sector has been around R1,200 per room per night with average occupancies in the region of 60%.
We plan to drive occupancy by introducing fully automated and dynamic pricing systems which interact with the supply in the market, assessing forward demand across the entire Cape Town marketplace, and returning daily rates which are at a level to achieve occupancy. As Managers, we’re no longer in control of pricing, and the notion of expecting enormous daily rentals for properties is defunct. The market will influence the daily rate, however, we are still able to set the broad parameters regarding pricing for a property based on its location, standard and overall “tourism potential.” We can also iterate if a property is running lower / higher than average occupancy. The parameters are governed by the following:
Lowest rate: This is the minimum rate per day that is accepted through the property. Generally not less than R1,000 per room per night and around 50% of the “Base rate.” (see below)
Base rate: This is set at the Average Daily Rate achieved through the property over the past year.
Highest rate: This is set at around 250% of the base rate. Effectively the highest value the property will be rented for during the course of the year.
Seasonality of pricing will be determined by the forecast demand in the market for a period of 360 days in advance. This is adjusted daily.
Our test properties on this platform have returned excellent results, with our sample properties delivering occupancies in excess of 70% over the past 3 months.
One also needs to take into account the distribution strategy of your property. It seems that the majority of the market exclusively use AirBnB, effectively creating a “race to the bottom” when one considers the price. The AirBnB platform accounts for around 10% of our business and the other 90% comes from direct marketing activity; other digital platforms (we’re exposed to another 15 Online Travel Agencies, otherwise known as “OTA’s”) as well as the professional travel trade. The strength of our brand, as well as our 15 years’ experience, gives credibility to each property in our portfolio, leading to bookings being received from approximately 150 Travel Agents & Tour Operators globally. It also ensures we have rate parity and aren’t directly exposed to a “price war.”
We’re optimistic that the upcoming changes within our technology and marketing strategy will lead to a strong rental performance this season. We believe that we have the broadest range of distribution possible and, backed up with accurate pricing, we should continue to see strong occupancies. We will have the new platforms and pricing strategy in place from 1 November 2017.
If you’d like to get in touch with us to discuss the performance or pricing of your property, please feel free to contact us on the details below.