In this article, we review the profitability of vacation buy-to-lets in the Canary Islands during the 2020’s pandemic. The analysis’s goal is to provide real estate investors with (1) an understanding of the profitability of investing in vacation buy-to-let properties in the Canaries, (2) the winners and losers of 2020, and (3) the ROI expectations for 2021. Before getting into detail, we can confirm that although the general perception might be worse, the year for vacation property investors in the Canaries as a whole has been better than 95% of all vacation rental destinations inside the EU (apart from Greece, and especially Crete). An analysis of the Canaries’ industry results till November points to investors of middle/high-end properties (that are conceived for tourism and are professionally managed) as the only ‘winners’ in the unfortunate times we are living in the industry and for society as a whole. Believe it or not, these properties have achieved average occupancy levels of 80%, and nightly prices averaging €170. These results translate into up to +25 yearly ROI, or +16 cash-on-cash return, on a 10-year plan of a €180 000 property investment. Considering the times we are living in, this is quite impressive!
Quick Introduction to the Local Vacation Property Industry
The property rental for vacation purposes is not such a new practice in tourism destinations like the Canary Islands. This channel has been around since the 80s, but it was mostly rented for seasonal stays. What is newer, or not more than ten years old is a property’s ability to generate a return of +15 yearly ROIs. This became a reality with the introduction of platforms like Airbnb that enabled profitable short stays and high occupancy rates. Other factors that have contributed to achieving these levels of profitability are:
the Canaries year-round warm weather. Unlike Costa del Sol, south of France, Italy, and Greece, year-round warm weather translates into a steady and consistent demand for vacation rental properties throughout the year.
the extra supply of tourists coming from the shift of traditional accommodation to property vacation rentals during the last decade. This is related to the local legislation that resulted in the decrease of traditional accommodations (like hotels and apartment beds), and the extremely low amount of new construction licenses since 2008’s real estate bubble burst.
and the extra demand coming from the growth of the Canaries’ tourism industry as a whole. Note that in 2019 the Canaries became Spain’s number one tourist destination with 15 million visitors. Also that Spain is the 2nd most visited tourist destination in the world.
2020 in Review
This analysis is supported by two different data sets. The first is the data available through local public entities or associations shared directly on their sites or distributed through local media. The second data set comes from AirDNA.com, a service provider of data and insight into the vacation rental industry. The aim is to get an accurate understanding of the impact of the pandemic on tourism as a whole, for vacation rentals in particular, and to the different segments within this particular industry.
The end of 2019 saw record numbers of visitors and occupancy rates for the Canary Islands’ tourism industry as a whole. Although always in the top three, the Canaries became Spain’s top destination for the very first time in history. Although a slowdown in the numbers of tourists arriving in the islands is noticeable in the data already during the end of March, the first quarter ended with great results for traditional accommodations, and for Airbnb type of rentals.
As travel restrictions started being imposed all over the EU and tour operators started canceling destinations, most traditional accommodations in the islands started closing up and remained like that for the rest of the year. That result has been crucial for the local vacation rental industry, as it was able to capitalize on a shrunk supply of foreign tourists that still demanded accommodation for their vacation in the islands. Also, it benefitted from national and regional tourists, who could mostly only find accommodation through Airbnb type of properties. These changes in the competitive landscape managed to limit the negative effects of pandemic-related travel bans. This is evident when comparing yearly average occupancy rates where the industry as a whole. By November, the industry yearly results were down 60%, compared to the 30% decrease in the vacation rentals.
Looking at data from Airbnb, Booking, etc, analyzed by AirDNA.com in San Bartolome de Tirajana (one of the top three tourism areas in the Canaries), occupancy and daily prices for all vacation rentals till the start of November was on average for all types of accommodations just 30% down. This percentage must be analyzed thoroughly, as it embeds two very different realities. On one hand, we have the 75th percentile or middle/high-end properties that are conceived for tourism and are professionally managed. These properties have been the favorite for holiday-makers wanting to limit the risk of infection (by staying away from crowds) while keeping up the amount of entertainment and pleasure (through in-house facilities and amenities as private swimming-pool, Netflix subscriptions, gaming consoles, etc). This translated into maintaining 2019 occupancy levels of 80% and an average nightly price of +€170. We call this segment the ‘winners’, as miraculously they have been able to achieve very similar results than in 2019.
On the other hand, we have all the 25th and most of the 50th percentile of rental properties, which mostly compete on price and do not provide environments that felt safe or enjoyable enough to the tourists visiting the islands through the second part of 2020. We call these the ‘losers’ for this reason and also because it has resulted in 20% of all vacation rental properties moving into long-term rentals as a way to safeguard their finances.
2021 Expectations
A Gradual Return to Normality
In summary, the expectation for the new year that just started is a gradual return to normality mostly fueled by the vaccination campaigns to take control of the spread of the disease. Like in previous times of turmoil, the Canaries will benefit from its EU status and be one of the first choices for European tourists, compared to traveling to other riskier destinations outside of the EU. The local government, tour operators, and experts estimate a return to the 15 million tourist level by the start of 2022.
During this first quarter, it is expected for vacation rentals to keep on benefitting from the lockdown of the traditional accommodations. On that ground, again the 75th percentile is expected to maintain a high level of occupancy and average night price, while the 50th will struggle, and the 25th would risk disappearing.
Opportunities for New Investors
Unfortunately for them, these ‘losers’ or those properties that only really compete on price will continue to struggle with many trying to move to long-term rentals or eventually having to put the property on sale. These properties represent a great opportunity for new investors, as these are high-return properties are limited, and there are no new developments in risk-free locations that could increase the supply.
Furthermore, there is already a 10% reduction in sale prices across the board, which opens the possibility for 15% to 20% discounts after negotiations. The best opportunities in the market will need some renovation, to create the extra value for tourism purposes that enables higher daily rates. The faster new investors move in the market, the better prices they are going to find and the more profitability they will achieve as the market continues to recover.
Take-Away: The Canaries are a top location for investing in high-return vacation rental properties.
If you are a vacation buy-to-let investor that likes to enjoy high returns with low risk, your portfolio risk management will benefit from investing in properties in the Canaries. Even in the worst times of recreational travel that can be remembered in recent history, investors of high-return vacation rental properties in the Canaries are not only not losing but maintaining record returns and there are only signs of improvement for 2021. If there was ever a doubt of the health of the Canaries vacation rental market, and how competitive it is to other tourist destinations for real estate investments, that should be clear now.
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Are you considering investing in a high-return foreign property? Contact us to understand what are the benefits of doing it in the Canary Islands compared to other locations.
Want to read a current overview of the Canary Islands market? Check out our 2021 update. Go to post!
Or would you like to start reading about sound financial reasons why? Here are the top 7 benefits of investing in a holiday home for vacation rentals in the Canary Islands. Go to post!
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