A QUARTER of the hotel rooms in Ireland need to be closed down urgently because the sector in its entirety is insolvent, according to a report by economic consultant Peter Bacon.
The report, which was commissioned by the Irish Hotels Federation (IHF), states that the “orderly elimination” of about 15,000 hotel rooms should begin before next year’s peak summer season.
Dr Bacon said most of the hotels that had been built as a result of tax breaks were now insolvent, but that the banks that financed their development were not foreclosing on the developers’ loans to avoid a negative impact on their balance sheets.
The report calls on the Government to remove the tax relief clawback provisions that currently apply if a hotel ceases to trade within seven years of receiving the tax break.
Dr Bacon said the clawback was preventing hotels that wanted to close from shutting down, with the result that the entire sector was now struggling to survive.
The Government should remove the clawback in next year’s Finance Act, he said.
Dr Bacon is sharply critical of the legacy of tax breaks for the hotels industry which led to the building of non-viable hotels, with the debt on the rooms exceeding their value even at the peak of the market.
“Most of these investments didn’t make sense at the time they were done . . . They were being driven in effect by tax,” he said.
By 2008, an average of €118,000 was owed per hotel room in Ireland, but the average value of the rooms declined sharply after 2005 and stood at €100,800 last year. Hotel rooms were therefore worth an average of €17,000 less than the debt per room.
“Given the ongoing and intensifying difficulties being experienced by the sector, it is considered that this deficit will have increased in 2009,” the report states. Dr Bacon calls for the establishment of a high level group comprising representatives of the hotels, tourism and financial sectors to begin the process of reducing capacity in the sector.
Dr Bacon said it was difficult to estimate how many jobs would be lost as a result of the closure of 15,000 hotel rooms, but that he expected it would be “relatively few” as there had already been a “significant shake-out” in the sector as a result of hotel occupancy rates as low as 50-55 per cent.
More jobs would be lost by “doing nothing at all”, he said.
Meanwhile, the Central Bank and the Financial Regulator should investigate why banks are not foreclosing on hotel developers whose loans have gone bad, Dr Bacon said yesterday.
“The burden of adjustment that you would expect to see on bank balance sheets is being pushed out to the hotels sector,” he said.
“The result is that the entire hotels sector is being compromised, and its sustainability and viability in the future is being questioned.”
Dr Bacon dismissed the idea that the removal of tax relief clawback provisions would create a “moral hazard”, whereby failed investors were freed from the consequences of their actions.
“This is not a bailout for hotels,” he said. “Market forces are not working. We cannot have a situation where zombie banks result in a zombie hotels sector or zombie-other-sectors.”
The Government should consider setting up a hotel restructuring fund to assess which hotels should be shut down and which might be insolvent but of strategic importance for the tourism industry, such as five-star hotels in key areas, Dr Bacon added.
It should also examine whether hotels that are “surplus” to the requirements of the tourism industry can be converted into alternative uses such as healthcare or educational facilities.
Some 26,802 new hotel rooms were opened between 1999-2008. The stock of new hotel rooms has been insolvent since 2005, while the sector as a whole has been insolvent since 2008, Dr Bacon’s report states.
Chief executive of the IHF John Power said a maximum of 5 per cent of hotels were running a profit. “Hotels are in survival mode at the moment.”
Hotel closures: the top five
Barry’s Hotel
The company behind Barry’s Hotel, one of Dublin’s oldest hotels and the scene of gunfire shortly after the 1916 Easter Rising, went into liquidation this week. The hotel was opened in 1889 by a Mrs Barry on the site of two Georgian houses in Great Denmark Street.
Morrison Hotel
Hugh O’Regan of Thomas Read Holdings, the shareholder of Morrison Hotel Ltd, , is in liquidation. The company, which operates the hotel, is being sued for €3.7 million in alleged unpaid rent.
Trinity Capital and Grafton Capital hotels
In September the O’Dwyer brothers Liam and Des put the Trinity Capital on Pearse Street, Dublin, and the Grafton Capital near St Stephen’s Green into provisional liquidation. Both hotels are part of their Capital Bars chain of pubs and hotels.
Tallaght Cross and Glashaus hotels, Tallaght
Property developer Liam Carroll closed down the Glashaus and the Tallaght Cross hotels in January – within a year of their openings – with the loss of 72 jobs. Both have since reopened, offering rooms to rent on a long-term basis.
Ostán na Rosann, Donegal
The only hotel in Dungloe, Co Donegal, Ostán na Rosann closed suddenly this week with the loss of 30 full and part-time jobs. The 48-room hotel is part of MMC Hotels, owned by the McBride family. A liquidator has been appointed, and the owners attributed the closure to a severe downturn in the Irish and world economy.
The Bacon hotels report by the numbers
26,802– the number of new hotel rooms opened in Ireland from 1999-2008.
15,000– the number of hotel rooms that should close down to avoid catastrophe in the sector.
€17,000– the average negative net asset value of hotel rooms.
€1bn– total excess of debt over room assets in the hotel sector in 2008.
25– percentage drop in room rates in real (inflation-adjusted) terms between 2000 and 2008.
11– the percentage drop in the number of overseas visits to Ireland in the first eight months of 2009.
