With cashflow now a problem and banks reluctant to invest in the sector, the commercial value of hotels is plummeting at an alarming rate, writes Gretchen Friemann
DEVELOPER BERNARD McNamara is thought to be in discussions with a potential purchaser for the Ormond Hotel after an €11.5 million deal with the veteran hotelier, Jim McGettigan, collapsed last month.
The disused building on the Liffey's north quays has been for sale since March and had initially been expected to fetch around €15 million, but according to well-placed sources the construction magnate is now keen to offload the property for between €10 million and €11 million.
Yet the reluctance of banks to invest in the sector means hotel values are plummeting at an alarming rate and lengthy delays in transactions risk leaving properties open to further price depreciation. It's understood the deal with McGettigan's Regency Hotel group, which is run by the Donegal-born businessman's family, fell through because the one institution that agreed to back the acquisition did so on punitive terms. As one source said, the financing package was so unpalatable it was "obvious the bank didn't really want to do the deal. They might as well have said 'no' from the outset."
The Regency Hotel group is one of the few hotel organisations to have sold a property within the past few months after the publican and hotelier, Louis Fitzgerald, snapped up the company's Parliament Hotel in Dublin's Temple Bar for around €20 million.
It is not clear whether these latest discussions for the Ormond are a renewal of negotiations with the McGettigan family or involve a new potential purchaser. Peter Browne of agent Browne Corrigan is acting for McNamara's construction firm, Michael McNamara Co, however he declined to comment on any prospective deal.
Mr McNamara acquired the Ormond Hotel in 2006 and controls it through a special purpose company in which he is the main shareholder. Although the property has been much altered over the years, its name and location still holds a fascination for Joyceans as the hotel featured in The Sirens episode of Ulysses.
But according to his construction firm, Mr McNamara purchased the four-storey over basement property, which has full planning permission to be demolished and replaced with a 6,503sq m (70,000sq ft) hotel with 130 bedrooms, as a development play. The company stated earlier this year that the building "was acquired to do a deal with a hotel group who did not go ahead".
The comments were in answer to a flurry of media speculation over Mr McNamara's decision to offload three central Dublin properties at a time when market values were embarking on a vertiginous descent. As one source points out: "Selling any property is all about timing. The hotel sector has been particularly hard hit by the economic downturn and we are advising our clients not to sell unless they absolutely have to."
Just down the quays from Mr McNamara's Ormond Hotel, the Tullow businessman, Lar Byrne, is experiencing similar difficulties in the sale of his Smithfield hotel and tourist attraction, Chief O'Neills.
Mr Byrne, who shot to fame when his horse Hardy Eustace won successive titles at the Cheltenham festival in 2003 and 2005, bought the hotel from developer Terry Devey for just under €20 million two years ago.
The property, which includes the 170ft Jameson distillery tower and is being sold as a going concern, has been on the market for over a year. Its original price tag was €21 million but that figure has been slashed twice - first to €18 million in April, and now to €16 million - without any effect so far. And according to one senior industry player, the latest market valuation on the hotel has shrivelled to €12 million.
Agent CBRE is acting for Mr Byrne, having replaced the initial selling agent, Lisney, and is quoting €16 million for the property. No one from the company was available for comment.
But a glance at the agency's website indicates just how tough conditions have become for the once-buoyant hotel sector. CBRE has over 20 establishments listed for sale as operators struggle to maintain a business in the face of one of the worst economic crises in living memory.
Recent research from Davy stockbrokers blamed cheap credit and tax breaks for the current market saturation. It showed that hotel bedroom numbers have increased by 150 per cent since 1996 while tourist numbers rose just over 70 per cent.
Davy economist Rossa White said: "Capital investment in hotels looked compelling on paper with the tax breaks available, but underlying businesses need to be profitable to survive. Many developers invested in or built hotels using earnings from their long-time buoyant housing or contracting businesses.
"As hotel cashflow dwindles, it creates another headache for banks exposed to the problems in the new housing and commercial property markets."
According to industry sources, all banks in Ireland are exposed to the hotel sector and the difficulties in selling these assets has forced financial institutions to adopt a more lenient approach to cash-strapped investors.
Aiden Murphy, a partner with the accountancy firm, Horwarth Bastow Charleton, claimed that banks have resorted to deferring or reducing annual interest payments in order to help hoteliers overcome chronic cashflow problems. He pointed out that annual interest charges represent the "biggest fixed overhead" for many businesses and argued that banks realise that investing in a hotel is a "long-term, 15 to 20-year play".
Yet one industry source claimed many hotels are now in a "desperate situation", having over-stretched their overdrafts, and he predicted that in the first quarter of next year there will be a "sharp increase" in the number of establishments entering receivership.
There have already been many big-name casualties in recent months, including the Dunne Group, which operated five hotels, and the construction firm John F Supple Limited, which was behind the five-star Capella resort in Castlemartyr, Co Cork. And as the dire economic conditions show little sign of easing, one senior industry source claimed that hoteliers are adopting classic credit-crunch survival tactics; shopping for supplies in Aldi and Lidl.
