Harem Hotel is a game where what makes it special is the world it has built. Each character is made better as the world expands because Runey pulls from that worldbuilding to inform those characters. For myself, I can't remove the sex in the game from the worldbuilding. As such:
It's cosplay, people dress as elves (and other things) all the time. It's role-play.
In the real world, where Elves don't exist, you're absolutely correct. In Harem Hotel, where the Elves are at times explicitly an allegory for black and indigenous people, it's literally the same as if you had your partner paint their face dark and treated them like a chattel slave. And not in the normal Slave & Master way, which is more than fine. In the the racialized way that emphasizes degradation on the basis of that status as a black or brown person.
If anything, it would be species-play, like furries.
Race is a social construct, and has no basis in science.
Language is also socially constructed, and the word race has taken on multiple meanings throughout time. We have both the concept of race as ethnicity, and the concept of race as an entire species. Both Sci-Fi and Fantasy tend to use this latter version of race when using the word. And often, they'll also take advantage of that distinction to make commentary on race as ethnicity, as Harem Hotel is so effectively doing.
Lin dressing as a high elf, that would be closer to "race" play.
Lin has dressed as a high elf, though I do hope that event gets changed, It makes no sense with the updated version of Sylvia's introduction. But the context for that was one of oppression. Lin was called a dirty ignorant lowlander by a woman from a race of elves who had once colonized her people, before her people led an uprising to end that. Feeling inadequate and fearing MC might prefer her to be better, as is normal for Lin, the slave, she dyed her hair blonde to look more like a high elf.
But that isn't race play. That's racial trauma.
Do you complain about Nia dressing as a human? ...I doubt it.
Speaking of racial trauma, you're right, I don't complain about the enslaved colonized elf hiding ther elf features in order to more effectively traverse human society as she fights for her people's liberation. In the real world, white passing native americans and black people have done this for centuries, because their race could get them killed, deny them work, force them into slums, etc. My roommate literally didn't even know about the fact that she was native in her childhood, because her grandmother hid it to survive. She literally found out near her grandmother's death when she saw a photo of her grandfather in native regalia.
At the end of this, all I have to say is, you don't have to twist facts or draw false equivalences to justify this desire. It's fiction and exploring these types of concepts in fiction can be a safe and non-harmful way to do things. However, just as you have a right to express your desire to see this, I have mine to express that I would prefer not to. It would actually make the game worse for me, as it is antithetical to the messaging the game has gone for.