We have heard countless stories about how businesses small and large have been affected by the global Covid-19 outbreak. Travel firms and those in the hospitality industry have been hit hardest, with international travel bans essentially freezing the market. In fact, this travel ban has brought one of the darlings of Silicon Valley, the world-famous proptech company Airbnb, from cloud nine back to earth with a thud from the weight of angry landlords and non-existent tenants.
We have heard countless stories about how businesses small and large have been affected by the global Covid-19 outbreak. Travel firms and those in the hospitality industry have been hit hardest, with international travel bans essentially freezing the market. In fact, this travel ban has brought one of the darlings of Silicon Valley, the world-famous proptech company Airbnb, from cloud nine back to earth with a thud from the weight of angry landlords and non-existent tenants.
A year ago, Airbnb reported yet greater growth and profitability projections along with plans to go public in 2020. Fast forward to now and the business required a $1 billion injection to keep it operational. This also valued the company at a meager $18 billion versus its $31 billion valuation of 2017. This loan also comes with a steep 10 per cent interest rate attached.
As of 15 April, Airbnb has announced another debt raise of $1 billion. Reports estimate that this loan carries a hefty 7.5 per cent interest plus LIBOR over the five-year term, which will involve no equity or warrants. Airbnb is seemingly in dire need of financing, and the prospect of a long-awaited IPO has been seriously damaged by the Covid-19 pandemic.
From being seen as one of the most anticipated flotations to come in 2020, the company had already lost $322 million in the first nine months of 2019, and another few hundred million since the start of this year. This led it to tell investors to expect full-year revenue to be less than half of what it was in 2019.
The impact on how the company operates has been staggering. Cancellation rates have skyrocketed, hitting 90 per cent compared to the average 3 per cent for this time of year, according to AirDNA data. As the rest of the travel and property industry really feel the pinch, Airbnb is starting to bleed out. Out of guests, out of hosts, and out of money.
With the company’s very generous free cancellation policy coming as great news for nervous travellers, hosts have in turn begun to openly revolt against the organisation. A far cry from the platform’s early days as a haven for amateur hosts letting out spare rooms, many hosts are now professional landlords with a portfolio of (often rented) properties, for whom Airbnb provides a large proportion (if not all) of their income and is relied upon to put food on their tables. Only after substantial lobbying did CEO Brian Chesky cede a $250 million bailout to refund 25 per cent of cancelled booking fees to hosts. This is a hole in the balance sheet that the firm undoubtedly didn’t see coming, which it could really do without as its cash position becomes ever more worrying.
What we are seeing is these properties being let out for longer periods, either through Airbnb or on other more traditional long-let websites. This is despite English law requiring a change in rental cover, as short-term lets are only allowed for 90 days of the year. It’s a shift happening across Europe and the US, as EUObserver.com’s Jose Miguel Catalyud wrote: “people in Madrid started to notice a sudden increase in the number of new flats to rent long term on real estate agency websites.” In turn, landlords have started to move away from Airbnb, with no end in sight for the travel ban and a desperate need for income.
So what does this mean for the future of Airbnb? Well we can kiss goodbye to that flotation, at least in the short term. The incredible blow this pandemic has already had on the business, let alone what the next few months hold for it, has impacted the valuation beyond imagination. Add to this the tenuous financial state the company was in before the crisis, and it’s a recipe for a WeWork-level of IPO disaster being whipped up in the corporate kitchen.
There is also a chance that Airbnb will see a long-term and potentially irreversible reduction in its number of hosts. With many furious with the way they have been treated by the company and listing longer-term lets on other platforms, it is unlikely they will return. Add to this the knock-on effect of fewer Airbnbs leading to lower rents in these areas, and it begs the question: why would hosts rejoin the service? The once-predictable income that Airbnb offered during peak and off-peak times has been replaced by precarity, and landlords and buy-to-let investors are less likely to take a punt on putting their properties on the short-term market instead of securing a longer-term tenancy through more conventional means.
Local authorities may well see this as an opportunity to impose stricter regulations on the short-term letting markets in their cities – something many have been itching to do for some time. Barcelona was a poster child for those uncomfortable, and at times outwardly angry, at the number of Airbnbs in the area, and local authorities are likely to see this as a break they can use to implement greater restrictions on the number of short-term lets in their municipalities.
Despite this, it is highly doubtful Airbnb will be reduced to zero, with investors still keen to have a piece of the proptech giant’s pie, and the longer-term lets play seems to be working, with urban dwellers seeking affordable long-term rural lets to escape the cities. However, the next few years for everyone, not just the property and travel sectors, are likely to see huge change.
So what can we learn about the future of the proptech industry? Firstly, the proptech space is so vast that what affects one section, like Airbnb and short-term rental, may not affect another part of the sector. However, the all-consuming nature of the pandemic has affected all industries, and how they recover will sort the wheat from the chaff. We are still seeing proptech VCs, such as A/O Proptech and Concrete VC, making investments in proptech companies and, with restrictions beginning to be lifted in Spain and other countries, there is cause for cautious optimism.
Loss-making businesses in every industry, not just proptechs, that are reliant on investor capital will struggle in this new climate. However, well-managed and financed proptechs will survive. It is certain that the world that exists after Covid-19 will be drastically different from that which came before it. Climate change will continue to be a problem that humanity faces, but proptech companies are at the forefront of tackling this. And in the new world, that will be an opportunity for them to continue working on as they lick their wounds and learn from the harsh lesson the coronavirus has taught them.
