Insights

In brief: Hoteliers in NSW are feeling the impact of Airbnb 

Airbnb is an online marketplace that offers affordable short term accommodation options to travellers and holiday makers. The impact of Airbnb on the Hotel industry is entirely real and hotly debated. Certainly, online accommodation sharing platforms will affect hotels differently, depending on each hotel's target market and location. Some hoteliers will be feeling the pinch of a new competitor, whilst others will be looking to take advantage of the trend by using Airbnb as a platform to move room nights.

This article explores the:
  • overall impact of Airbnb on hoteliers in NSW
  • benefits of the platform
  • various regulatory responses to short-term holiday letting 
  • future outlook for the platform

General impact of Airbnb on hoteliers

Airbnb has grown rapidly in Australia, with new figures suggesting it is closing in on an annual turnover of $1 billion. The platform is turning into a lucrative source of income for local hosts, with amounts earned by them reaching $978 million annually in the 12 months to January 2018, up more than 60% in host earnings a year earlier. With these figures in mind, absent of any new regulations, Airbnb is here to stay.
 
Unfortunately for hotels, it has been suggested by a Current Issues in Tourism article that people who stay in peer-to-peer accommodation (such as Airbnb) are more likely to do so again. Hoteliers will be familiar with the issues arising from the platform's increasing popularity. However, are the guests who stay in Airbnb the same target market for hotels? Perhaps there may be some overlap in some segments of the market, but arguably, guests that frequent the middle to upper range of the hotel market may be unlikely to change preference to Airbnb stays. Notwithstanding this, mid to upper market hotel room prices may experience downward pressure as the lower to middle market adjusts rates to compete with the Airbnb threat in certain areas. The effect of downward pressure on room rates undoubtedly impacts profitability, especially when considering the myriad of regulations, insurance and licensing requirements to be complied with, all of which do not (at this stage) apply to Airbnb hosts. 
 
The direct impact on profitability will be dependent upon the varying room prices, facilities and services already offered by hotels. For some, there is still question over whether guests who use Airbnb have in fact switched preferences from hotels to peer-to-peer accommodation, although again, this will ultimately depend upon a guest's preferences and the purpose of their travel. Peer-to-peer lodging is not always an adequate substitute for hotel accommodation. 
 
In this light, hotels are not necessarily in direct competition with Airbnb. According to Sam McDonagh, Australian and New Zealand country manager for Airbnb, "the vast majority of listings in NSW are located outside of traditional hotel districts".

Airbnb Select - a premium alternative

Recently however, it was announced that Airbnb was launching a luxury tier for mansions and penthouses, in order to complete with other premium short-term accommodation. The new tier of Airbnb launched under the name "Select" sets additional standards for listings. These premium tiers have launched as an attempt to compete directly with hoteliers. It remains to be seen however, how successful it will be and the general profitability of the platform.

Current Airbnb Regulations in New South Wales

Land use in NSW is regulated by the Environmental Planning and Assessment Act 1979 (NSW) (EP&A Act). Generally speaking, under this legislation, Councils prepare Local Environmental Plans (LEPs), which set out permitted and prohibited uses of land. Councils must follow a standard LEP, meaning that the structure, terms and land use definitions are uniform across NSW councils. Local provisions can be changed by councils, as long as amendments do not give rise to an inconsistency or impact local planning objectives. 

The category of 'tourist and visitor accommodation' covers short-term accommodation such as hotels and bed and breakfasts (BnBs). It does not explicitly include short-term holiday letting (STHL) such as Airbnb. This makes it difficult for councils to regulate STHL in particular zones as they can other tourist and visitor accommodation. 

Due to the lack of regulation, councils have instead attempted to restrict STHL using the definitions of certain types of property. This can be effected under s 121B of the EP&A Act which enables councils to issue an order on property owners to refrain from using their premises for a prohibited purpose. In North Sydney Municipal Council v Sydney Serviced Apartments Pty Ltd (1990) 71 LGRA 432, for instance, a 'residential flat' was determined to mean that a certain significant degree of permanency or habitation or occupation was required. This then, could form the basis for councils to restrict an apartment owner's ability to participate in short-term accommodation sharing platforms like Airbnb.

The practical difficulty of applying this however, was evident in Foster v Sutherland Shire Council [2001] NSWLEC 89. Certainly, there was overwhelming evidence that the residential flat was not being used in the prescribed way. Yet Council's order restricting the use of the owner's residential flat as STHL was deemed invalid for lacking in certainty. The good news for hoteliers is that the outcome was particular to the facts of the case. It is therefore likely that no definitive precedent was set. Unfortunately, this does not resolve the regulatory void presently in place. 
 
From a legislative perspective, the use of the Airbnb platform by renters is similarly unclear. There is nothing definitive in the Residential Tenancies Act 2010 (NSW) that defines whether Airbnb is a sublet or licence to occupy. A sublet requires renters to seek permission from their landlords, whereas a "licence to occupy" operates similarly to having guests on the couch. At present, this is largely determined by the contents of individual leasing agreements. Nevertheless, there is real support for renter participation in Airbnb, as can be seen in a recent report by the Tenants' Union of NSW. As such, the possible use of Airbnb by renters on top of property owners may increase competition on hoteliers in certain segments. 
 
Airbnb is itself also mindful of the lack of regulation around its service. Desperate to avoid similar backlash to that felt by other sharing platforms (such as that which Uber has experienced in Australia and elsewhere in the world), Airbnb has agreed to streamlined planning requirements in Tasmania, and is currently in negotiation with other state governments to regulate anti-social behaviour by Airbnb guests.

Airbnb, Owners Corporations and by-laws

Interestingly, Airbnb users have also faced resistance by certain Owners Corporations in strata buildings. Although STHL can be beneficial to an individual lot owner, it may be very disruptive to the strata scheme in which that lot owner resides. It can compromise security and quiet enjoyment of common property, with new people coming in and out constantly. These people use common property differently and would be more likely to use all the facilities of an apartment building, like a pool, gym, or tennis courts as much as possible during their stay, while actual residents might be less inclined to frequently use these facilities. Visitors are also less inclined to have consideration for the long-term maintenance of these facilities as a resident would. 
 
Under current strata laws, Owners Corporations can adopt or draft by-laws that manage some of the impacts of STHL. This can include the requirement for lot owners to provide notice of a change in property use, as well as managing noise and occupancy levels. This may inadvertently alleviate some of the competitive pressure placed on hoteliers. 
 
However, a recent NSW Civil and Administrative Tribunal (NCAT) found that the Owners Corporation did not have the power to make a by-law that had the effect of banning short-term letting in the building: Estens v Owners Corporation SP 11825 [2017] NSWCA TCD 52. This finding was consistent with a recent Victorian Civil and Administrative Tribunal (VCAT) decision: Owners Corporation PS501391P v Balcombe (Owners Corporations) [2015] VCAT 956 (29 June 2015).The NCAT decision arose from an interpretation of section 139 of the Strata Schemes Management Act 2015 (NSW) (SSMA) which prohibits by-laws from restricting the devolution of a lot or a transfer, lease, mortgage or other dealing. An Airbnb tenancy was found to constitute a lease, thereby making the by-law invalid. 
 
At first glance, the NCAT decision appears to restrict by-laws from prohibiting short-term letting. However, relevant planning legislation was not considered by the court. LEPs can contain clauses that effectively override all agreements and dealings (including by-laws). If for example, the relevant LEP prohibited short-term accommodation, it would be open to argue that the by-law in question did not restrict the devolution of the lot as the use was not available. Certainly, as regulatory responses begin to unify, the reach of this case may prove limited. What all of the cases suggest however, is the desperate need for a standardised approach.

NSW Government's response to short-term letting 

The NSW Legislative Assembly Committee on Environment and Planning released its Final Report on the Adequacy of the Regulation of Short-Term Holiday Letting in New South Wales in October 2016 (Final Report). The Response to the Final Report was released on 19 April 2017. 
 
The Final Report recommended that the NSW Government develop a definition of short-term rental accommodation and be generally permitted under planning instruments. It also emphasised the need to develop and standardise regulations so that local councils may monitor and enforce compliance. 
 
A further Options Paper on STHL was also released 20 July 2017 (Options Paper). The Options Paper builds on the work of the Parliamentary Inquiry and considers different alternatives to effectively approach the growing concerns of STHL. The Options Paper discusses the possibility of greater industry self-regulation through a stronger Code of Conduct; possible registration or licensing of STHL operations as well as changes to strata laws in order to provide a greater level of protection to residents. 
 
The NSW Department of Planning and Environment invited those to respond to the ideas raised in the Options Paper by 31 October 2017. These responses are still being considered. 
 
The Options Paper submissions will assist the NSW Government in determining next steps for the regulation of Airbnb and other STHL in NSW. Indeed, there is no uniform regulation over STHL in NSW. Currently only twelve councils have rules that specifically allow home owners to rent their properties for short stays. The thresholds for what constitutes short-term letting vary from council to council. 
 
Of course, regulations will need to take into account the differences between the hotel industry and STHL and manage this accordingly. For example, traditional operators aim to have a property occupied 365 days a year, while STHL is (generally) irregular. With this in mind, some LEPs have already been amended to set time limits and thresholds for STHL. For example, the Shoalhaven Local Council allows short-term rental accommodation for a maximum period of 45 consecutive days in any 12 month period. Kiama Council, on the other hand, provides a maximum period of 60 consecutive days a year. 
 
This is by no means standardised across the state. It may be that NSW will be forced to look to international cities for more uniform approaches, such as that in New York, where the advertising of an entire unoccupied apartment for less than 30 days is prohibited. 

How can hoteliers benefit from Airbnb and other sharing platforms?

In the wake of regulatory uncertainty, some hotels are beginning to push back on Airbnb by tapping into alternate platforms and capitalising on the peer-to-peer offer of a local experience. For example, AccorHotels has recently announced that it will be investing in Onefinestay, which specialises in the rental of luxury homes around London, Paris, New York, LA and Rome. AccorHotels' CEO Sebastien Bazin, also spoke about another innovation that may provide a competitive edge - the ability to pay for rooms by the hour. Bazin said this would assist in maximising the use of rooms, even if guests did not stay the night. 
 
Some hotels are looking at Airbnb as an opportunity, particularly boutique accommodation which may use it to fill empty rooms. In this way, Airbnb acts as another Online Travel Agency (OTA) and hotels benefit from the lower processing fees (3%) charged by Airbnb to hosts, as opposed to the higher fees typically charged by other OTAs, which can be between 15-25%. OTAs provide an easy way for guests to choose accommodation to suit their preferences and there is no reason why hoteliers operating in complimentary segments should distance themselves from this platform. 
 
Hoteliers can also benefit from platforms other than Airbnb, by tapping into the traction being gained in the sharing economy. As an example, Marriott International has a Workspace on Demand program where it lists workspaces and meeting rooms on LiquidSpace, a website, which is essentially the Airbnb of meeting rooms. Hoteliers can make use of every square metre of their hotel by expanding their reach to customers through various online platforms.
 
Although Airbnb has its own recognisable brand name, every host needs to develop their own reputation in order to attract the level of safety and trust that hotels have built up over time. Hotels will continue to have this in their favour, as guests can expect a certain and regulated standard.
 
Even for more premium peer to peer accommodation, hotels may still have the upper hand. A recent article in the Australian Financial Review suggested that the lack of streamlining in Airbnb, safety issues and the penetration of mainstream hotels into the shared community space will start to weaken the Airbnb accommodation model. It has been argued that hotels will begin to fill the space again, especially as luxury tiers begin to charge hotel prices, coupled with the impact of innovative strategies put in place by hoteliers to take back their market share. Now more than ever, is the time for hotels to adapt to the changing landscape. 

Hotels - the safer choice?

Despite the popularity of Airbnb, there are some guests who expect a certain level of sophisticated service from hotel chains, who trust the brands of particular hotels and consistently have their expectations met by these hotels. It is highly unlikely that this type of guest would make the switch to Airbnb accommodation, which allows each listing to set its own standard. Until regulations for STHL are standardised in NSW, hotels have the upper hand over STHL. Hotels offer the trust and security of a reputable establishment. There is no substitute for reliability.

Hotels must be proactive with their marketing strategies to compete with Airbnb and short-term letting providers

Even where hoteliers decide not to directly participate in the online sharing platforms available, they can still use the sharing trend to their advantage. For one thing, clever marketing strategies can highlight the difference between their brand and the weaknesses of other platforms, including Airbnb. The Westin, for example, has built its brand around health and wellbeing, which research suggests is high on the list of Millennial priorities. This being the case, the Westin now offers a workout gear-lending program as well as runWestin, a concierge service that provides guests with local running routes. Brian Povinelli, SVP and Global Brand Leader for the Westin states that they "have a compelling proposition that could only come to life, realistically, with the resources we have as a full-service hotel. We have the infrastructure to deliver that, whereas Airbnb doesn’t". 
 
Hotels should continue to be proactive and assess the underlying trends of peer-to-peer accommodation providers. This will enable hoteliers to explore ways of offering the local and authentic experience to their own clientele. Further engagement with the community may also develop this ability. In the meantime, the NSW Government is actively undertaking a consultation process and review to improve the adequacy of regulations relating to STHL. We are likely to see the outcome of this shortly. 
 
For now, the impact of Airbnb on the hotel industry cannot be denied (however the gravity of the impact is variable). Yet the long-term effect is far from conclusive and will itself be influenced by the impending regulatory outcomes in NSW.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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