In November, inflation in the United Kingdom reached a 10-year high, which may not come as that much of a shock to those of us who drive, shop, eat or, well, live. The cost of living has gone up significantly, and while most economists expect it to be temporary, the evidence would suggest the lasting effects on business owners could be significant if handled incorrectly.
With that in mind, we decided to explore how inflation impacts the holiday rental market and, most importantly, what property managers and hosts should do to tackle it’s effects.
Furnished Holiday Lets (FHLs) Feel Inflation Pressure
When we hear about inflation, we tend to think of the CPI (Consumer Price Index), which is the most common measure of the price of a common basket of goods. From the property manager’s perspective, however, it’s more than just the cost of milk and gas. Property managers sit at the crossroads of a highly laborious industry that’s seeing rising pressure on housing, wages and staffing shortages, as well as rising prices for goods and material to keep listings open and clean for guests.
To make sure your portfolio is in shape to deal with these inflationary pressures, take a look through our Insights tool by requesting a demo today.
With inflation rising, property managers need to react quickly to changes in their costs. While some might be able to absorb rising costs, most will need to pass on the costs to their guests in the form of higher rates. We’ve already seen this happen over the past year with ADRs up as much as 30% on 2019.
How To Fight Against Inflation
The first thing to do is review your marginal cost per listing, or how much it costs you to have a guest spend a night. All reservations need to be profitable, so ensure that your lowest prices are at least covering your break-even costs.
Increasing the final cost to the guest is obvious, but taking this a step further, exactly what levers or mechanisms should we use? Is increasing my nightly rate the best option or just adding on to my fees?
To answer this we would suggest understanding what type(s) of inflation pressure you’re mostly experiencing. In markets with soaring rents and home prices, with an owner commission model, increasing the nightly rent (and therefore the payout to the owner) may be the preferable way. Otherwise, the return on the owner's capital investment (their home) will drop under your watch, making them more likely to look for other asset managers (PMs).
For those with dynamic pricing, simply raising the Base Prices along with inflation is a simple and straightforward strategy to keep up with rising costs.
Alternatively, if labor and material goods costs are the predominant inflationary force, then it may be better to seek out additional revenue through increased fees. Raising the nightly rent (if that’s even a possibility when rents aren’t rising) will increase the total guest cost with the majority flowing towards the owner, but they aren’t paying the expanding costs of cleaning and reservation staff which fall squarely on the PM! Instead, think about fees; it could be a better mechanism to ensure rising costs are covered by those who pay them.
Not Doing Anything Is Not an Option
In this market, there’s an urgency to do something, whether it’s through nightly rate hikes or fee increases. “The run-up in inflation could be due to a wrinkle in supply chains and job markets that gets smoothed out quickly or drag on for years, pumping prices even higher,” said James Breece, an economist at the University of Maine. Property managers are being squeezed by supply chains and wages, while at the same time having burgeoning demand for their inventory. These days are a true test of any hospitality entrepreneur.
Those that leave their prices flat will find themselves delivering unprofitable reservations well into 2022 and beyond, while those that adjust their costs will see record-breaking revenue. The only thing for certain is that higher prices tend to attract attention and new competitors so we all need to be on top of our game.
To make sure your portfolio is in shape to deal with these inflationary pressures, take a look through our Insights tool by requesting a demo today.