Backing from the bulls in the alternative accommodation space

Airbnb is keeping investors hanging on the timing of its IPO but interest in the $100bn alternative accommodations space is growing

Exactly what hotel boards don’t want to hear! Leading US business magazine Forbes has just headlined a contributor’s view that ‘I’d rather wait for the Airbnb IPO than buy into hotel stocks at this point’.

He’d taken a look at the five-year revenue path of Expedia and Priceline ‘bypassing’ growth at Marriott International and International Hotel Group (IHG). Hotel margins may still be hefty. But the best exponential growth prospects are, according to him, with the disruptors.

Especially with the major OTA’s mopping up all around them! Expedia has now made a pre-emptive move into the accommodation space itself – increasing the pressure on margins. It is buying US-based short-term rental site HomeAway for $3.9 billion. 

“We have long had our eyes on the fast-growing $100 billion alternative accommodations space...” said Expedia CEO Dara Khosrowshahi in a statement. Expedia has been working with HomeAway for the last couple of years.

We have long had our eyes on the fast-growing $100 billion alternative accommodations space...

Expedia CEO Dara Khosrowshahi

With stock markets currently very nervous, this caution on hotel shares is being echoed in the UK, Airbnb’s third-largest market. The London-based leisure analyst at French investment bankSociete Generale (SocGen) has justdowngraded the shares of Premier Inn owner Whitbread to ‘hold’ from ‘buy’. This was on the grounds of only possible impact from Airbnb.

In fact, Whitbread says, so far it has felt no impact from Airbnb at all, even for London weekend bookings. However, SocGen sees Premier in as ‘the type of hotel’ that is exposed to this kind of new competition. It is also looking at the fact that the UK has just eased regulations on letting all or part of a private home. There is no longer the need to obtain permissions for rentals of less than 90 days.

Smart strategy

Meanwhile, still leaving would-be investors in suspense on its IPO timing, Airbnb goes on growing. Analysts think it is being very smart in its strategy for China, targeting outbound Chinese. This way it can build up a loyal fan base and take advantage of a huge market – Chinese travellers took 109 million trips in 2014 (the world’s largest outbound market.) Yet at the same time it is expanding without inciting the wrath of the Chinese government, which is notoriously unenthusiastic about US digital companies. 

The tactic also avoids the sort of regulatory hassle that Airbnb is having in the US. (There locals in tourist cities are lobbying vociferously for controls on the grounds that Airbnb’s business is adding fuel to already sky-high rents.) In the domestic Chinese market Airbnb would also meet more competition, with Xiaozhu, Mayi, Muniao and Tuijaalready established in its market.  

Airbnb has brought in a number of well-connected Chinese investors to help it, partnering with investment funds China Broadband Capital and Sequoia China. Both are thought to have participated in Airbnb’s $1.5bn June funding. It has built a Chinese language website, integrated popular local payment methods and focused its offer via locally preferred mobile devices.

In India the stock market expects the company’s revenues to cross the half billion rupee mark in 2015, and listings on the site continue to grow. India is clearly a growth market for Airbnb with about 5,000 listings reported last year. Its strategy is developing with super-luxury accommodation to appeal to local holidaymakers. 

Another vast country, Russia, has also become a rapidly growing market for Airbnb. Russians no doubt welcome the potential to earn some additional income - real wages fell by 8.8% in the first half of the year. A recent Moscow Times story said a couple of days ago that Airbnb’s Russian business “...has doubled during the past year, propelling Moscow into the world's top 10 cities with the most bookings.”

The speed at which they [Airbnb] are proliferating and growing is witness to investor and traveller enthusiasm.

Of course, no one knows if Airbnb and the other new entrants to the accommodation market will be able to match the stock market successes of the OTAs. Yet the speed at which they are proliferating and growing is witness to investor and traveller enthusiasm.

China’s Tuija is seenas having a strong business model, offering high-end rental services and short-term rentals. It has pulled in $300 million of investment this year, giving it a $1 billion valuation. Latest backers were fund All-Stars Investment, serviced apartment company The Ascott China and OTA Ctrip, which is already an investor. Competitor Xiaozhu won $60 million from four local private equity firms.

In India, Stayzilla has built an exciting Airbnb variation. It combines regular hotel bookings with short-term, Airbnb-style rentals and attracted $20 million earlier this year from investment funds. Stayzilla’s CEO and co-founder Yogendra Vasupal was quoted by online tech magazine Techcrunch as saying that at the end of 2014 it had around 22,000 rooms in 4,000 towns.

“Alternative accommodation has exploded over the past year,” Vasupal told TechCrunch. He said that the company expected this trend to continue, and it aimed to hit 50,000 rooms across 8,000 towns by the end of 2015.

Airbnb is no doubt setting a trend globally. In the UK there is Onefinestay, a business out of London offering private luxury homes in cities in Europe and the US. Co-founder Greg Marsh has been quoted as saying that it is already bigger than The Ritz, The Plaza, Hotel George V and Hotel Bel-Air combined. It raised $40 million this summer from funds and leading global hospitality brand Hyatt Hotels. There were also notable angel investors including Joss Kent, CEO of &Beyond and former global CEO of Abercrombie & Kent.

At the moment, at least, the alternative accommodation story is bullish, regardless of the uncertainty in stock markets as a whole. Punters are being shown exciting numbers. Best of all, vis Expedia’s move on HomeAway and Airbnb’s take-over history, there are big investors around with M&A shopping lists – welcome reassurance.

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