Short-term lets - licensing scheme and planning control area legislation: draft business and regulatory impact assessment (BRIA)

G. Wider economic context

G1. Trends prior to COVID-19

107. Prior to COVID-19, the short-term lets market had not reached equilibrium. A number of factors were at play:

a) the continued growth of the short-term let sector, driven by the success of on-line platforms in connecting hosts to guests, although there were some signs of market saturation;

b) growth in concern by residents and local communities on the impact of short-term lets; and

c) growing concerns about the contribution of tourism (especially air travel) to climate change and moves to make tourism more sustainable (which might include holidaying nearer to home).

108. With regard to the growth at (a), it is hard to be sure what would have happened in terms of tourism had these platforms not appeared on the scene; at least some of these guests would have been expected to have been accommodated through hotels and elsewhere. Some of the growth is due to previously off-line accommodation (e.g. advertised in magazines etc.) moving on-line.

G2. Contribution of tourism to the Scottish economy

109. The Scottish tourism sector makes a significant contribution to the Scottish economy. A report by the Scottish Tourism Recovery Task Force^[16] notes that in 2019, Scotland received 13.8 million overnight domestic visitors from Scotland and elsewhere in Great Britain, around 3.5 million international overnight visitors, and 133 million day visitors, spending a combined £11.5 billion. Visitor expenditure provides an important contribution to Scotland’s economy: the Scottish Government estimates that expenditure in 2018 by overnight and day visitors supported around 5% of Scotland’s GDP. Prior to COVID-19, the sector employed 218,000 people, or around 1 in 12 jobs across Scotland, and was a major employer in many rural areas.

110. Short-term lets play an important role within the visitor economy. They can:

• Offer visitors a unique tourist experience through a host’s local knowledge, increasing the attractiveness of Scotland as a place to visit.
• Offer accommodation in places not served by hotels and hostels, for example, and therefore help with dispersal of visitors from “hotspot” areas.
• Offer more affordable accommodation, helping to attract tourists that may have a lower budget.
• Provide additional capacity to accommodate tourist or other visitor demand in areas with a high amount of demand over a short period of time (for example, to accommodate tourists during the Edinburgh Festival or the Open golf tournament).

111. Over the period 2013 to 2019, during which accommodation hosted on online platforms grew dramatically, visits to Scotland increased by an annual average of 2.9%, while real-terms visitor spend increased by an annual average of 2.2%^[17]. Within this, local authorities with higher concentrations of short-term lets generally recorded higher growth in visits and spend than Scotland as a whole over this period^[18]. While a variety of factors other than the presence of short-term lets could affect these trends, the figures could be consistent with short-term lets creating additional supply in these regional markets, even if there is also a degree of displacement of existing providers^[19]. However, data limitations relating to the historic trends in the size of different components of the tourism accommodation sector make it difficult to estimate robustly the relative share of additionality versus displacement.

112. According to Airbnb, nearly 2.5 million visitors to Scotland used accommodation booked through their platform in 2019^[20]. Airbnb is the dominant, but not exclusive, provider of short-term let accommodation in Scotland, so the total number of visitors booking through online platforms will be higher. A study commissioned by Airbnb from BiGGAR Economics in October 2020^[21] suggested that economic activity in Scotland connected to visitors that book through their site was in the region of £0.7 billion, and that this supported around 33,500 jobs in the tourism sector and wider Scottish economy. However, the study did not appear to consider explicitly the extent to which activity associated with Airbnb was additional or the extent to which short-term lets or other stays in Scotland would take place in the absence of the specific platform.

113. Airbnb’s evidence to the Local Government and Communities Committee advised that the proposed regulation of short-term lets would put almost 17,000 jobs at risk^[22]. This was based on one scenario from BiGGAR’s scenario analysis, where a 50% reduction in Airbnb lettings was considered. However, BiGGAR’s study did not appear to articulate explicitly the causal linkages between measures being considered, and the probability of the scale of reduction articulated in the chosen scenario.

G3. Impact of COVID-19

114. The trends at paragraph 107 have been interrupted from March 2020 by restrictions imposed following the COVID-19 pandemic and behaviour change curtailing even permitted activities. In 2021, the adverse health impact of COVID-19 has been dramatically reduced by the successful ongoing mass rollout of effective vaccinations, testing and treatment, and ongoing compliance with public health interventions. However, the economic and behavioural impacts are likely to persist for longer and some changes will not be reversed. For example, the demand for accommodation by business travellers may be permanently reduced now that remote working and videoconferencing have become familiar and, to varying degrees, more popular, and necessary as part of the response to the global climate emergency. So there are now new trends to consider:

a) an increased concern about safety by guests and neighbours, especially around the transmission of COVID-19;

b) a likely permanent shift to travelling less for work purposes;

c) lower economic growth which is likely to reduce spend available for leisure travel;

d) some scarring in the tourism sector with some short-term let and other accommodation not returning to the market as part of wider recovery; and

e) behavioural change, and changes in preferences, from guests as experience of COVID-19 affects their risk appetite and priorities, but this may attenuate over time.

115. The tourism economy has been badly affected by COVID-19. It is currently challenging to estimate the full reduction in visitor numbers and spend within Scotland by market, owing to the pause in data collection for both the International Passenger Survey and GB Tourism Survey during 2020, as a result of restrictions on data collection arising from COVID-19. During 2020, Visit Britain forecast that international visits to Scotland in 2020 may be down 78% compared to 2019, to 775,000, with spend down by 85% to £388 million. They also forecast that spending from domestic overnight and day visitors in Scotland may both reduce by over 50% from 2019 levels, to £1.6 billion and £2.8 billion respectively^[23]. The Scottish Government’s analysis of ONS’s BICS statistics for Scotland also show that there has been, and currently is, significant pressure on the Accommodation and Food Sector^[24]:

• The overall share of businesses ‘currently trading’ in the Accommodation & Food Services sector was estimated as 83.0% in the period 17 May to 30 May 2021, compared with 94.6% for the economy overall.
• 18.2% of businesses not permanently stopped trading in the Accommodation & Food Services sector reported being at severe or moderate risk of insolvency in the period 17 to 30 May 2021, compared with 9.9% for the economy overall.
• Over one third (34.2%) of businesses in the Accommodation & Food Services sector that had not permanently stopped trading reported having no or less than 3 months cash reserves in the period 17 to 30 May 2021, compared with 24.0% for the economy overall.
• In the period 3 May to 30 May 2021, 69.7% of businesses in the Accommodation & Food Services sector reported experiencing a decrease in turnover compared with what is normally expected for this time of year. The comparable proportion for the economy overall is 35.3%.

116. More broadly, the contraction in GDP has been greater in activities related to tourism than in the economy overall. This is illustrated in Figure 1.

Figure 1. Output in the accommodation and food services sector was 70% lower in March 2021 compared with February 2020. This contrasts with GDP overall being down by 5.4%^[25].

117. With regard to the regional effect of COVID-19 on the tourism sector, the Scottish Tourism Alliance note that demand for self-catering accommodation was in most demand in rural and coastal areas of Scotland around summer 2020. However, hotel occupancy in Edinburgh, Glasgow and Aberdeen was badly affected by COVID-19.

118. These figures suggest that short-term let hosts’ earnings will likely have fallen markedly following the COVID-19 pandemic. Longer-term, the shock to unemployment and household incomes across the UK and internationally could depress tourist numbers.

119. All of the above makes it almost impossible either to establish a counterfactual (“do nothing”) scenario or to describe in detail what the market will look like in April 2023 by which time existing hosts and operators should have applied for a licence. For this reason, we using the 2019 data established in the Scottish Government’s 2019 research as a baseline for this BRIA.

G4. Potential impact of this legislation on the tourist economy

120. It is possible that the time and cost involved in applying for a short-term let licence (or the application of overprovision policies by licensing authorities) will lead to a reduction in the amount of short-term let accommodation capacity. It could also increase the cost of short-term let accommodation if these costs are passed on in whole or partly to tourists. However, it is difficult to quantify the total net effect on short-term let capacity for the following reasons:

• The fee will depend on the fee structure determined by local authorities and the relationship of this to the revenue earned by a short-term let host from their accommodation.
• The total cost of these proposals, in terms of the licence cost and cost of achieving the mandatory conditions to obtain a licence, will vary based on the current condition of the accommodation.
• That a short-term let has passed a set of mandatory safety conditions should give visitors more confidence in using short-term let accommodation, which could act to increase the number of visitors looking to use short-term let accommodation.
• Some visitors displaced by a reduction in short-term let capacity may use other forms of accommodation, such as hotels and hostels. This may also encourage the further provision of these types of accommodation.
• The price elasticity of demand^[26] for tourist accommodation. The more inelastic this is, the more short-term let hosts can pass on the costs incurred from the licensing scheme to guests and/or the smaller the reduction in demand for short-term let accommodation from guests.

121. Short-term let control areas would reduce short-term let capacity if significant numbers of planning applications were refused in the control area. It is not possible to quantify the total effect of this as it will depend on whether local authorities implement control areas and the size of these areas and how many short-term lets within a control area already have planning permission.

122. Airbnb has commented^[27] (in the context of the Scottish Government proposals for regulation):

Guests who stay in short-term lets such as those advertised on Airbnb stay longer, spend more and are more likely to return to Scotland than other visitors. Last year travel via Airbnb boosted the Scottish economy by almost £2 million a day, supporting 34,000 jobs.

Under the proposals, hosts wanting to welcome guests into their home would have to overcome one of the most bureaucratic and financially damaging regimes in the world. The costs of meeting licensing requirements could be more than £700 while securing planning permission could cost up to £4,000. Hosts could also face costly home alterations, such as replacing wooden floors with lino.

Economists say that the proposals could take £1 million a day out of the Scottish economy and put 17,000 jobs at risk. For families, nearly half of whom say that the additional income is an economic lifeline, the effects would be devastating.

123. Airbnb’s comments suggest that the size of the sector could be halved by the impact of the legislation. In the context of £86 million earned by local households over the period 1 July 2016 to 30 June 2017 cited by Airbnb^[28], even under conservative assumptions (i.e. using the higher licence fee from scenario 2 and assuming none of the licence fee can be passed on to guests), the fees for the Scottish Government’s licensing scheme (at a total of c. £12 million for all hosts in Scotland to get a three year licence, equivalent to an annualised cost of c. £4 million) would be equivalent to only 5% of host income. Thereafter, total revenue from renewal fees is expect to be lower at an annualised total cost of £3 million per annum. Even if the scheme delivered no benefits at all, this would be unlikely to have the dramatic effect on the sector projected by Airbnb. However, the scheme does deliver significant benefits; see the costs and benefits and summary table at section E.

124. The Scottish Government’s view is that, in areas where there is a reduction in short-term let activity, this will be the result of deliberate and legitimate policy decisions by local authorities using the licensing scheme and control area regulations to achieve that aim. The Scottish Government’s view is that it is likely that any deliberate reduction in short-term let activity in an area will have compensating economic benefits for that area. For example, a secondary let might be repurposed as a private residential tenancy with a permanent member of the community earning and spending in that community; and the visitors who might have used that accommodation are likely to be able to find other accommodation that meets their needs. It therefore seems unreasonable to assert that the visitor spend would not occur at all.

125. When considering the effect of this legislation on the wider economy, the effect on areas other than tourism must be considered, such as:

a) Reduced costs on public services:

(i) Less need to contact local authorities or Police Scotland to deal with issues arising from a short-term let, if residents can contact the host directly because they know who to contact.

(ii) Reduced incidents (e.g. fire) where accommodation meets mandatory safety standards and unsuitable hosts are not granted a licence. This could reduce costs incurred by local authorities, Police Scotland and the Scottish Fire and Rescue Service.

b) Reduced costs from compliance failures. A public register of short-term lets should bring greater transparency and compliance with insurance, tax, mortgage and planning permission conditions.

c) Better functioning housing market:

(i) Local authorities should have greater knowledge about the prevalence and location of short-term lets in their local authority area. This will help them better understand the extent to which short-term lets are, or are not, contributing to local housing pressures.

(ii) Numbers of short-term lets can be managed in areas where there is an insufficient supply of accommodation for local residents. This could reduce housing costs and/or costs to local authorities of temporary accommodation.

(iii) Increased availability of housing from managing numbers of short-term lets could also help local employers recruit workers if they have more choice of accommodation within an appropriate commuting distance. These workers could contribute to the local economy by spending locally, working for local businesses and paying relevant taxes.

d) Improved quality of life for residents: The strength of resident responses expressed in the Scottish Government’s research into of short-term lets suggests that there are significant concerns about the effect of short-term lets on local areas in terms of: sense of community, housing supply, safety and local amenities. The licensing scheme and Control Area Regulations will go some way to mitigating these concerns and improving quality of life for residents.

e) Displacement to other tourism accommodation providers: Previous sections of this BRIA have shown that the cost of a licensing scheme should be relatively small in comparison with earnings of a typical host. At the margin, there could be a small number of hosts that exit the sector. But this provides opportunities for other providers of tourist accommodation to meet this demand, helping to maintaining the overall level of employment opportunities in the tourist accommodation sector, as well as wider local economy.