Cracking the condo rental nut

By Jesus Alcocer on 11 Aug 2017

[Bangkok Post]

'In condominiums, everything appears fine on Airbnb's side, but all of the sudden the host tests you: 'OK, come in through the back door, and if anyone asks, you are my uncle or my nephew'," says Sean Conway, chief executive of San Francisco-based short-term rental management startup Pillow Residential.

While the Thai government is battling defiant renters, startups are collaborating with condo owners and developers to solve the short-term rental quandary.

Putting someone up in a high-end condo for a couple of nights can have year-long consequences. Simon Landy, executive chairman of Colliers international, says daily rentals of condominiums violate the Hotel Act of 2004 and can lead to one year in jail. The act requires properties offering accommodation for less than 30 days to have a hotel licence. But hotel regulations exclude most of these buildings from becoming licensed hotels.

According to an industry source, juristic offices used to turn a blind eye when they found short-term renters in their building, but they are becoming increasingly stringent. Many building owners have announced that they will prosecute those who rent units on a weekly or daily basis.

On one side of the discussion is a government keen to collect tax and maintain safety standards, as well as a hotel industry protective of its competitive advantage. On the other side are unit owners looking to maximise the economic value of their assets.

Hotel Act or not, there are still upwards of 13,000 Airbnb listings in Bangkok. Airbnb did not release the specific Bangkok percentage, but Mr Conway puts the number at close to 60% in the US market.

Regulations and culture have made condos a hard nut to crack for short-term rental services. Instead of looking at the platforms as a perk for residents, local developers say they undermine the safety and residential feel of the building.

Building owners and developers often feel left out of the discussion, as they are caught in the crossfire between platform providers and government. But they are one of the parties with the greatest exposure. In Singapore, where rentals for less than six months are prohibited, errant property owners face fines of more than S$600,000 (20 million baht) for unlicensed, short-term rentals. Some condominium owners have taken enforcement into their own hands by hiring 24-hour "bouncers" who can deny entry to anyone who fails to produce proof of residence.

The growth rates of Airbnb have been slowing since 2016. An April investment report by UBS revealed that listings on the platform were up 110% in October 2016, but only 35% this past February.

According to UBS, regulation is one of the main drivers behind the drop. In New York and Barcelona, two cities that have became increasingly strict on short-term rentals, Airbnb saw a decrease of 10%. The bank also found similar drops in San Francisco, Berlin and Paris.

There is intense demand for short-term condo rentals, which provide an experience and a price point somewhere between that of a hotel and a single-family residence. An efficient and pervasive solution that frees this pent-up demand could reap a substantial top line.

Startups on both sides of the Pacific have started working on that project.

American companies like WhyHotel operate whole floors of newly built luxury condominium buildings, decking them out with the amenities one would expect of a hotel. It's a win-win situation: the platform keeps occupancy rates high and remits revenue to building owners while they look for long-term tenants.

Models like these, however, work best for rooms with high price points, which leaves out a large part of the market. They also fail to distribute income among middle- and low-income renters.

Pillow Residential, which was announced on June 17, goes a long way towards shoring up these shortcomings.

The company works with both unit and building owners to provide legal, short-term rentals, splitting the profits between the two.

A similar revenue-sharing programme has been in the works at Airbnb since at least 2015, when the company started collaborating with Equity Residential, AvalonBay Communities Inc and Camden Property Trust.

According to Airbnb, a pilot programme entailing 10,000 units is running in select US cities. While it does not dictate the amount taken by landlords, it has recommended 5-15%.

As for Pillow, it takes a more active role in property management than Airbnb. The company starts by advocating that the building owner allow short-term rentals, if they're not allowed already. Pillow creates an automatic listing, then uses a third-party service to suggest a profit-maximising price for the unit.

The company then installs automatic locks in the unit so that customers can check in even while the guest is not home. Finally it provides a reporting platform and cleaning services.

Pillow also integrates an earnings calculator.

"After entering information about a unit and the number of days it will be up for rent, the website should be able to tell you how much you will be making per year," Mr Conway says.

But the company's real added value is on the owner side. The firm monitors several short-term rental platforms and keeps owners updated on available units, reducing the risk of rentals going underwater.

Owners are also given access to information about all of the renters, just like they have access to information about all of their long-term tenants.

Similar to the Airbnb pilot programme, Pillow gives a cut to building owners for each unit rented in order to entice them to allow rentals.

The company has facilitated 25,000 reservations, more than 50% of which were in condominium buildings.

The company received US$18.5 million (615.5 million baht) in funding from investors, including Mayfield, Sherpa Ventures and Saul Wurman, the founder of Ted Talks.

"We were also funded by owner operators like Picus Capital, which itself has more than 30,000 units," Mr Conway says. "These strategic partnerships will allow us to scale quickly."

The firm usually expands into new markets by building relationships with building owners.

"The average owner we work with has 55 buildings, which allows us to cover a lot of ground very quickly," Mr Conway says.

He says a good percentage of the people the platform works with are already renting illegally, so it's a win-win situation for regulators and renters alike.

The goal, he says, is for users to be able guarantee a profit from their rentals. Owners should be able to plan a 30-day vacation and have the peace of mind that their unit will produce revenue during that time.

"Rent can represent close to 50% of someone's income, and if we can help them pay for it, they can channel that money into travel, education and student debt," Mr Conway says.

"In the long run we hope the application will help build a short-term rental culture, so that people feel comfortable having this in their communities. We want the ability to make short-term rentals to be a plus rather than a minus when a potential buyer looks at buildings in the market."

Condo buildings implementing the programme will see a 20% increase in the number of applications, according to Mr Conway.

The platform will also serve as an intermediary between the government and renters. By monitoring short-term rentals in the buildings they work with, Pillow can help ensure that an appropriate amount of tax is paid.

"Airbnb is very willing to work with governments, including on taxation issues," Mr Conway says. "It just signed a tax agreement in Mexico, and if that is what is needed in Bangkok, I think Airbnb will be willing to [take that step here]."

Pillow operates in nine cities in the US but is looking to make inroads in Asia.

"We've had people from six Asian countries request a demo in the past three weeks. We don't have an Asian office yet, but we definitely want to scale there," Mr Conway says, adding that they are first-movers in the market.

"Right now we are in a very unique spot. Companies like Turnkey and VAcasa are doing some of the same property management [in rural areas], while we're focusing on the urban market," he says.