Decoding The Luxury Vacation Rental Asset Class

The luxury vacation rentals (SFL) asset class is a unique real estate investment that merges an elevated in-home experience with high-yield potential, catering to a niche of affluent travellers seeking exceptional and private accommodations.

To clarify, the luxury SFL asset class has come a long way in recent years, evolving into something that’s quite different from its former self.

Historically, a vacation rental was more of a leisure investment, whereby owners purchased a vacation home and rented it out in order to cover some holding costs, with real profit (cash yields) almost never being part of the equation. 

This is no longer true today, and it certainly isn’t the future of the asset class or space. 

Consumer (traveller) behaviour and expectations have grown far beyond being content with ‘renting someone else’s house’, and homeowners (investors) are starting to expect better and more sustainable returns, especially as you move up the segments in the space. 

Ultimately, today the luxury vacation rental is distinct, standing apart from other real estate asset classes and existing in a unique category, all on its own. 

The only problem is that most investors, and by proxy, managers have diluted billions in capital trying to force ill-suited investment structures and growth plans, simply because those strategies have worked well in the past, or in other industries, or for other real estate asset classes.

And so, it’s becoming clear that traditional investment strategies need a rethink.

Traditionally, the entire business model for luxury SFL managers has been based on maximizing their share of transactions as an intermediary, providing services on both sides of the transactions. 

While effective in marketplace tech, this approach falters when scaled in SFL management. And no matter how much investors have tried to force it, it simply doesn’t work like that. 

As portfolios expand within the same value segment and market, or stretches across different ones, the highly conflicting marketing and operating strategies disproportionately inflate costs and strain essential resources, resulting in unavoidable dilution and cannibalization at the asset level. And pivoting to a one-size-fits-all approach only worsens asset-level performance, as we’ve seen time and again.

This then leads to travellers over-spending on mediocre product with artificially inflated prices, while most properties underperform—even operating cash flow negative. Learn More — Navigating a predatory landscape: Adding transparency to the unit economics

Growth plans within these outdated models both inevitably and disproportionately end up scaling losses for the majority of their stakeholders, and — a pattern reflected in high churn rates and real time implosions across the sector, and the defunct status of once-prominent companies.

It should go without saying, but opportunity lies in capitalizing on market failure, not in exacerbating it. 

The data on luxury vacation rentals is riddled with inaccuracies, especially at the micro level.

Shared spaces, studios, and one-bedroom apartments that sleep 2ppl are essentially hotel room derivatives—not true vacation rentals. Whether or not they have a kitchenette, these units function more like hotel suites, skewing market data for our asset class.

These kinds of bookings account for a significant share of all transactions happening in the space, and it’s one of the reasons that many of the larger operators in the segment are pivoting to the more traditional hotel management models.

Yet, macro data from both industry and non-industry aggregators frequently overlooks asset value fluctuations, true ADRs (average daily rate) booked and counterfeit occupancy. And if taken at face value, asset-level TAM (total addressable market) estimates often reflect a highly inflated or disproportionately skewed view.

This is why we conduct all of our own market research, data collection, and regression analyses in-house—ensuring we operate with precise, actionable data. Learn more about this here.

The luxury SFL asset class is a unique niche. And the niche is way smaller than you probably think.

Affluent travellers might account for a disproportionate share of the spending in the broader vacation rental space, but the transaction volume is in the minority.

It’s also group travel. Which means that anything above 4 people is in the single digit percentage points of total bookings across all travel, and the larger the group, the lower the percentage point.

So, when you ignore all the hype, and cut out the noise, you might see that the number of vacation rental transactions (bookings) above $10,000 for a given market and month could represent as low as 1% of the total available dates in its segment.

Ultimately, success in luxury SFL assets demands operational excellence to consistently deliver lifestyle-rich experiences for discerning guests and institutional-level returns for investors.

That’s the advantage we bring—and where others fall short.

READ NEXT: Navigating a predatory landscape: Adding transparency to the unit economics