Hostmaker: a one-off or a property management domino effect?

UK: Last week’s news which saw property management company Hostmaker enter administration has left the rest of the short-term rental industry reeling over the short- and long-term impacts on the global market.

The company’s demise was almost inevitable as soon as a report emerged in The Sunday Times a fortnight ago that its parent company, Flying Jamon Ltd, had filed a notice of intention to appoint administrators. A statement by the appointed administrators, RSM UK, revealed that Hostmaker had “suffered from severe cashflow issues at the start of this year”, leading to 112 redundancies in London and Houst [formerly Airsorted] acquiring equity in the firm’s overseas subsidiaries and some domestic assets and contracts.

That, along with the panic generated by the global spread of the coronavirus, has only heightened concerns that Hostmaker will not be the only property management company to fall and that it could indeed lead to a chain reaction.

The wider consensus appears to suggest the company was a victim of the short-term rental industry’s rapid evolution over recent years, and the fact that companies such as Lyric and OYO have recently announced significant job cuts serve as a warning to those seeking to expand at breakneck speed.

Founded by husband and wife pair Nakul and Deepti Sharma in 2014, Hostmaker went on to raise $29.3 million in two separate funding rounds. Its investors included Thai property developer Sansiri, Hong Kong real estate investor Gaw Capital Partners and Silicon Valley Bank.

The investment allowed the startup to expand its operations beyond its London base into France, Spain, Italy, Portugal and Thailand, as well as Dubai most recently last year.

However, this was offset by spiralling losses, illustrated in Hostmaker’s [Flying Jamon Ltd] most recent set of accounts in 2018, which saw the company make a pre-tax loss of $18.4 million [£14.3 million]. This represented a 159 per cent rise on the previous year, despite revenue rising during the same period by 141 per cent to $15.5 million [£12.1 million].

Such numbers beg the question why last week’s events took a dramatic turn for the worse.

Hostmaker’s struggles in the latter years have been well documented ever since Marriott International took the company on board for a home-sharing pilot in 2018, in which it was tasked with identifying and managing a portfolio of homes for Marriott, based on design, functionality and location. Unfortunately for Hostmaker, it was dropped from the collaboration as Marriott expanded its Homes & Villas Collection in April 2019.

After that, the firm was the subject of a BBC Inside Out investigation, in which undercover filming recorded Hostmaker employees encouraging landlords to keep properties on their site and to “feign ignorance” of the law if they were found to be breaking it.

Yet one likely factor behind Hostmaker’s downfall was heavy marketing expenditure, notably when it was forced to pull company adverts from Lomdon’s TfL [Transport for London] network for appearing to encourage buy-to-let landlords to convert their properties into more lucrative short-term lets, rather than cater for long-term rental tenants.

Attention now turns to the rest of the industry to ensure that Hostmaker’s fall is not the precursor to greater problems in the segment.

Skift senior research analyst Wouter Geerts alluded to an “extremely fragmented” short-term rental sector in the newly-published Travel Megatrends Report 2020. With millions of independent hosts, on top of 100,000+ property managers and thousands of business-to-business vendors, management companies are having to broaden their horizons to provide more unique alternative accommodations and find new points of differentiation to their business model.

While the rental industry continues to mature, driving up competition, channel manager Rentals United says property managers will becoming increasingly driven to improve their use of technology as external pressures mount.

Speaking in the Global Short-Term Rental Tech Report 2020: Stats, Trends and Investment, CEO James Burrows made reference to Airbnb premium management company GuestReady as one example of a property manager building its own tech and PMS capabilities to sell to other property managers while using external channel management for its own services.

By automating more tasks including operations, marketing and revenue management, more large property managers will be targeted by VC-backed third-party providers to solve their needs and boost tech innovation within the industry, according to Burrows.

Lavanda is another pertinent case study as an SaaS [software as a service] platform that is white labelling its technology and, in its own words, is aiming to “power the convergence of residential real estate, hospitality and travel”.

ALTIDO is one of the newest property management companies on the block after four separate companies brought their businesses together last May: they were UK-based BnbBuddy and The London Residents Club, Hintown in Italy and RentExperience in Portugal.

More mergers and acquisitions [M&A] are expected in 2020, a move pre-empted by AJL Consulting co-founder and CEO, Simon Lehmann, in ShortTermRentalz’ 2020 predictions piece, which would leave a select number of players to assert their dominance in the space.

Both Lehmann and Merilee Karr, chair of the UK Short-Term Accommodation Association [UK STAA], concur that smaller property management companies with 10-100 properties will look for partners to give them more power in the market over the next 12 months. This will allow them to compete in a crowded marketplace as larger companies armed with better technology grow to dominate.

That being said, it is dangerous for consumer-facing hospitality brands to build up by pure acquisition at speed, especially in light of the failed WeWork and Uber IPOs, and it remains to be seen how it will pan out.

Lehmann highlighted Hostmaker’s focus on multiple markets, as well as its expensive marketing strategy, as key reasons for its insolvency.

He said: “We have seen it coming in terms of the way they’ve invested in marketing and trying to scale their business. It’s boom and bust – the fact that it’s very difficult to scale an urban business across several different jurisdictions, just by being so progressive on the market.

“If you can prove the business model in one market, it doesn’t necessarily mean you can do it in another. You need to understand the particularities of each market because each market works differently in terms of relationship with owners, product, service providers etc. and that was a challenge for Hostmaker.

“When they started to lay off management team, it was seen that operations costs had to be reduced. Maybe they were trying to do too many things at once, but regardless of that, the urban business is different to the leisure side in sales and marketing, and this industry is hyper-local.

“You need to recognise that you need to have the right people in the right places in order to bring the value and have the right unit economics. I think it was a very challenging endeavour with a lot of expectations and being heavily VC-backed with different strategies that they weren’t aligned definitely didn’t make the situation easier,” he added.

AirDNA chief revenue officer Tom Caton suggested Hostmaker’s failure to secure a new funding round was a major factor in the company’s insolvency.

He said: “They always had a big focus on quality and data which should have borne them well. It had been on the cards when they had been waiting for funding for six to eight months, which is difficult when you’re growing so fast and spending an ungodly amount on expansion.

“They signed this great deal with Marriott but then the TV investigation took them by shock. They were just moving towards offering short-term and mid-term rentals on a three-month lease and making the most of the sweet summer months.

“It also addresses the question of can you make the right economies of scale as a large company to outfence the smaller operators who know their business well?” he added.

Hedi Zidan, founder and CEO of UK-based proptech lettings agent Nestify, said the collapse of Hostmaker is symptomatic of wider issues facing the short-term rental industry and overall property market currently.

“The demise of Hostmaker demonstrates the challenges the short-term letting industry, and wider property market is facing.

“Although the property market has rebounded in recent months, unprecedented long-term uncertainty has not come without impact. Ultimately, short-term lets are vital to landlords, particularly those who need greater flexibility for their circumstances, and those who will be affected by the restriction of mortgage interest relief to the basic rate of income tax coming in from April, which could put a significant dent in their profits.

“Landlords need options tailored to them, and offering a mix of short-, mid- and long-term lets provides exactly this. We have a number of property specialists at Nestify to guide landlords through their options, depending on their circumstances and the market situation,” he added.

In addition, the STAA has moved swiftly to offer reassurances to hosts who were Hostmaker customers that they will be supported by the industry.

Merilee Karr said: “It is always sad when a company falls into financial difficulties but it is one of the traits of a fastly, evolving and growing sector. My sympathies go out to all the Hostmaker staff and their customers that have been affected by this news.

“We are pleased that the industry has acted quickly so that homeowners who were customers of Hostmaker have been migrated to one of our member companies, Houst, to ensure, in most instances, the services they signed up for will continue to be delivered.

“Our absolute focus is on seamlessly transferring service and ensuring that you’re earning again as soon as possible. We know how important this is.

“The short stay sector has been one of the most innovative and fast-growing in the UK and is forecast to grow at 30 per cent a year globally in the next few years, according to PWC.

“In any new sector, the market will gradually consolidate as some companies merge, sell or exit. Our goal, as an industry body, is to ensure that homeowners, guests and companies all work together for the responsible growth of the sector and we will support our members and Hostmaker’s customers to resolve this unfortunate situation.

“It’s crucial that as the industry matures homeowners, guests and everyone else that works in it continues to have confidence in its sustainable growth. All of our member companies who are committed to that vision are listed on our website and I would recommend that if hosts and guests are looking for companies to work with in this sector, this should be their first port of call,” she added.

While the industry unites to seek a way forward in the face of mounting external pressures, Hostmaker’s downfall will inevitably cause a detrimental effect on the short-term rental industry. At the same time, it should serve as a warning that companies will have to adapt their models to operate in a more sustainable way or face a damaging domino effect.

Lehmann said: “It is sad and it will show a ripple effect, particularly on the urban business. Maybe they [Hostmaker] should have focused on just expanding in their core market while the investment market was big enough, and then start to venture out in many different cities.

“Was the concept proven? Probably not,” he added.

Speaking on the coronavirus, AirDNA’s Caton suggested that Hostmaker’s demise had predated the illness – “its goose was cooked long before” – but predicted that it would be “rough” for the fundraisers this year as a result of both sets of circumstances.

He said: “I think they were of the mindset in 2016 that it would be a “winner takes all” market but since then, the market has changed its mind and smaller operators have stayed robust. They have just continued to make money in a less exciting way.

“Operators will need to know how they can judge how well they are doing. Everything in a listing has to be on point and you have to ensure you optimise as much as possible.

“More investors will be asking companies how they are different to Hostmaker, particularly in terms of unit economics.

“The world is changed for good in short-term rentals: all of a sudden, you could bank on a growing economy and increasing travel numbers and units. Even if you’re profitable now, 20 or 30 per cent of business is down from last year for much of the industry and this will lead to a crisis of profitability,” he added.

The fallout of Hostmaker’s collapse into administration, coupled with the impact of the coronavirus outbreak, is difficult to estimate in what are almost unprecedented circumstances.

Companies that have a pipeline of extended stay bookings, such as AltoVita and Nestor Stay, are more likely to experience less short-term pain during the coronavirus crisis than hotels, for example, which thrive on single night bookings.

However, what is certain is that while the warnings are stark, property management companies will be challenged to prove their differentiation and profitability more so than ever before this year to avoid a serious knock-on effect for the industry as a whole.