Ireland’s Hotel Woes to Lessen in 2011

REPORT FROM IRELAND—The highly publicized economic distress of the Republic of Ireland has taken a toll on Irish hotels. But the situation should improve this year as the industry fights back and real-estate conditions improve. 

In another turn of good tidings, demand in the country improved by 6% year-to-date as of November 2010, according to data from STR Global.

“We have hit the bottom of the cycle and there will be a correction,” said Paul Gallagher, president of the Irish Hotels Federation. “I tell our members that our job as a sector is to reinvigorate business by being personable, by showing visitors that Ireland is a great value that offers an experience. We’re not just bed and breakfasts; we must broaden our horizons.”

The federation also responded in support of the proposed 11.5% decrease in minimum wage to €7.65 (US$9.92) in December’s “National Recovery Plan 2011-2014.”

Source: STR Global

The National Tourism Development Authority, Fáilte Ireland, Tuesday released visitor statistics for 2010:

• Overall tourism earnings are estimated to have fallen to €4.6 billion (US$6 billion) by year end, a 13% drop over 2009.
• Total overseas visitor numbers fell by 15%; British visitor numbers fell by 18%, which accounts for approximately half of the total decline in visitors.
• Two out of every three hotels saw profitability decrease during 2010.

Hoteliers, however, remain optimistic, according to Redmond O’Donoghue, chairman of Fáilte Ireland.

“Despite being an incredibly punishing year for tourism, most businesses survived through a mixture of innovation, experience and sacrifice,” he said in a statement. “Even in the hotel sector, while revenues fell significantly, the vast majority of our hotels have renewed their registration for 2011 despite the avalanche of closures predicted during 2010. The survival of tourism businesses through a year such as that is a testimony to the resilience of the industry and to a certain ‘can do–will do’ attitude out there.”

Distress and oversupply

On the real estate side, the industry players continue to discuss the status of distressed hotel properties and oversupply with government and banks.

There is a lot of distress in the Irish hotel market at the moment, but in many cases the banks are looking for alternatives to receivership because of the high costs associated with this strategy. They will support the borrower where possible, said Paul Collins, executive director for CB Richard Ellis Hotels in Ireland. 

“This is sometimes very difficult, and they have to appoint a receiver where the borrower is not being cooperative or where they have to protect their security against unsecured creditors,” he said. “At the moment, we have approximately 60 hotels in receivership or liquidation, which represents just over 6% of the Irish hotel stock. We expect this number to continue to grow in the next 18 months.”

 Many hotels were built for the wrong reasons in the wrong place, Gallagher said.

“There are 80% of the tourists visiting 20% of the locations,” he said. “ … When you have a fairly ailing and weak product base built on a market that didn’t exist, it results in a lowering of achieved rates in all of Ireland. And that price doesn’t allow for any profit for Irish hotels.” 

• Read the IHF’s 2009 study, “Over-Capacity in the Irish Hotel Industry and Required Elements of a Recovery Programme.”

Gallagher said the IHF is still pushing to close hotels built during the boom.

Paul Collins, CBRE

“There needs to be a correction in the system. Whether or not it’s administrative I can’t quite tell you,” he said. “We know capital value will improve over the short term, but there is no equity in the Irish market so there are no purchasers of hotels. You can’t keep putting them into receivership. Sooner or later they’re going to have to bite the bullet. These hotels must be the first to go under.” 

Ireland’s National Asset Management Agency

has acquired loans secured by 139 hotels, 87 of which are in Ireland, according to a statement from Finance Minister Brian Lenihan on 29 November.

“Towards the middle of 2011, (NAMA) will be developing a comprehensive strategy to deal with the hotels that are within its portfolio,” Lenihan said. “Ultimately, the long-term future of those hotels may not be as hotels and alternative uses will have to be found.”

NAMA’s attitude on the hotel debts that they have and will acquire is unsure, Collins said.

“NAMA are purchasing the loans of numerous developers,” he said.  “At this stage they have acquired the loans on almost 90 Irish hotels, and we expect this number to grow to over 100 in the coming weeks and months. They have a 10-year mandate and are likely to be patient and measured over this period and wait for some recovery in the market before offering hotels for sale.”

Market for hotels

Hotel assets should begin to trade this year, according to Collins.

“Some hotels have been on our books for 12 to 18 months,” he said. “It’s not as if the market is heating up—it’s just that there is greater activity because of more competitive pricing. We’ve had a horrific couple of years—historically there were 30 to 40 transactions a year at an aggregate capital value of more than €200 million (US$259.4 million). In the last couple of years there were less than five hotels sold each year for a total of less than €20 million (US$25.9 million).

“We expect that whilst the market won’t get back to historic levels, we should see 10 to 12 hotels changing hands in Ireland this year. That should send the right message and decision makers, including banks, may start to consider selling. Some hotel transactional activity will at least demonstrate that there is a market, but that correct pricing is critical."

The lack of a debt market is the underlying issue for much real estate in Ireland.

In a clear example of the impact on hotels, The Bank of Scotland Ireland announced in August it would close and with it would go a supply of working capital. The bank holds up to 20% of all hotel loans, worth €2 billion (US$2.5 billion), according to the IHF.

• Read “Bank of Scotland Ireland mum on hotel closure claims.” 

The bank was due to close after 2010 but told The Independent in Ireland that although all business current accounts were closed on 15 December, limited working capital arrangements would be available into the New Year.

“One of the biggest barriers to transactions is the absence of debt finance,” Collins said. “Whilst there are quite a number of buyers who have up to €5 million (US$6.5 million) in cash, once you get beyond this level deals become increasingly difficult to complete because the banks are not lending.

“In some cases the only solution is for the incumbent bank to stay in, refinance a new purchaser and at least in that instance there is the opportunity to move the debt from being a non-performing bad loan to a performing good loan on market terms with immediate capital repayment.”

The industry is carrying a debt load of €6 billion (US$7.8 billion), according to Gallagher. “That’s huge exposure—there were some very large loans for some major hotels in the last six years. … Hotels are finding it hard to pay and support staffs at that level.”

Some correction will have to be done on debt with debt forgiveness or debt shelving for a few years, Gallagher added. “The debt forgiveness is reasonable because banks will have already written it down.”

Demand factors in 2011

New taxation will probably affect domestic markets, said Gallagher. “On the first of January, the country will see new tax levels and that will affect discretionary spend. It could dampen demand for hotels.”

With a third of all hotel rooms in the country, Dublin’s performance is a key indicator of the health of the hotel industry. So far, demand is staying strong with a 5.3% growth rate as of November, in data from STR Global.

Source: STR Global

Some key infrastructure projects in Dublin, such as the Grand Canal Theatre, the 50,000-seat Aviva Stadium, Terminal 2 at Dublin Airport and the Convention Centre Dublin, opened in 2010 and should be beneficial to the city, Collins said.