HOTEL INDUSTRY FACES MAJOR CHALLENGES
We are fast approaching the end of what has been one of the toughest years on record for the Irish hotel industry. Figures recently released by the Central Statistics Office show a reduction of almost 600,000 visitors to Ireland in the first nine months of 2009, an 11.2% year-on-year decline.
Hotel occupancy rates are currently at 15 year lows; turnover is down by at least 30% and more significantly, some industry sources suggest that profitability for 2009 could be down as much as 70% across the sector. A combination of falling tourist numbers, reduced discretionary spending, lower revenues, an illiquid banking system, unsustainable operating costs and a serious over-capacity issue have proved disastrous for the industry.
Hotels have essentially been in survival mode over the last 12 months, focussing their attentions on cutting costs and improving operating efficiencies in order to maintain margins. There was virtually no funding available for any transactions in the early part of 2009 as banks grappled with the credit crunch and this situation only worsened following the NAMA announcement in April. Since then, the market has been at a standstill which is quite starkly illustrated by the fact that only two hotel transactions have completed so far this year, namely the sale of the Moyglare Manor Hotel in Co. Kildare, for a reported €3.3 million and the Ridgepool Hotel in Ballina, Co. Mayo, for over €3 million. A number of other significant hotel properties offered for sale and which generated good interest during the year, were the Blarney Golf Resort in Cork and the Fleet Street, Ormond Hotel and Chief O’Neill properties in Dublin but, for various reasons, final negotiations are still ongoing.
The continuing lack of liquidity in the market has led receivers and banks to appoint private consultancy and hotel management companies, to operate some non-hotelier owned or distressed hotels, rather than put them for sale on the open market. In some cases, where the hotel is worth rescuing this can prove worthwhile but in other cases, it is surely a stop-gap measure with little chance of a successful outcome.
In recent weeks, there has been much focus on the hotel industry following the publication of Dr Peter Bacon’s report – commissioned by the Irish Hotels Federation - on over capacity in the Irish hotel industry. We support the report’s conclusions on the seriousness of the oversupply issue and have ourselves been expressing concern for some time now on the number of hotels that were built for tax reasons only, especially as many of them are trying to operate in very unlikely trading locations. The reality is that while the hotel tax incentives schemes were initially welcomed, they went on far too long. Several extensions to the scheme saw development of hotels for all the wrong reasons, resulting in oversupply in many locations around the country. Some advisors to the industry are not without their share of blame as many of these ‘white elephants’ would probably not have been funded had the feasibility reports which supported them addressed the most critical question – i.e. “Is there a proven, commercial need for this hotel in this location at this time?” In many instances, the conclusion reached should have been a resounding NO!!
We disagree however, with some of the solutions proposed in the Bacon report, as expecting the Government to change the tax rules - thus appearing to facilitate tax investors - together with some arbitrary group of interested parties deciding the ‘optimal future structure of the hotel sector’, would not seem workable.
The report suggests that a process of ‘decommissioning’ between 12,300 and 15,300 hotel rooms should begin before the start of the 2010 season and that the 217 hotels built and registered since 2005 is the obvious place to start. This seems to be a rather facile solution and smacks of ‘throwing the baby out with the bathwater, as many of the newer hotels are now strategically important in their local markets and have as much right as any other hotel to stand or fall, as market forces should dictate.
The Bacon report also concluded that some tax driven hotels and other hotels that were originally purchased for alternative development, are clearly insolvent but are being allowed to continue trading without meeting any or all of their banking commitments. This practise is extremely unfair on those other hoteliers who have to trade in the same market place and, at the same time are obliged to meet all their financial commitments. It is not too much to ask that everyone should at least be operating on a level playing pitch? As with any other business, normal commercial market forces rather than self interest or some arbitrary measure, should decide at all times whether any particular hotel business is sustainable or not.
It is assumed by its promoters that the current lack of credit in the market will be resolved once NAMA is operational but it remains to be seen how long it will take for any significant amounts of credit or working capital to become more readily available. In our view, it is likely to be the second half of 2010 before there is any meaningful improvement in liquidity and in turn, any increase in transactional activity. Many hoteliers have already made difficult decisions to help them survive over the coming months including closure of some elements of their business such as surplus bedrooms, spas and leisure centres while others will look to reduce operating costs by perhaps, closing entirely from Sunday to Thursday, reducing staffing levels and cutting employee remuneration. With profits in the industry non existent at the moment, fixed costs such as local authority rates are way too high and with the countrywide revaluation of all commercial property at last underway, the CBRE rating department has so far been quite successful in securing substantial rates savings for some hoteliers.
We would also support the IHF’s calls for an immediate scrapping of the badly conceived €10 air travel tax – as has already been done in Belgium and Holland - and we believe their suggestion to widen the free travel scheme for our older citizens to all qualifying Europeans, would reap big dividends for the country. Considering how badly wrong we got the whole golf tourism strategy in recent years – witness the hype and expense of hosting the Ryder Cup on an untypically Irish golf course in 2006 and the surge of new Resorts across the country - we would also urge a root and branch review of how we market Ireland Inc abroad. We would suggest that the UK should be the major focus of any future marketing strategy and all our efforts should be focussing on the 60+ million people on our doorstep, who have excellent and easy access to our shores through more than 30 different UK airports and several ferry ports.
Hoteliers should also use the IHF’s regional networks to facilitate innovation in the sector at a more local level, to help devise specific marketing strategies to boost tourism and generate business for hotels in each specific region and to provide updated information for hoteliers on successful yield management strategies.
It remains to be seen what if anything the Government can or will do to about the overcapacity issues in the hotel industry or indeed if some of the Bacon report reccomendations will be addressed in the forthcoming Budget and the 2010 Finance Act. The vast majority of Ireland’s hoteliers are hardworking professionals, entrepreneurial and resolute business people who are in the business for the long haul and to date, they have made a huge contribution to Ireland’s economic success and to our international image abroad. It is to be hoped that Government will do all they can to help them through these extremely worrying and difficult times and, while waiting for some liquidity to return to the system, that our Banks will take each case on it’s merits, provide the essential working capital and support the many good people in the industry, through these critical times.
This article appeared in the Sunday Business Post printed edition, 29th November 2009.
For further Information please contact
Dermot Curtin, Director
CB Richard Ellis Hotels, Ireland
t:+ 353 1 618 5500