Grant Webster: A 'bed tax' would harm hotels just recovering from the last downturn

Auckland has a severe shortage of quality accommodation for visitors.

• Grant Webster, chief executive of Tourism Holdings Ltd, is also chair of Tourism Industry Aotearoa.

Tomorrow the Auckland Council's finance and performance committee will look to finalise the council's 2017/18 budget. It will have before it a proposal for a new funding stream - a targeted rate on properties from which commercial accommodation is provided.

Those directly impacted by proposed rate rises of 150 per cent and more have understandably reacted strongly. However, the concern extends much further, the wider tourism industry and the business community is also alarmed and dismayed.

An unbudgeted cost increase of this magnitude would create serious challenges for any business, and Auckland's commercial accommodation providers are no exception.

Although the current tourism visitation trend is creating stronger balance sheets for hotels, it is only a short time since they were struggling with low occupancies and room rates that were far lower than comparable international properties.

Accommodation providers in Auckland have thankfully emerged from a prolonged downturn following the global financial crisis. However, adjusted for inflation, hotel rates are only just getting back to a level last seen in the late 1990s.

Recent improved incomes are being ploughed back into overdue refurbishments and upgrades.

The medium and long term return on capital has not been at acceptable levels for the hotel sector. A short period of improving hotel rates does not change the unacceptable returns over the last decade. This needs to change to engage investors for the future.

It is widely recognised that Auckland now has a severe shortage of quality commercial accommodation stock, as evidenced by increased pricing at times of high demand. If the targeted rate goes ahead, the council risks deterring would-be investors.

The official projections from New Zealand Trade and Enterprise's "project palace" report are that Auckland needs an additional 4300 hotel rooms by 2025. Some hotels are under construction. However, there is strong evidence that at least half a dozen major investors are looking at current hotel projects in Auckland who will not proceed with their investment if the targeted rate goes ahead.

The impact of the targeted rate means that some hotel development projects no longer add up financially. Other options that avoid the targeted rate, such as residential apartments or offices, instantly become more attractive.

The council has previously claimed that the rate increase will simply be passed on to visitors. However, hoteliers have pointed out that they are already charging what the market will bear. A lot of attention goes on spikes in room prices when something like an Adele concert is held in Auckland. But at other times of low demand, the prices fall dramatically to what the market will accept.

Higher room rates every day of the year present the risk that holidaymakers and business travellers will spend less time in Auckland or bypass the city completely if they can, to the detriment of hospitality, retail and other businesses serving the tourism industry.

Of the $7.5 billion visitors spend in Auckland, just 9.3 per cent ($697 million) is spent on commercial accommodation. The balance goes to a wide range of sectors, including retail, hospitality, transport, attractions and activities. The money spent by visitors increases demand for local goods and services, sustaining businesses, jobs and attracting investment.

That is the great thing about the tourism dollar - it spreads far and wide. Every business in Auckland and all Aucklanders benefit directly or indirectly from the economic value visitors bring to the city. It's not in anybody's interests to create barriers to that growth.

A sector that gets 9 per cent of the benefit from growing the visitor economy should not be asked to bear 100 per cent of the cost. We can get a much better, sustainable outcome from the council working with the accommodation sector and the wider tourism industry to find ways to attract more visitors to Auckland.

The targeted rate would be disastrous for Auckland. The council needs to reject it and start talking about a fair way ahead.