Deal flow in the Irish hotel market is increasing in pace, as investor interest grows. However, while sales in Dublin have made headway, a new report suggests that outside the capital, the market remains seriously financially under water, a situation that won’t work itself out in the short term.
Among recent deals, locally based investor iNua has bought the Radisson Blu in Limerick to add to the recent sister hotel it bought in Cork. Kennedy Wilson paid NAMA EUR29.8m for the 138 room Portmarnock Hotel and golf course. And Dalata has paid a similar sum to make its first acquisitions since its March flotation, the Maldron and Pearse hotels in Dublin; it plans to refurbish the Pearse before rebranding it under the Maldron flag.
One indication that the scale of sales will be increasing is the offering of a portfolio of three Irish hotels together. Savills is marketing the trio for NAMA, and are looking for around EUR30m for the Malton in Killarney, Ormonde in Kilkenny and Metropole in Cork; individual offers are also being taken. The Malton, with a guide price of EUR15m, sold previously at the peak of the market for EUR40m.
According to figures from Savills, 2012 saw 24 Irish sales amassing to EUR150m, rising to EUR200m in 33 deals during 2013. This year, more than 40 hotels will sell, driving turnover to EUR350m.
Yet despite this positive upturn, a fresh report from economist Alan Ahearne suggests the sector remains seriously under pressure, and in dire need of substantial further investment. And a recent report from Ireland’s bad bank, NAMA, indicates how great a volume of sales needs to be achieved, before Ireland’s toxic debts in the sector have been worked out.
Ahearne produced a report for the Irish Hotel Federation in 2012. Entitled “Time to Invest”, it revealed the sector had EUR6.7bn of debts. Progress has been made, says Ahearne, in his update “The Next Steps”, with sector debt now diminished to EUR5.3bn by end 2013. Some debt has been written off, with discounted loans sold to new holders; while better performing hotels have paid down loans.
Visitor numbers are up, and the sector has created 25% of the country’s new jobs in the last year, adding 17,000 to hospitality sector roles. This growth is set to continue, with overseas visitor numbers expected to continue rising, while in the medium term, domestic consumers will increase spending, too. Overseas visitor revenue recovered to EUR3.3bn in 2013, not far below the previous peak of just over EUR3.4bn in 2009.
As a result, ebitda per room is reckoned to be on the way up, calculated as EUR6,497 per room in 2012, from EUR5,220 a year earlier. “These figures highlight that the hotel sector as a whole is generating an operating surplus and therefore can sustain a certain level of debt,” says Ahearne.
But “progress has been uneven”, he warns. In contrast with a growing number of deals in Dublin and other towns, “many medium-sized and smaller hotels. especially outside of urban areas, are too small to be of interest to international investors”.
Ahearns estimates EUR1.4bn is still needed to steady matters, putting the sector in a sustainable position. The debt overhang is leading to “underinvestment in maintenance, renovation and innovation”; there is also a concern that debt repayments are also cannibalising essential maintenance costs. He has renewed his call for the recently announced Ireland Strategic Investment Fund to be extended and made available for hoteliers, “to assist where market failure still exists for hotels that are viable but undercapitalised”.
NAMA still owns 117 Irish hotels, around 12% of the country’s inventory, according to figures revealed at a June conference held by the Irish Hotel Federation. To date, it has sold just 19, or which 14 are in Dublin, but the organisation has promised it will increase the speed of sale through the coming months. Accountancy firm Crowe Horwarth presented figures revealing 240 hotels are in financial difficulty, with 69 in receivership.
HA Perspective [by Chris Bown]: The Irish hotel sector is to be congratulated for being so open about its problems – as well as its progress to date. In common with its government, decisive actions have been taken, to help improve the dire situation hanging over from the boom years.
There’s still a long way to go. Debt in the Irish hotel sector remained at an eye-watering EUR92,750 per room, at the end of 2013; the good news is, that figure is down from EUR113,250 in 2011.
Debt sales have taken place, and a promise of greater deal flow will inject fresh capital into the market. Though NAMA has sold relatively few of its legacy portfolio of hotels, to date. Will this spread out from the key urban centres, and bless more rural hotels? Time will tell.
The market is also waiting to hear of a new brand that could transform a swathe of Irish country hotels, promised since last September when RBS decided to draw together at least 25 hotels in debt to its Ulster Bank subsidiary. Hotel management consultancy Michels & Taylor were tasked with developing the new brand, which promises to support the businesses with better marketing and distribution – and ultimately deliver a better return for the bank.
But while earnings are up, and overall debts down, Ahearne points out that an interest rate rise will snuff out revpar gains. It is to be hoped that the promised increase in deal flow continues.
[Andrew Sangster adds] The Republic’s government has been the most aggressive in Europe in dealing with its problem loans. The recent sale of Project Eagle by NAMA illustrates this point with its 75% discount to book value, selling GBP4.4bn worth of Northern Irish property loans for GBP2.2bn.
The loss to NAMA on this sale is reportedly GBP320m. But rather than holding their head in their hands, politicians in Ireland have been supportive of a relatively early exit. In the case of this latest sale, leaders across Ireland have welcomed the move for being likely to reignite economic activity on what were mostly development sites.
NAMA itself is talking up the prospects of completing its self-off before the self-imposed 2020 deadline. The agency’s head, Brendan McDonagh, said back in April that NAMA would be increasing the pace of its disposals to take advantage of the improving conditions in the property market.
The thinking has been to take a small hit now and allow the market to get on with its work of stimulating activity in the belief that this will result in a greater gain overall in the long-run. This NAMA deal, completed in early June and its biggest sale to date, is the surest sign yet of the end of procrastination over under water loans.