A closer look at the vacation rentals market in Europe.
Picture this: a cozy villa overlooking the Mediterranean sea in Greece, a stylish apartment nestled in the heart of Paris, or a charming cottage in the English countryside. These aren't just dream vacation spots; they're gold mines in Europe's short-term rental (STR) market and big investment opportunities.
Based on AirDNA statistics, the demand for short-term rentals in Europe has reached unprecedented levels. In just the first half of 2023, travelers have booked a combined total of over 177.8 million nights, marking a 20% increase compared to the same period last year. Not only are occupancy rates rising, but revenues are also on an upward trajectory.
Given the booming demand and increasing occupancy rates, along with rising revenue figures, investing in short-term rentals in Europe seems to be a highly lucrative opportunity. The sector has demonstrated strong resilience and growth, indicating that it's not only a trending market but also a stable and profitable one. For investors contemplating diving into the European short-term rental market, now may be an opportune time to capitalize on this upward trend.
If you've been contemplating diversifying your investment portfolio or are on the hunt for avenues promising robust financial returns, the European STR market should undeniably be on your radar. The pressing question remains: which particular country or city in Europe should you target for investment? What unique characteristics do they offer, and which parameters define the vacation rental ROI?
The Renty team delved deep to answer these queries.
Why should one consider channeling their funds into European housing instead of, say, acquiring an apartment in New York City? Beyond the stark price difference that doesn't favor the latter, there are several compelling reasons. Here is a brief overview of Europe's STR market benefits:
Investing in European STRs is not just about revenue; for foreign investors, it offers an avenue to diversify portfolios while potentially tapping into various residency programs. Given the complexities of foreign investment and immigration laws, it is paramount to consult financial and legal experts.
The stability of the Euro make it an appealing choice, shielding investors from currency-related risks, especially those wary of volatile market currencies.
When considering buying European short-term rental property, it's crucial to factor in tourist flow data. It will help in assessing the current and potencial direct income generated by travelers.
In 2022, guests spent a staggering 547 million nights in accommodations booked through one of four platforms – Airbnb, Booking, Expedia Group, and Tripadvisor. For context, this figure stood at 364 million in 2021.
The EU stands out with its robust property rights and a comprehensive legal framework. This provides an added layer of security to foreign investors, ensuring they operate within a stable legal environment.
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There are two pivotal factors that have greatly impacted the trajectory of short-term rentals in Europe.
Firstly, the influence of international tourism cannot be understated. Europe is undeniably the most sought-after tourist destination globally. Recent European statistical data confirms an ever-increasing number of tourists flocking to the region for various reasons, be it business, leisure, or recreational pursuits.
The pandemic brought about a steep decline in international travel, causing a drastic slump in demand. This was acutely felt in countries that largely rely on foreign visitors. Cities typically bustling with international tourists experienced significant drops in demand. However, with the reopening of borders, the tourists were quick to return.
Secondly, regulatory dynamics play a substantial role in the short-term rental market's behavior. Over recent years, there has been a noticeable uptick in the tightening of regulations pertaining to short-term rentals in many European countries, notably in Spain, Italy, Netherlands, and Ireland. These newly minted regulatory measures range from more stringent tax policies and mandatory government registration to specific laws outlining the zones and durations that short-term rentals can function within.
For instance, in Amsterdam, Netherlands, there's a regulation capping the number of nights hosts can offer their homes for rent at just 30 nights annually. Meanwhile, Dublin, Ireland has demarcated rent pressure zones (RPZs) wherein hosts are only permitted to rent their domiciles for 90 days each year. In Florence, there's an outright ban on any new short-term rentals within the city's historic center. Similarly, Venice is on the brink of implementing even more constraining measures.
With each passing year, the rules governing short-term rentals are becoming more rigorous, which compounds the challenges associated with launching new rental properties. These developments underscore the present as a prime window of opportunity, suggesting that those interested should capitalize sooner rather than later.
Secondly, regulatory dynamics play a substantial role in the short-term rental market's behavior. Over recent years, there has been a noticeable uptick in the tightening of regulations pertaining to short-term rentals in many European countries, notably in Spain, Italy, Netherlands, and Ireland. These newly minted regulatory measures range from more stringent tax policies and mandatory government registration to specific laws outlining the zones and durations that short-term rentals can function within.
For instance, in Amsterdam, Netherlands, there's a regulation capping the number of nights hosts can offer their homes for rent at just 30 nights annually. Meanwhile, Dublin, Ireland has demarcated rent pressure zones (RPZs) wherein hosts are only permitted to rent their domiciles for 90 days each year. In Florence, there's an outright ban on any new short-term rentals within the city's historic center. Similarly, Venice is on the brink of implementing even more constraining measures.
With each passing year, the rules governing short-term rentals are becoming more rigorous, which compounds the challenges associated with launching new rental properties. These developments underscore the present as a prime window of opportunity, suggesting that those interested should capitalize sooner rather than later.
Simply having the funds and the desire to purchase a house or apartment in Europe isn't enough. For a "smart investment," a meticulous attention to detail is crucial, along with comprehensive analytics on the real estate markets across different nations.
One of the key metrics to consider will be the ratio between the apartment's cost, the revenue from short-term rentals, and the taxes on the profit.
For example, if you decide to buy an apartment in Budapest. With an average cost of 150,000 euros, the profit tax here is small (compared to other countries) - just 9%. The net yield, after deducting all expenses, is 10.00%. As an antagonist to the Hungarian capital, let's take Geneva. To buy an apartment in this European city, on average, you will need 715,000 euros. Meanwhile, the profit tax amounts to 32.50%, and the net yield rating reaches only 2.20%. This means that Geneva real estate is overly valued, and it's likely you won't make a profit from it.
Mortgages are popular in Europe, yet housing prices remain high for many Europeans. Analysts believe that bank policies, which stimulate the market, continuously drive up real estate prices.
One cannot ignore the impact of the pandemic when many Europeans saw a decline in income during lockdowns, as well as rising mortgage rates and inflation. As a result, there have been cases where someone who took out a mortgage cannot repay it and is forced to divest their property, selling it at a lower price. For the same reason, some real estate markets have seen a significant drop in prices: for instance, for the first time after 10 years of continuous growth, the cost per square meter in Sweden fell by 15%.
Now, let's take a closer look at European cities where you can profit from real estate. In some of them, like Paris and Rome, the tourist influx never ceases, giving these cities the reputation of unspoken leaders. Yet, from a cost and profitability perspective, there are other highly attractive destinations in Europe – for example, Athens.
The first thing to know about Rome is that there are serious issues with public transportation. The metro lines are not widespread, and it's better to avoid buses since they sometimes just don't show up. Therefore, real estate in the historic center or near metro stations is considered to be in a prime location. The average return on apartments reaches 7.5%.
Another important aspect is the layout of the apartments. It's rare to find small studio apartments, which are ideal for short-term rentals. Most Roman apartments are typically around 60 sq. m.
Paris is divided into 20 districts, some of which are affluent while others can be quite dangerous. Real estate in districts 1-8 commands the highest prices. An apartment in the city center can cost around 6 million euros. When looking for more affordable options, areas like the 14th, 15th, and 19th districts should be considered. Here, one can find interesting properties priced between 500-600 thousand euros.
Unlike Rome, the French capital boasts an extensive metro network and a well-functioning bus system. This last point is important for foreign investors since real estate in the suburbs is cheaper. Reaching properties outside the city limits can be done by buses (including nighttime ones) and suburban trains, which are conveniently integrated into the metro system.
The average return in the French capital lags behind Rome at about 6.5%. However, it has extremely high liquidity: the price of residential real estate increases every quarter, with an average growth reaching about 1%.
Athens is a city of promise: The number of tourists has been swelling every year, and the cost per square meter remains one of the lowest in Europe – nearly six times lower than in Paris and almost half that of Rome. Moreover, there's potential for growth: the economic activity is expected to rise by 2.4% in 2023.
One particular advantage of short-term rental properties in Athens is the straightforward registration process, a rarity in Europe where there's often a need for a tourist license, and one of the highest STR market yields in Europe at 11.08%. When considering investment, the old city offers prime options: Anafiotika, Monastiraki, Plaka, Psiri, Thissio. However, availability is limited and prices are remarkably high even by Athens' standards.
With a budget of €250,000, one can secure a property near the sea, but its profitability will be largely season-dependent. Hence, we suggest eyeing the secondary market and districts around Athens' center such as Monastiraki, Pagrati, Plaka, and Psiri. Here, we delve deeper into the intricacies of selecting districts for investment in Athens and highlight some less obvious but compelling options.
Before the pandemic, Hungary's capital drew hundreds of thousands of tourists annually. Now, their numbers are inching back to the pre-pandemic levels. The yield from short-term apartment rentals in Budapest is notably high at 10.8%. When scouting properties for vacation rentals, it's crucial to recognize that Budapest is split into two parts: the hilly side of Buda and the flat terrain of Pest.In Buda, one finds grand old mansions and historic buildings. While they are tourist magnets, they often require additional investment for refurbishment.
Moreover, their upkeep can be quite pricey compared to newer structures.Over in Pest, the landscape is dominated by dense high-rises with sparse greenery. The apartments here are more modern, but the district itself might not be as appealing to travelers. Nevertheless, potential investments abound: the fifth, as well as parts of the sixth and seventh districts of Pest — delineated by the Grand Boulevard — could pique an investor's interest. Among these, the fifth district commands the highest price.
In recent years, over 1,150 international corporations, including titans like Google, Facebook, Twitter, and Intel, have relocated their headquarters to Ireland. This shift is attributable to the favorable business environment, including investment incentives and tax benefits.
Such corporate relocations underscore the burgeoning business travel market and unveil new opportunities for the growth of short-term rentals (STR). Consequently, Dublin has consistently ranked high in property investment expectation lists among European cities for several consecutive years.
The average yield from rental properties reaches around 10%. One promising investment strategy is acquiring multi-apartment buildings composed of mini-apartments. Such properties, especially those in close proximity to tech company offices – in the city center, the "Silicon Docks" area, and the surroundings of the International Financial Services Centre – are particularly enticing.
After studying the real estate situation in your country of interest, don't forget about the following factors:
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