Top 10 reasons why one should evaluate an investment in vacation rental homes (Holiday homes)

Vacation rental home is a secondary dwelling in the form of villa or apartment, situated in a different location other than the primary residence which is used mainly for recreational purposes including vacations or holidays.

Vacation rental homes (Holiday Homes) have evolved from being a mere lifestyle product to an investment product. Holiday homes have become an increasingly important product type both from the perspective of housing and tourism. Post pandemic, vacation rental homes have gained prominence as an alternative to hotels and resorts on account of the privacy, safety and hygiene as compared to a hotel or resort. Further, the flexibility to work-from-home (anywhere) has fueled the demand for both owning and renting a holiday home.

Factors fueling the demand of vacation rental homes:

1. Improved Connectivity

Better road and air infrastructure has enhanced the connectivity of major tier I and II cities to many tourist destinations of India.

• Road Infrastructure: The road infrastructure in India has significantly improved in the past two decades. Completion of Golden Quadrilateral project (connecting four metro cities) and construction of the East – West – North – South Corridor has improved connectivity of major cities of India. Recently inaugurated Bengaluru – Mysore Highway and NHs connecting various locations of Himachal Pradesh and Uttarakhand are likely to improve the road connectivity of tier I cities to tourist destinations.
• Airport Infrastructure:
  • Since UdeDeshkaAamNagrik (UDAN) scheme conceptualized in 2016, the count of functional airports has jumped from 74 to 141.
  • As of February 2023, the total number of operational airports in India are 158 (including 35 international airports) which has grown from 111 operational airports in the year 2016.
  • Nearly 10 airports are under development and expansion across various cities of India as of February 2023.
  • 220 destinations (airports, heliports, water aerodromes) under UDAN are targeted to be completed by 2026 with 1,000 routes to provide air connectivity to unconnected destinations in the country.
    (Source: Airport Authority of India)

2. Growth in domestic tourism

The COVID-19 outbreak resulted in huge disruption in tourism, in the country as well as across the world. According to Bureau of Immigration, Government of India, NRI arrivals have registered 52.6% growth in 2021 over 2020. The International Tourist Arrivals in India has registered annual growth of 10.6% in 2021 over 2020, respectively.

The number of domestic tourists making trips to various states and union territories of India has grown from 1,200 million in 2014 to 2,300 million in 2019; indicating a Compounded Annual Growth Rate (CAGR) of 12% . The year 2021 witnessed a growth of 11.05% in domestic tourist visits over the year 2020.

Domestic travel revenue in the year 2019 was estimated at USD 215.38 billion and is pegged at USD 405.8 billion by the year 2028.
(Source: Ministry of Tourism)

3. Change in the behavior and growing Target Audience

Post pandemic, vacation rental homes have gained prominence as an alternative to hotels and resorts on account of the privacy, safety and hygiene as compared to a hotel or resort.

Further, the flexibility to work-from-home [anywhere] has fueled the demand for renting a second or a holiday home as compared to a hotel property. Tourists are evaluating self – sufficient properties with high-speed internet connectivity at secluded, picturesque leisure destinations.

As of September 2022, the total number of HNIs and UHNIs is estimated to be over 800,000 Households (HH). These HH have a net worth more than INR 7 CR and have registered a growth in the range of 11% - 13.9% since 2013. Currently, India contributes 8 per cent of the total global billionaire (net worth of 1 billion dollars) population compared to 4.9 per cent five years ago.

4. Enhanced Affordability

Today, many developers offer an option of fractional ownership – wherein a property can be owned by multiple owners. Fractional ownership results in a reduction of the ticket size allowing even the upper middle class to evaluate this product type.

Though property costs have been rising over a period, so is affordability due to rising incomes and lower home loan interest rates.

5. Availability of organized developers and operators

The vacation rental home market has witnessed entry of multiple organized developers – Isprava, DLF, Mahindra Lifestyle, Sun Estates, and Tata Group to name a few. A vacation rental home today is a semi furnished to fully furnished product and may include even whitegoods and soft furnishings.

Further, with many international and national vacation rental companies entering space, the holiday home market has evolved as an attractive investment option. Airbnb, StayVista, Lohono Stays, and SaffronStays have steadily expanded their listings.

6. Professional Property Management

A vacation rental home today is fully serviced residences wherein operators offer professional property management and housekeeping services – statutory dues, housekeeping services, concierge services, and assist in renting the property (on short term basis).

With many hospitality chains evaluating to enter the market, the service offered is likely to improve further.

7. Capital Value Appreciation and Rental Yield

Holiday home projects across key locations (7 regions namely Goa, Alibaug, Lonavala, Shimla – Kasauli, Rishikesh – Dehradun, Ooty – Coonoor and Malnad belt are among the preferred regions for vacation homes) of India have witnessed a capital value appreciation in the range of 5% - 7%.

Annual rental yield in matured locations range between 4.9% - 5.5% while in emerging locations it ranges between 9% - 11.5%

The rental yield for a vacation home is at par with the rental yield of residential [3.5% - 4.25%] and commercial (office) spaces [7.5% - 9%].

8. Increased Transparency

The introduction of Real Estate Regulatory Act (RERA) in the year 2016 has normalized a few regulations related to the uncertainties in the real estate industry. A project approved by RERA will essentially have all the necessary statutory approvals as well as assures provision of funds to complete the construction of the project.

9. Availability of Finance

A vacation rental home project with necessary residential approvals is eligible for home loans, while finance for a holiday home or second home project with farmhouse or plantation approval can be raised by mortgaging a residential or a commercial property through Loan Against Property (LAP).

10. Locations

Travel restrictions on account of COVID-19 have led to substantial growth in domestic tourism. Property owners and tourists are evaluating self – sufficient properties at secluded, picturesque leisure destinations. Hill stations and beach locations have witnessed significant tourist footfalls in the year 2022-23. The beach locations of Goa and Alibaug and the hills stations of Shimla, Kasauli, Rishikesh, and Lonavala are amongst the key locations preferred by developers, operators, and investors for a vacation home product. Locations of Ooty, Coorg, Wayanad, Matheran, Mahabaleshwar and Igatpuri are also witnessing increased developments in this space.

Conclusion

Vacation rental homes or holiday homes have a huge potential in a country like India which is a home to significant HNIs and UHNIs. With operators also offering fractional sale model, the product is becoming accessible to a larger target audience. Vacation rental home as a product has evolved from being just a lifestyle product to an investment product. The entry of organized operators in this space has led to product differentiation, improved operations, and the ease to rent out the property on short term rent.

Read our detailed report on Handbook for Vacation Homes and Holiday Homes Business in India