Airbnb challenges Middle East hotel industry

Peer-to-peer lodging companies are starting to gain ground in the Middle East, particularly in Dubai. The hotel industry needs to consider its response. Published in MEED, 16 February 2015

There was a time, not too long ago, when anyone looking for a place to stay while in a foreign city would have little choice but to check in to a hotel. These days, with the growth of the internet and other technologies, that is starting to change and new options are opening up.

Instead of a bland hotel room, a traveller can now just as easily rent a room or even an entire property from a private individual through sites such as Airbnb, the latest poster child for what has been dubbed the ‘sharing economy’. Not only does this offer a more personal touch for the visitor, it is often a lot cheaper than a hotel would be.

This may not be a mainstream option quite yet, but it is getting there and it seems to spell trouble for hotel operators. The new breed of companies presents an obvious competitive threat that in the long term could force hotel operators to cut their prices.

“Overall, and not just in the Middle East, [Airbnb] is reshaping the hotel industry,” says Filippo Sona, head of hotels for the Middle East and North Africa (Mena) region at US real estate firm Colliers International. “It is putting pressure on hotel operators and room rates.”

San Francisco-headquartered Airbnb was set up by a group of friends in 2008 and has since spread around the world. It claims to have properties in more than 34,000 cities in some 190 countries. And while it is strongest in its home market of the US and the major cities of Europe, it is also becoming increasingly visible around the Mena region.

On one day in mid-January, Airbnb had many thousand properties available around the region on its website, from Morocco in the west to Muscat in the east. There were a few blank spots in its coverage, including Iran, Syria and some parts of Iraq, but some equally offbeat places were, perhaps surprisingly, included. In Libya’s capital Tripoli, the choice ranged from $45 a night for a small studio apartment on the fringes of the city to $330 a night for a five-bed villa near the second ring road with the promise of security cameras and bodyguards in the area.

Airbnb may be the best known, but it is far from the only company active in this space. In the past five or six years, plenty of competitors have sprung up, including the likes of 9Flats and Wimdu, both of which are based in Germany; Singapore’s Roomorama; and Tujia, which is focused on the Chinese market.

All of these companies essentially offer the same service: the ability to rent a room, an apartment or a house for a short period of time from a private individual. For the most part, the offerings in the Middle East are not particularly extensive. Many of the sites offer only a small handful of properties in most cities, and a lot of the major Gulf centres – including Riyadh, Jeddah, Kuwait City, Doha and Manama – barely feature on their websites at all. Airbnb is the only one with anything like comprehensive coverage, although the choice available in Saudi Arabia in particular is still very limited.

There are some areas of stronger activity, however. On the sites surveyed by MEED, Dubai and Marrakech are the cities with by far the greatest number of properties. Both locations also have very significant tourism industries of course. Their popularity on the property-sharing websites is perhaps a sign that the main users of these sites are visitors from outside the region, particularly from Europe and the US, and are people accustomed to using such services in their home countries.

While the market is still in its infancy in the Middle East, on a global basis it has already reached an impressive size. UK-based research company Euromonitor International estimates that private rentals were worth about $39bn in 2013 and are expected to reach $46bn by 2018. These figures include companies such as Airbnb and US-based HomeAway, as well as informal rentals such as locally organised homestays. Nikola Kosutic, research manager of Euromonitor International, says Airbnb sold an estimated $2bn-worth of rooms around the world in 2013.

However, there are some risks for people using these sites, both for those providing the accommodation and those using it, not least because of the legal grey area in which the transactions take place.

“Peer-to-peer websites that seek to lease out rooms or apartments to visitors at reduced prices [compared with] hotels face strong challenges in the GCC as, currently, such transactions fall outside the confines of the rental laws of the countries,” says Kosutic.

Typically in the GCC, for example, tenants are not allowed to sublet a property without the explicit permission of the owner, Even then, it is usually only permissible for entire properties to be sublet, rather than individual rooms. There may also be terms and conditions in a mortgage that preclude subletting, and developers may also have their own rules restricting such activity in their developments.

On the other side of the transaction, it is not always clear whether a property owner would get compensation if their property was damaged, and whether they would be liable for any accidents that happen in the property.

Such issues will eventually need to be addressed through changes to local laws. Market observers say there have been indications that the authorities in some jurisdictions have been weighing up what to do, but as yet no new regulations have been issued. It is probably in their interests to clarify the situation, however, if they are to take advantage of the potential benefits for local economies.

If Gulf cities are to meet their ambitious tourism targets for the coming years – Dubai, for example, wants to attract 20 million tourists by 2020, up from 10 million in 2012 – then they would benefit from having a more diverse range of accommodation on offer. “What Airbnb provides is an alternative way for people to shop around,” says Sona. “When a destination starts to become expensive, a consumer will try to find ways to reduce their expenditure. It will open up a different segment of the market. It will allow Dubai’s tourism industry to become more sustainable because it will become a more affordable destination.”

Some large hotel operators may well resist any move to regulate, and thus legitimise, the likes of Airbnb. Given it is only a few years old but still growing fast, the threat that the firm poses to the hotel industry is not completely clear.

A report by US-based Boston University’s School of Management in February 2014, called The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry, found that for every 1 per cent increase in Airbnb listings in Texas, there was a 0.05 per cent decrease in quarterly hotel revenues.

So while there is clearly some impact, those figures suggest it is rather small and should be manageable for the hotel sector. Euromonitor International suggests the effect might be greater on other types of accommodation such as hostels, bed and breakfasts, and small, independent hotels.

Even so, until the picture becomes clearer, many hotel operators are likely to remain wary of the potential threat. It is not just the hotels that are worried, however. Airbnb has provoked much criticism as it has expanded around the world. Governments tend to point out that the people renting out their rooms pay no tax on the income, while industry regulators often worry about the health and safety implications.

For its part, Airbnb likes to counter its critics by saying it benefits the local economies where it operates. The company says it generated some $312m in economic activity in Los Angeles in the 12 months to April 2014, and supported 2,600 jobs. It has produced similar statistics for other corners of the world, including an annual gain of $175m and 4,310 jobs in Barcelona, Spain; and $824m and 11,629 jobs across the whole of the UK. The company has also struck deals with the authorities in some cities such as Amsterdam to levy a tourist tax on those using the site.

Sona suggests that, in the longer term, the best way for the hotel industry to deal with the likes of Airbnb might be to work with it rather than try to fight against it. This is a path the industry has taken before when trying to cope with emerging threats from the internet, such as online booking engines, which allow consumers to easily compare prices from many different operators.

“It was the same phenomenon when Booking.com came into the market,” says Sona. “It became a superpower. Rather than fight against it, the hotel industry joined and worked with Booking.com. I think they will do the same with Airbnb. It could become another way for an operator to reach the consumer and advertise their brand.”

Beyond the simple issue of accommodation, Airbnb has also been making moves into new areas that could provide some unwelcome competition for other parts of the travel industry, such as providing transport to and from an airport.

“Airbnb is not satisfied staying within the lodging industry alone and is testing initiatives across a diverse range of sectors,” says Kosutic.

Other companies have already made big inroads into the transport sector, such as peer-to-peer taxi services Lyft and Uber. They too have attracted harsh criticism from industry incumbents, but for now continue to grow. Even if a fightback is possible in the short term, it seems the ‘sharing economy’ is here to stay, whether hotel owners, taxi drivers or others like it or not.