How Airbnb's success in London could help the city's hoteliers

St. Pancras Airbnb. Photo credit: Airbnb (Guests can stay at an apartment in St. Pancras Station in London)

While London-based hoteliers worry about the increasing occupier-related real estate tax—otherwise known as business rates—the growth of Airbnb may ameliorate some of the damage.

A recent study by Colliers International pointed to 45 percent growth on the year in rooms booked through Airbnb in London—growth that could have an impact on the capital's weakening hotels market. According to Colliers, the rise in volume of Airbnb lettings should be seen as a “material change” to the hotel industry. Hotel owners in areas where Airbnb has a strong presence can use this factor to appeal their business rates valuations. 

The broker said the Valuation Office Agency, which undertakes business rates appeals, normally looks favorably on businesses that can show a “material change in their circumstances,” and by definition hotels in areas where Airbnb was strong and growing should be included in this policy. 

How Airbnb Can Help Hotel Tax Rates

As noted earlier this week, hotel operators in London have been seeing the second rise in their business rates following the April 2017 revaluation, and due to the policy of transition these rises will continue for the next few years. For example, at the top of the range, the Dorchester Hotel saw a 131-percent ratable value rise in the revaluation, which Colliers estimated meant its annual bill nearly doubled from £301,000 in 2016/17 to just under £600,000 this year, and this will be nearly £750,000 by 2021/22.

“If you change the use or operations of a property, that ticks the ‘material change’ box,” said John Brennan, head of rating, Colliers International. “If you had built a hotel, then everyone can see the cranes, the signs but Airbnb is an interesting case as it’s not visible. It’s a bit like online retailing. But the very fact that it is domestic rooms being used for a commercial purpose means there has been a material change. Business rates are called ‘non-domestic rates’ and, as these are rooms being used for non-domestic purposes, they should be demanding appropriate rates.

“If the whole of The Shard was converted to hotel rooms, that would be 1,234 rooms (including 202 in the Shangri-La). Say it has 90 percent occupancy, that’s 329 days times 1,234, so 405,986 nights or stays. That’s the equivalent of adding 12 Shards to the skyline. If you built that, the Valuations Officer would say ‘come in and see us, that is a material change’.

“The reality is that it is not a level playing field if Airbnb properties do not pay business rates, and it means they can keep prices fixed at a lower level. If there is demand for a room then people will pay—what you can’t do is have a market growing to the size that it is without acting. There aren’t the resources or the inclination to do it, it’s easiest to hit the targets which they can see. It’s not sustainable, but it’s very difficult for the Valuation Office Agency or the government to get their heads around it. It’s difficult for traditional hotels to compete, their margins are being hit all the time and it means a whole area of the market which isn’t being addressed," Brennan said.

Brennan drew attention to the current faltering performance in London, where STR’s preliminary June data indicated higher occupancy but lower rates. Hotels reported occupancy was up 2.2 percent to 86.1 percent, while ADR dipped 0.6 percent to £160.84, RevPAR increased 1.6 percent to £138.46. 

What's Ahead

STR analysts noted market demand was boosted by various concerts throughout the month, with favorable weather conditions also helping hotel performance. June was London’s first month with a year-over-year occupancy increase since May 2017. On the other hand, June was the fourth month in a row with an ADR decrease after 16 straight positive months in the metric.

“There is some pretty unpleasant writing on the wall for the economy which suggests a turn to the worse, which could see more people putting their homes on Airbnb and hotels emptying, leading to a tipping point,” Brennan said. “On the high street there is all sorts of carnage at the moment, and that should be a lesson for the government.”

There are solutions available, however. “One overriding problem with business rates is the multiplier [the number of pence per pound of ratable value paid in business rates, before any relief or discounts are deducted],” Brennan said. “The governments of all persuasions have thought it expedient to give away reliefs and whole towns and villages don’t pay business rates, so the focus has been on getting more and more out of a small group of businesses. You need to get rid of downward phasing, reduce the multiplier, give relief to areas which need it and cap next year’s increase. The £25 billion collected would remain the same, but it would be more fair.”

With Airbnb looking to its IPO, the sharing platform has been eager to prove what a good citizen it is. This has seen it pay some tourist taxes, but not yet business rates. There have been moves by some councils in the UK to push landlords into acknowledging the change of use and paying business rates. As the sharing economy expands, such pressure applied at a local level could increase.

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.