LUXURY VACATION RENTAL OUTLOOK 2023

2022 was a re-correction year, with a swift deceleration in the number of transactions, with pricing resets, and homes spending a little longer on the market.

The exponential growth and profits investors and managers enjoyed post-pandemic 2021- 2022 have fallen back to earth and are indeed normalizing.

However, a true buyer’s market is unlikely, with increased construction costs and the growing popularity of luxury vacation rentals as an alternative asset class for private and institutional investors alike.

Demand and prices to purchase luxury vacation homes in top leisure destinations are to remain high.

As the popularity for luxury real vacation rentals as investment vehicles continues to grow, the demand for luxury vacation homes is projected to remain high.

Although transactions have significantly cooled from the frenzied market of 2021, they are projected to remain stable through 2023.

A significant share of luxury vacation homes are purchased without leverage, especially those located in leisure markets with an exceptional high density of HNWIs and HNWIs. As a result, luxury vacation home sellers are mostly unaffected by the shifts in capital markets that may drive other market segments.

Combined with a relatively strong and stable rental demand from affluent travellers, luxury vacation home sellers in high demand markets can more easily hold onto higher prices, as holding costs are covered almost effortlessly.

The ripple effects of the construction slowdown is likely to be felt in the luxury vacation rental market for years to come.

As we already know, in periods of economic distress, the luxury market is not affected in the same way as the general market. Rapid inflation does not greatly affect the purchasing power of HNWIs or UNWIs, instead, it is the social stigma behind making large purchases when the general population cannot.

However, rapid inflation has real estate capital markets constricted. And reduced supplies have shocked the material supply chain, forcing increased costs of construction materials and luxury appliances, forcing greatly extended delivery timelines, all of which is delaying and slowing down the growth of inventory.

Growth may cool in the short-term, but this is a long-term game.

A “crash” in the luxury segment of real estate is unlikely, but not impossible.

All of the warning signs are there, including the already steep declines seen in markets all over the world.

However, popular luxury vacation destinations are uniquely protected and less likely to see as large of a decline in comparison to mostly residential markets.

And although ‘flips’ may have been more prevalent during the recent bull market frenzy, the luxury vacation rental game has always been a long-term play, with compounding operating profits as a core facet of the investment strategy.

There will always be opportunities for investors, but a true buyer’s market is unlikely.

Luxury home buyers may have started to back away, but investors with deep pockets and cash to disburse are ready and willing to invest in the right deals.

Great deals are likely to be rare this upcoming year, but not out of the question, and competition to acquire them is likely to be fierce as well.

Occupancy rates and booking revenues for market leaders will be mostly unaffected.

The majority of luxury vacation rentals are likely to see a significant decrease in occupancy throughout 2023, resulting in a negative y-o-y for most markets and operators.

Many operators will continue to increase nightly rates, whether it’s under pressure to counteract this decline, or from an overestimation of previous market momentum, but this will only create opportunity for market leaders.

As we know, the luxury vacation rental market is a zero sum game.

And the right assets strongly positioned will still have plenty of opportunity to generate another growth year with the right management strategy.

From careful market analysis, VRP focuses its investment strategy on 8 unique markets, which offer exceptional revenue potential and diversification for capital investment.

Each market is uniquely positioned at the international level, especially with respect to their demand in both the short-term rental and international sales markets.

Investors can expect on each market to produce consistent cash flow throughout the year with unique seasonal peaks that produce exceptionally high ADR multiples. Also, investors can further capitalize on the potential to compound longterm revenue and value with cross-market investments that offer complimentary vacation experiences.

These markets have also proven to be exceptionally resilient in periods of economic distress, showing rare hedging ability.

For instance, during the recent COVID-19 Pandemic, rental demand was only minimally affected (or not at all) and fully recovered extremely fast, while market sales prices soared. And during the same time period, prices per square foot on sales soared to double digits.

In addition to the above, each market shares the following rare merits, optimal for maximizing operating margins and generating outsized investment returns: