Ireland saw EUR36m in hotel transactions in the first quarter, after recording more than EUR730m for the full year last year.
The imminent sale of the Conrad Hotel in Dublin was expected to drive renewed interest in the market, particularly at the higher end
CBRE reported that four hotels in the country had been sold in the first quarter. Debbie Hugger, senior analyst, CBRE Hotels Ireland said: “The opening months of the year are generally slow in the hotel property market and 2019 has been no exception with very few hotel sales having concluded during first quarter despite a strong volume of activity underway in the sector behind the scenes. With negotiations continuing on a number of hotel transactions at present and several new opportunities due to be formally offered for sale over the coming months, we expect a pickup in transactional activity in this sector from the second quarter of the year onwards.”
The market was awaiting the sale of the Conrad Hotel in Dublin, with local media reports suggesting that it could sell for EUR115m, which, at EUR600,000 per key, would represent a new high for the city. There were thought to be a number of interested parties bidding from around the world, with the hotel subject to a management agreement with Hilton.
Paul Collins, head of hotel investment properties UK & Ireland, CBRE Hotels, told Hotel Analyst: “The sale of the Conrad may unlock other deals, particularly in the four and five star sector. On the transactions side, Dublin is booming, we are seeing a lot of US companies expanding and using the city as their European base, and the airlift continues to improve; there are two direct routes to China and the pre-clearance for the US has driven room sales. We’ve seen more Asian interest, mostly out of Singapore and interest from the US, from funds, private equity and hotel companies in the Irish market.
“Market conditions have been very strong, trading has been good. We will start to see a slowing down, but we couldn’t continue at the high velocity we had been at. VAT has been increased and that has had an impact on rate, but we are still expecting to see growth. Occupancy is close to a peak, but is expected to stay strong. These fundamentals will continue, but not at the same rate.”
Concerns had been raised by some observers that new supply coming into the market, particularly in Dublin, would dampen performance. Cushman & Wakefield reported that 3,882 hotel rooms were in development in Ireland at the end of 2018, a 70% increase on the number of rooms that were in development at the end of 2017. The company said that just over 1,300 rooms opened across 21 hotels in Ireland in 2018, with 1,000 of those 1,300 rooms being spread across 13 properties in Dublin.
Collins said: “We’re seeing activity in development. Over 12 years we had negligible net new supply. It’s only now that we’re seeing new supply coming through but we’re comfortable because a lot of it is catch up. Our sense is that the secondary and tertiary markets may suffer when more supply comes into the city centre in Dublin.”
The end of last month saw Premier Inn announce plans for its third hotel in Dublin. Kevin Murray, head of acquisitions (North and Ireland) for Whitbread, said: “With significant bedroom requirements in the city we are actively exploring other live freehold and leasehold opportunities as we work to secure up to 2,500 Premier Inn bedrooms in Dublin.”
Other brands targeting the city including Motel One with Collins also highlighting Spanish and Portuguese hotel groups and “some of the new wave of budgets”. When asked whether budget hotels would work in such locations with prices rising, he said: “A lot of development is in areas which are not in prime office locations, so they are cheaper” and could still be used by the budget operators.
While the sale of the Conrad was expected to be finalised imminently, not all deals were going smoothly. The Times reported that talks between Starwood Capital and Tetrarch to create a joint venture had broken down. Tetrarch had been planning an IPO, but delayed due to market turmoil.
HA Perspective [by Katherine Doggrell]: Ireland has been very much the place to find the pot of gold at the end of the rainbow for many investors, with hotel brands adding it to their must-have lists, but memories are long (in investor terms at least) and there remain fears that we could see a return to the days of the financial crash, where everyone, his dog and his aunt was developing a luxury golf course.
Those fears are irrational. The Celtic Tiger was fuelled by cheap debt poorly monitored and tax breaks to fuel development. There are no such tax breaks today, indeed the government now sees the hotel market as stable enough to increase VAT.
Any market where everyone has to be is bound to see a certain competitive tension and those looking to buy into it need to be clear on what they’re offering. As with most other mature markets there is opportunity for five-star hotels like the Conrad and for the budget offerings at the other end. It is the mid-market where the questions are most likely to be posed.
Additional comment [by Andrew Sangster]: There is a lot to like about the Irish hotel market: strong trading thanks to an economy that was the fastest growing in the EU in 2017, high demand for assets and limited supply.
One challenge is the relatively small size of the market. Take Dublin, truly a boom city right now. It has less than 20,000 rooms, way behind the UK capital which is north of 150,000 rooms. The danger with small markets is that it takes relatively modest changes in supply to create a big impact. If Premier Inn does indeed secure 2,500 rooms in Dublin, this increase alone is enough to cause a supply shock.
Also, data can be misleading. The EUR730m of deals in 2018 was so big due to just one deal, Tifco, going for almost half of the total at EUR305m. There are not many deals of this scale in the Irish market.
Looking forward, there seem more headwinds than tailwinds. The economy has slowed markedly and is at extreme risk in the event of a hard-Brexit. Supply, however, continues to keep coming. There is enough demand right now to absorb the pipeline being built but a big negative demand shock would obviously throw this out of kilter. Lack of scale makes volatility a real risk.