One of the biggest problems with the proposed targeted rate in Auckland is that it will have a significant effect on property values, with both minor and major players losing out. These losses could have a large knock-on effect across the entire property sector in the region.
The Targeted Rate
Mayor Phil Goff and the Auckland Council have proposed setting a rate based on the capital value of an accommodation business, providing that the business meets the definition of a hotel or motel. This levy is intended to increase the amount of money available to Auckland’s tourism board to fund advertising in the region, highlighting desirable tourist spots and improving Auckland’s image as a tourist destination.
Unfortunately, it’s also proposed that the accommodation sector foot the bill in its entirety. This, as critics of the proposed levy have pointed out, is manifestly unfair, as the accommodation sector will only reap about 10 percent of the benefits, with the rest going to a wide range of industries, including bars, restaurants, retail and infrastructure.
A Chilling Effect on Availability
The proposed targeted rate will likely have a major effect on the availability of rooms in Auckland. Some accommodation businesses will be able to absorb the rate, although doing so will decrease return on income. But for accommodation businesses already running close to the line, the extra expense will gradually tip them over into insolvency. As businesses go under due to the increased costs, the number of available rooms will decrease.
Another unintended consequence of the targeted rate is that fewer accommodation businesses will feel inclined to invest in Auckland, as the potential rate of return may simply become too low for major expenditures to be profitable. Existing hotels and motels that have been declared bankrupt or are waiting for a buyer will experience longer lead times, so the natural turnover that happens in this industry will force numerous little players out.
Naturally, this situation will have a major effect on prices in the region. There is little room for expansion for many businesses, so their costs will remain roughly the same apart from the new targeted rate expense. Prices will go up to compensate for the increased expense, which may decrease visitor numbers — a natural result in such a price-competitive industry.
Decreased Business Values
The figures for the proposed rate increase are staggering — a business that’s currently paying approximately $1 million in rates will end up paying $2.6 million. The money has to come from somewhere, so naturally, it will eat into the businesses’ profit.
In addition, the decreased profit potential will slowly drive down accommodation business values. The lowered valuation will naturally decrease the businesses’ ability to raise capital against their properties, resulting in fewer upgrades and a lower standard of accommodation overall. This scenario represents such a serious problem for Auckland’s tourism industry that it’s baffling why a targeted rate would even be proposed.
In addition, the proposed targeted rate doesn’t consider potential recessions or sudden dips in the tourism industry caused by local, national or global events. A major increase in oil prices, for example, would make flights to New Zealand from global tourists progressively less cost-efficient, thereby increasing the cost of doing business in New Zealand and putting a damper on the tourism industry. Coupling that situation with this extraordinary proposed levy could push a wide range of hotel operators out of the business altogether, making the Auckland hotel and motel sector even more cost-prohibitive.
Overall, it’s clear that even a cursory study of the proposed targeted rate shows major flaws in the thinking of those who have championed it. It’s regressive, it’s unlikely to raise the amount of capital year-on-year that is required, and it’s likely to push a wide range of operators out of the business entirely. It also fails to take into account the realities facing the hotel and motel industry in Auckland today.
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