Cape Town’s Airbnb by-law could change more than rates

When investors purchase a property, one of the first questions they ask is simple: What return can I expect? In Cape Town, short-term letting has become an attractive investment strategy, with the potential for higher rental income than traditional long-term leases, particularly in sought-after tourist destinations.

But what happens when the cost of operating that investment changes?

Cape Town’s proposed short-term letting by-law has understandably sparked discussion about Airbnb, tourism and housing affordability.

Yet I believe one of its most significant potential consequences has received considerably less attention: the impact on property investment returns, buyer demand and ultimately the prices investors are prepared to pay.

Having spent approximately seven years working in Cape Town’s Deep South property market, including founding and operating my own short-term rental business, South Seas Properties, before moving into residential sales with Sotheby’s International Realty, False Bay, I’ve seen how closely property ownership decisions are tied to income expectations.

And I’ve learned that even relatively small changes to a property’s operating costs can influence much bigger financial decisions.

When rental returns change, investment decisions change

Under Cape Town’s proposed framework, short-term letting properties would be subject to registration requirements, while properties available for short-term accommodation for more than 50% of their annual room-night capacity would fall into the commercial accommodation municipal rates category.

The intention is to improve transparency, compliance and fairness between different accommodation operators.

There is a reasonable argument for this. Hotels and established guesthouses have long operated with commercial obligations, and properties functioning predominantly as accommodation businesses should be assessed consistently.

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But from an investment perspective, the implications go beyond the municipal rates bill.

A property’s value to an income-focused investor is influenced by the net return it can generate after operating expenses.

Consider a hypothetical property generating R180 000 annually in net operating income. If its annual municipal rates increased by R30 000, that would reduce net operating income by approximately 17%, assuming revenue and other costs remained unchanged.

For an investor targeting a particular yield, that reduction could materially change the price they are willing to pay.

This does not mean the property’s market value would automatically fall by the same percentage. Residential values are influenced by many factors, including owner-occupier demand, location, financing conditions and comparable sales.

But it illustrates an important point: when investment income changes, investment valuations can change too. And when enough buyers reassess their numbers, the effects may eventually become visible in the sales market.

Will short-term rental owners start selling?

Possibly. But I don’t expect one uniform response. During my years working in short-term accommodation, I’ve come to appreciate just how different property owners’ motivations can be.

Some depend on rental income to help cover ownership costs. Others have purchased specifically for investment returns. Some want the flexibility of using their property themselves while generating income during periods when it would otherwise stand empty.

For profitable operators, additional rates may simply become another cost of doing business.

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Others may attempt to recover those costs through higher nightly rates, although competition, seasonality and guest demand will determine whether that is achievable.

Some owners may decide that the income no longer justifies the management, maintenance, cleaning, vacancies and unpredictability that come with short-term letting.

And for those already considering selling, higher operating costs could influence the timing of that decision.

If enough owners in a particular development or neighbourhood reach similar conclusions, we could see additional properties entering the sales market.

That could create opportunities for buyers.

But it would be premature to predict widespread price reductions. Cape Town’s residential market is diverse, and the demand for a family home in Kommetjie is very different from the demand for an investment apartment in Sea Point.

The impact is likely to be concentrated in property segments where short-term rental income has played a significant role in purchasing decisions.

Could long-term rental supply increase?

One of the arguments in favour of tighter short-term letting regulation is that it could encourage owners to return properties to the long-term rental market.

That is certainly possible, and greater rental supply could improve choice for tenants. But we should be careful not to confuse additional rental availability with improved affordability.

A luxury holiday villa in Noordhoek will not necessarily become an affordable family rental simply because its owner decides to stop accommodating tourists.

Similarly, an investor who purchased an apartment at a price justified by strong short-term letting projections may find that conventional rental income produces a much lower return.

They may accept that lower return, particularly if it comes with greater stability and reduced management demands.

Or they may choose to sell.

There is also the question of whether the property is suitable for long-term occupation and whether the owner wants to give up the flexibility of personal use.

The reality is that not every property leaving the short-term letting market will become a permanent rental, and not every permanent rental will meet the affordability needs of local residents.

Cape Town’s housing challenges involve far more than the availability of Airbnb properties.

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Infrastructure, development costs, land availability, planning processes and the supply of appropriately priced housing all play a role.

Regulating short-term accommodation may form part of a broader housing strategy, but it should not be mistaken for a complete solution.

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What does this mean for buyers and sellers?

For buyers considering a property primarily for short-term rental income, I believe this is a reminder of the importance of proper financial due diligence.

Projected nightly rates and occupancy levels are only part of the calculation.

Municipal charges, levies, insurance, management fees, cleaning, maintenance, vacancy periods, compliance costs and changing regulations all affect the actual return.

An attractive gross rental projection does not necessarily translate into an attractive net investment yield. For sellers, particularly those marketing properties on their holiday-let potential, income claims may face greater scrutiny.

Buyers could increasingly ask for verified income histories, detailed operating expenses and clarity on the property’s regulatory position.

And estate agents have a responsibility to ensure that investment projections are realistic rather than simply presenting the most optimistic potential returns.

Having worked on both the short-term rental and residential sales sides of the industry, I believe this is an area where property professionals can provide considerably more value through education and transparency.

Could developers rethink their investment strategies?

Another question worth considering is how regulation might influence future residential developments. Some Cape Town developments have attracted buyers partly because of their short-term letting potential.

If investors begin placing greater emphasis on regulatory costs, stable long-term rental income or owner-occupier demand, developers may need to reconsider how they position new projects.

That could influence unit sizes, amenities, pricing strategies and the types of buyers developments are designed to attract.

Of course, the strength of Cape Town’s tourism market may mean short-term accommodation remains attractive in many locations despite higher operating costs.

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The point is not that the investment model will disappear. It is that the assumptions supporting certain investment decisions may need to change.

What can Cape Town learn from international markets? Cities around the world have faced similar challenges in balancing tourism accommodation with the housing needs of permanent residents.

Different jurisdictions have introduced registration systems, restrictions on short-term letting activity and various forms of licensing or taxation.

The results have not been uniform.

Regulation can improve transparency and create more consistent operating conditions, but its effect on rental affordability and property values depends on the design of the rules, enforcement and the characteristics of the local housing market.

Cape Town should therefore be cautious about assuming that measures adopted elsewhere will automatically produce the same outcomes here.

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Our tourism economy, neighbourhoods, property ownership patterns and housing needs are not identical to those of other international cities. We need local evidence, not just international comparisons.

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The real opportunity is better information

Rather than viewing the proposed by-law purely as a disagreement between short-term rental operators and housing advocates, I believe it presents an opportunity for a more informed conversation about how Cape Town’s property market functions.

How many properties operate predominantly as commercial short-term accommodation? How many are occasionally rented family homes?

Which neighbourhoods have the highest concentrations of investor-owned short-term rentals?

And if the regulations lead owners to change how they use their properties, how will that affect sales volumes, achieved prices, rental availability and investment returns?

These are questions worth monitoring over time.

I support sensible regulation, fair competition and greater transparency. I also believe that tourism contributes meaningfully to Cape Town’s economy and that property owners should be able to make informed decisions about their investments.

Those objectives are not necessarily incompatible.

But regulation should be evaluated not only by its intentions, but also by its measurable outcomes.

A change in rates could have consequences far beyond rates

Having spent years working with homeowners, visitors and investors in Cape Town’s Deep South, and now working with buyers and sellers, I’ve seen how interconnected these decisions can be.

Read:
Short-term rentals move from seasonal ‘gold rush’ to long-term property play
Bo-Kaap residents call for Airbnb to be regulated
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A change in operating costs can influence rental returns. Rental returns can influence investor demand. Investor demand can influence purchase prices, development decisions and the availability of properties for other buyers.

And those changes can ultimately affect the communities in which we live.

I don’t believe Cape Town’s proposed by-law will suddenly transform the entire residential property market. But I do believe its potential impact deserves to be assessed more broadly than the immediate cost of compliance.

Because when we change the economics of owning an investment property, we may also change what buyers are prepared to pay for it, whether owners decide to sell it, and who ultimately gets to live in it.

That is a property market conversation worth having.

Christina Masureik is the founder and former owner of South Seas Properties.

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