A quarter of hotel rooms in Ireland need to be closed down urgently because the hotels 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 the “orderly elimination” of about 15,000 hotel rooms should begin before next year’s peak summer season.
Dr Bacon said many of the hotels built as a result of tax breaks were now insolvent, but the banks that had financed their development were not foreclosing on the developers’ loans in order to avoid a negative impact on their balance sheets.
The report calls on the Government to remove the clawback of tax relief that currently takes place 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.
“Most of these investments didn’t make sense at the time they were done... They were being driven in effect by tax,” Dr Bacon said.
Dr Bacon’s report 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.
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.
“The burden of adjustment that you would expect to see on bank balance sheets is being pushed out to the hotels sector,” he said at the launch of his report in Dublin today.
“The result is that the entire hotels sector is being compromised and its sustainability and viability in the future is being questioned.”
Dr Bacon said it was difficult to estimate how many jobs would be lost as the result of the closure of 15,000 hotel rooms, but that 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.
The Government should also 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, 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 in Ireland in the period 1999-2008. The stock of new hotel rooms has been insolvent since 2005, Dr Bacon’s report states.
John Power, the chief executive of the IHF, said it was estimated that the sector owed €15,000 in debt for every hotel room. A maximum of 5 per cent of hotels were running a profit, Mr Power said. “Hotels are in survival mode at the moment.”
