Finance & DevelopmentFinanceMind the Gap: Short-Term Rentals Fill a Visible Need in London’s Hospitality...

Mind the Gap: Short-Term Rentals Fill a Visible Need in London’s Hospitality Market

London’s short-term rental listings have more than tripled since 2015. While this is common for major cities around the globe, a look at London highlights this accommodation type as a flexible supply offering to meet demand in the marketplace. That flexibility is especially handy as the hospitality industry grapples with periods of fluctuating demand during the pandemic.

Undersupply of hotel rooms?

London’s volume of hotel supply volume is relatively low compared with peer markets around the globe.

With the third highest number of international visitors annually, and the eighth highest economic output of all cities globally, London is a global center of commerce and culture. However, London’s roughly 100,000 hotel rooms rank it as only the 28th largest market.

This trend is most pronounced in the city’s urban core submarkets, as defined by STR—City & Shoreditch, London Centre North, and London Centre South. The City & Shoreditch submarket has a modest 680 hotel rooms per square mile while London Centre North and London Centre South have less than 200 rooms per square mile.

By comparison, urban centers such as Times Square, Hung Hom, Sydney Centre, and Tokyo Centre have more than 2,300 hotel rooms per square mile. All of London’s submarkets covering the urban core rank in the bottom half of their top 100 peer submarkets around the globe.

Short-Term Rentals Filling the Void, Faster

When accounting for London’s expensive real estate market, along with the resource-intensive process of developing traditional hotel supply, short-term rentals have a strong upside in major markets like London.

One of the key benefits of short-term rentals is their ability to add supply to a market when it is needed and to easily take that supply offline when demand dries up. This has been particularly useful throughout the pandemic as traveler preferences for features such as more privacy and limited guest-staff interaction have increased demand for listings.

Gains for short-term rentals in London could be offset by the next hotel development boom, but given their success throughout the pandemic, it is likely we instead will see more consolidation in the sector. Still, growth in hotel development and supply is strong, but accommodations supply is made even stronger with short-term rentals. For instance, the City & Shoreditch submarket is coming off of a hotel development boom with the highest hotel supply growth since 2015, but that growth is still much lower than the growth in short-term rental for the submarket.

Solid Hotel Performance Despite Competitive Pressures

While short-term rental growth can impact hotel performance, that doesn’t appear to be a market-level issue in London. Pandemic performance aside, London regularly posts annual hotel occupancy among the top five markets globally, even showing strong growth from 82.6 percent in 2015 to 84.1 percent in 2019—despite the 300 percent increase in competition from short-term rentals.

Total Accommodations

As the debate continues and more analysis is done to quantify the impact of short-term rental supply on hotel performance, it is important to balance the conversation with an assessment of what market voids the short-term rental sector is filling. Are there any local gaps in supply and what is the most efficient means to meet demand given local factors?Much of the conversation still compares hotels versus short-term rentals, but discussions will benefit from a total accommodations vision that can best capture demand as travel ramps up.

Will Sanford
Will Sanford
Will Sanford is a research analyst at STR.