Digitalization of the long-term rental real estate market

Main article: Real estate (Russian market)

State Information System on Rental Housing

Main article: Project:Ministry of Construction (state information system - digital platform for hired housing)

2019: How to digitize the trillion-dollar long-term rental market

In early December 2019, it became known that Airbnb, the leader in the short-term rental market, took part in round B investments in Zeus Living, a company specializing in long-term rental of housing for corporate workers^[1]. In this round, Zeus Living attracted $55 million in investments. At the same time, the company has 2,000 objects in management, and revenue reached $100 million.

Airbnb's exit to the adjacent segment seems completely logical. However, why does the world leader in the short-term rental market enter the long-term rental market only now - after more than 10 years of existence?

In fact, Airbnb began to look at the related market a few years ago. Back in 2011, it became possible to rent housing every month up to 6 months^[2], but this option did not receive serious promotion. In 2017, the company had talk about entering the long-term rental market, for which even a study was ordered in the ^[3] Market McKinsey]. However, a real exit followed, instead AirBnb intensified in the development of related segments of the tourist market:^[4] boutique hotel booking service^[5], luxury offers for vacations, organization of corporate retreats, tourist services from local residents^[6], etc. the company continued to focus on short-term customer interactions.

Airbnb's entry into Zeus Living capital reflects two key points characterizing the long-term rental market:

• the market is promising - the investment in Zeus, as many analysts note, was made on the eve of the expected release of Airbnb at the IPO in 2020 in order to demonstrate plans to develop new large-scale markets and increase capitalization;
• the market is complex - it is noteworthy that Airbnb decided not to independently develop a new business direction, but to attract competencies from the market.

Thus, the not too noticeable case for Airbnb investments in Zeus Living raises several questions at once about the digitalization of the long-term rental market:

• what does the market attract digital companies?
• why is the market not yet digitized?
• What business models can change the state of affairs?

How does the long-term rental market attract digital companies?

Scale

The long-term rental market is an order of magnitude larger than the short-term rental market. Its direct estimates for a wide range of countries could not be found, but even approximate indirect estimates show the volume of the world market in more than a trillion dollars. For comparison, Airbnb's revenue estimate in 2019 is at $5 billion.

Table 1 - Assessment of the long-term rental market in 2018

Growth potential

The long-term rental market is expected to grow significantly in the coming years. This is influenced both by changes in public preferences for use, rather than ownership (sharing-economy), and by an increase in population mobility.

So, in the US housing market over the past 15 years, the share of homeownership rate owners has decreased from 69% to 64%^[11]. And not the last role in changing preferences is played by technology, forming a new positive customer experience.

In Russia, rental housing is still far behind in terms of attractiveness from ownership - only 10-15% of households rent housing, compared with 54% in Germany and 35% in the United States. However, even such a share of renters forms a market of more than 1 trillion rubles. And growth prospects are also high - according to estimates Дом.рф "millions of Russians are ready to rent real estate on a long-term basis if this market is civilized, and the process itself is transparent."^[12].

Why is the market still not digitized?

The long-term rental market in terms of the business model is much more complex than the short-term rental market.

Airbnb's main business model is fees for a convenient platform for finding short-term housing and making a safe payment. This business model is easy to implement and geographically scale to digital companies.

For long-term rental, taking into account a much smaller number of transactions for 1 apartment, such a monetization scheme is less attractive. Additional revenues for long-term rental platforms can be brought by various online and offline services (apartment display, tenant check, insurance, cleaning, repair, etc.). However, such services require much more immersion in physical processes. There is a need to build the so-called "phygital" platforms, combining both advanced digital solutions and high-level physical services with partners in the field. This, in turn, significantly slows down the geographical expansion of such business models.

Due to the greater complexity of business models and the need to build phygital platforms tied to local features, the digitalization of the long-term rental market is significantly behind the digitalization of short-term rental. According to Cometrics experts, modern technology companies that create digital platforms for long-term rental of real estate began to enter the market en masse only in the last 3-5 years. Examples of such companies include 2nd Address, HousingAnywhere, Onerent, QuintoAndar, Blueground, Zeus, ZiRoom, etc. At the same time, there is no clear leader in the market, like Airbnb in the short-term rental segment.

In Russia, given the lack of a civilized market and the high sensitivity of tenants to price parameters, there is a shortage of technological startups in the long-term rental market. large players are currently targeting the long-term rental market: PIK-Rent and Rent Дом.рф (together with Cometrica).

What business models can change the current state of affairs?

You can trace a certain evolution of business models in the long-term rental market: from a simple information service to the supply of additional offline services and further to full-fledged housing management and even colivation (Table 2).

Given the fact that even Airbnb did not fully develop the Online Intermediary business model, it seems that the future in the long-term rental market is beyond the Offline Support and Housing Management phygital models. The option of the Coliving business model seems interesting, but in the longer term, when young people will be massively ready to live in, in fact, hostels of a new type.

Offline Support and Housing Management business models can significantly affect the development of the long-term rental market. Important is the issue of scaling, firstly, to reduce the cost of such phygital platforms, and secondly, to change the attitude of society to living in rented housing - a positive and massive customer experience in the housing market can become a strong driver for the development of the sharing economy as a whole.

So far, leading technology startups in developed countries cover only a few thousand facilities. The target audience for such startups is employees of companies (both SMEs and large corporations). Perhaps the most large-scale player at the moment is the Chinese ZiRoom with 500 thousand objects served.

In Russia, prospects for substantial scaling of phygital platforms in the long-term rental market may be associated with a partnership between technology companies responsible for the digital component and companies operating in the housing market responsible for the physical component. Large developers can become partner companies from the housing market (for example: PIK-Rent), management companies, real estate agencies with a developed regional network, etc.

Table 2 - Overview of Long Term Rental Business Models

Authors:

• Kotlyarova Daria
• Frolov Alexander

Notes