The Irish Hospitality Industry illustrates the law of unintended consequences (Pt 1)

    150 150 Daniel Fountain
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    For over two weeks I have roamed Ireland staying in a range of hotels ranging from eccentric B&B’s such as Druid Lodge to one of the country’s top 5* hotels. Along the way I have experienced a range of offerings from very good pub/hotels to disastrous and inhospitable four stars.That the Irish industry is in crisis is common knowledge, with criminally negligent banking regime lending combined with generous tax allowances funding a boom of high quality, generally well designed, new build hotels across the country. Unfortunately many of these properties have been hit by the collapse in property values and a similar collapse in tourist numbers due largely to the same banker created recession. It is estimated that 83 of these properties are now running under the auspices of Irelands National Asset Management Agency, having taken from the banks in return for the loans that the public purse has bailed them out with. Of course taking these failing assets onto the public books only compounds the issue for taxpayers who ultimately must pick up the bill.

    The amount of money that can be recouped by the NAMA depends on the health of the tourism industry as this will generate the room nights that will give trading returns for the hotels. Compounding their problems are the additional 60 or so hotels now in receivership. To the accountants at NAMA this is a simple equation – if you minimise costs you can lower prices and attract more guests, the achieved occupancy rates being a marker in the sale brochure. Here is where the law of unintended consequences comes in.

    Most of the hotels in the NAMA book are 4* or 5*. A room in a 4* for €37.50 per head including a full Irish breakfast may put people in rooms but the price has unintended consequences elsewhere in the market place. The sector most adversely affected is one already struggling in the face of the fall off in tourist numbers – that of the B&B owner. Many of these are now struggling to attract custom as the reduced 4* rates are undercutting their own rates. The Druid Lodge referred to above has seen its only competitor B&B in Dalkey, South Dublin go under, and the Travelodge type operator is noticeably missing from the Irish market, with an Ibis recently being converted into a school by its owner, for example.

    Even in the London market assets can be severely depressed in value by the lack of loan availability (those same now over cautious lenders) as the price placed on the Hotel Verta (ex-Von Essen ) shows, at a price approximately 50% of the build cost. Trophy 5* hotels in the capital were changing hands at over a million a room – the new ’W’ Leicester Square recently sold for £200 million for example, to an overseas state asset fund not dependant on bank borrowings. The level of discount of price to value is more marked in Ireland where property prices have fallen by 45% and are predicted to fall another 15% in the next year.

    In part 2 I will look at the operational implications for an hotel market where business traffic has virtually disappeared and where operational practices are damaging further the resale value of properties. To contextualise all this I append below the policy statement on the Hospitality Industry from NAMA, made in March 2011

    ©Patrick Goff
    September 2011

    Daniel Fountain / 16.10.2011

    Editor, Hotel Designs


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