Hotels play a losing game

BUSINESS AGENDA:A HOTEL in "survival mode" is an eerie place indeed: floors where the lifts mysteriously never stop, ripple-free swimming pools, banks of CCTV screens containing few signs of anything resembling a tourist, writes LAURA SLATTERY

The once €150-a-night rooms might be sold for €50 or less, plunging owners further into the red and leaving staff fretting for their livelihoods. The damp summer season fades into autumn with no money in the bank and no hope of borrowing more for what promises to be a harsh winter.

And yet the hotels not only remain open for business, but are almost single-handedly propping up classified ad revenues in newspapers with new bed-and-breakfast packages. “Come stay with us,” they beg, “we’ll upgrade you to a suite and throw in a free massage.”

There are some 65,000 hotel and guesthouse bedrooms for cash-strapped “staycationers” to choose from. Although the hotel sector says this is 10,000 to 12,000 rooms too many and hotels are, technically speaking, failing all around the State for want of people to crease their sheets, the check-in desks remain eager for new arrivals. But what is the reason for this five-star folly?

It’s the clawbacks, according to the Irish Hotels Federation (IHF).

The tax incentives that once seduced the industry are now destroying it. About €330 million worth of capital allowances were used by the industry between 2004 and 2007, with the size of the tax foregone peaking at €118 million in the final year of the scheme.

At first, the incentives helped. Hoteliers with what the industry refers to as “stale product” and what visitors know as dingy rooms promptly called in the refurbishment companies.

But the tax breaks were used too heavily by the wrong people in the wrong places (“you should never build lighthouses in bogs,” says Philip Gavin of the Talbot Hotel group), creating a legacy of severe overcapacity.

Coupled with an all-pervasive global dip in trade, it has left Irish hotels officially half-empty: the latest occupancy rate, according to IHF president Matthew Ryan, is 53 per cent. It is little wonder, then, that there were cries of “feck the developers!” at the Grand Hotel in Malahide this week, as more than 200 struggling hoteliers congregated for a crisis meeting.

The real kicker is that the clawback conditions mean that, if a hotel does not stay open for seven years after the redevelopment, the investors have to repay the sums they offset against their personal tax bills. So they remain open, unprofitable and uncared for, but snaffling away custom from their neighbouring hotel cluster or forcing them to match their no-star rates.

IHF figures suggest there are about 21,000 hotel rooms across the State that fall short of the seven years of age needed to prevent clawbacks. Drowning in debt, but still clinging on, many of these hotels want to close, but can’t.

It is a strange state of affairs when modest, cautious, sustainable businesses can be run into the ground not by the success of their newer, cheaper, riskier competitors but by their failure – already rubber-stamped by receivers in some cases.

“We’ve got to separate the businesses that are operating under their normal commitments and the businesses that are artificially being kept alive,” says IHF chief executive John Power.

“There are hotels in receivership where the debts are drawing a line under the sand and the objective of the receiver is just to protect the bank’s asset, maintain it and sell it, or recycle it in some way. That’s creating unfair competition. That’s not what business is actually about.

“Then you have the overhanging clawbacks and the investors who are putting in more money to keep them alive and avoid having to repay the tax reliefs they got. Again, that’s distorting the market.”

Abolishing this barrier to exit would help bring about an “orderly” reduction in hotel numbers. “It costs the State nothing to remove it,” says Power.

There is widespread annoyance within longer-standing members of the industry that its numbers were infiltrated by a crude developer class. “Give the hotel industry back to the hoteliers, that’s my line,” says Michael Rosney, in business with his wife for 30 years at the Killeen House Hotel in Killarney, Co Kerry.

Rosney remembers the 1970s revolution in the business, when builders who had gone to the UK came back with “biscuit tins full of money” and threw up big hotels. But at least there was genuine demand back then.

Many of the 1990s and Noughties generation of tax-break investors did not understand the hotel business; nor did they want to. It was only meant to be a seven-year game. Building specs were viewed with one eye on the potential conversion opportunities to apartment units or retirement homes. Who needs German couples and Dutch hikers when you’ve got the tax break?

“It’s a big concrete jungle out there,” says Gavin, who runs the Talbot hotels in Carlow and Wexford and the Stillorgan Park Hotel, which he says is suffering due to an oversupply in Dublin, “the likes of which we have never seen and will probably never see again.”

For Ryan, managing director of the family-run Grand Hotel, it is quite simple. “They shouldn’t have been there. A real hotelier would look at a location properly and would have said ‘absolutely no way’ it can never repay its investment and it will never survive in the location that it’s in.”

There has been a tripling of bedroom volumes in the Grand Hotel’s catchment area over the past five years, with the addition of 2,500 rooms at Dublin airport.

“Our big problem is rate. You can bring your rate crashing from €150 to €50, and you’re not getting any extra business because there’s no extra business out there,” says Ryan. “It’s silly, and when you see hotels going below cost, you think, well we’re not going there. We’re going to survive and we have to survive. We’re second-generation here.”

What worries Power and Ryan most is that, while the five-star “portfolio” hotels such as Hugh O’Regan’s planned resort at the Kilternan hotel in Co Wicklow and big players such as the Dunne Group or Lynch Hotels generate national headlines when they fail, the rank and file of the hotel industry could be allowed to hit the wall quietly, taking down their local communities with them.

The sector now has a “risk profile” that the banks will not touch, and working capital – in other words, the seasonal overdrafts that have been traditional in the industry for decades – is typically being cut by 50 per cent.

“Because the downturn in visitors began from mid-2008, hotels’ reserves were already lower going into the winter,” Power adds.

“The overdrafts were used to their limits, so people are only coming out of them now, two or three months behind when they normally would have done it. We’re not going to have reserves going into this winter, in fact many people would still be in overdraft, and then you need another overdraft to get you through this winter.”

If there is one thing hoteliers can count on, it’s that the weather will be as spectacularly unhelpful as always. There was a suitably grey sky on Wednesday morning as hoteliers piled into the Grand. Without the sun, Malahide beach and marina were as subdued as the faces gathering inside.

The IHF is a broad church, where family guesthouse owners rub shoulders with large chain operators such as Pat McCann’s Maldron Hotels, which is happily signing up to provide the management services that keep some failed hotels open.

So agendas can conflict as much as they overlap. Maldron Hotels deputy chief executive Stephen McNally told The Irish Timesthat the company was working on the basis that the hotels in receivership that it was managing, such as Whites Hotel in Co Wexford, would have "a bright future", although he added that the group was turning down some businesses where there was "no point going in".

There was widespread support, however, for the IHF executive’s five-point proposal to the Government: the abolition of the tax clawbacks; ensuring that the National Asset Management Agency (Nama) does not create further “distortions” in the market; the introduction of new incentives for equity investments (properly structured this time); new State-guaranteed credit facilities; and a 30 per cent reduction in local authority charges.

With the low season fast approaching, Power and Ryan have written to three Government Ministers stressing the urgency of the need to fix the hotels sector before the only business that anyone can rely upon is room bookings for their rivals’ creditors’ meetings.

But the line of lobby groups crying foul to policymakers is long and so there was an unveiled threat in the air on Wednesday: if nothing is done to help, the industry will simply default on its local authority rates.

So how many will not make the cut?

“You never know,” says Power. “I’ve talked to people who I would have thought were utterly sound and were the last people in the world that might have been in financial difficulty and found that they were in crisis talks with their banks. And then there are certain other people out there and you wonder how in God’s name are they surviving?”

Dark times: one hotelier’s story

“I’VE BEEN through recessions, foot-and-mouth, Sars, 9/11, bird and swine flus, seen them all. They were only temporary inconveniences relative to the crisis we now find ourselves in,” says Joe Dolan, proprietor of the Bush Hotel, a 60-bedroom three- star in Carrick-on-Shannon, Co Leitrim, for the past 25 years.

“The big issue is overcapacity. There are 2½ times as many rooms 40 miles from my hotel as there was two years ago, and that means I need 2½ times as many visitors as before. Superimpose on to that recession and you have a nightmare.

“Visitor numbers and visitor spend are down 20 to 25 per cent. In addition, you have hotels with excess capacity, particularly the newer ones, in crisis management and they are below-cost selling out of necessity, because it’s all about cash.

“They need cash to pay next Friday’s wages.”

Dolan, in Dublin to attend the Irish Hotels Federation’s emergency summit, says he is “only treading water”, which is unsustainable.

“I must have profit. If I don’t have profits, I can’t reinvest, therefore my product will become stale and I’m at a competitive disadvantage, so you start to go down the tube,” he says, his eyes welling up slightly.

“All those other things I mentioned, foot-and-mouth and so on, they were very tangible things. You could actually see them, put your hand on them, and you knew, when the dust settled after the cooling-off period, you were out of the woods,” Dolan adds.

“This thing is open-ended. There’s no light at the end of the tunnel, there’s no quick-fix solutions, there’s no hiding places. It’s global, it’s across every sector, it’s what we face.”

The issue in numbers

60,729– number of hotel bedrooms in Ireland;

4,070– number of guesthouse rooms;

200,000– number of people employed in the tourism industry;

€6.3 billion– sum contributed to the Irish economy by the industry in 2008;

€1.5 billion– domestic tourism expenditure in 2008;

70 per cent– average fall in profits across the industry this year forecast by accountancy firm Horwath Bastow Charleton (HBC);

53 per cent– occupancy rate in Ireland's 925 hotels, according to the Irish Hotels Federation (IHF);

10 per cent– number of hotels opened in the past five years that will close, according to HBC;

18.4 per cent– annual decline in overseas visitor numbers, Central Statistics Office (CSO) figures show;

16.2 per cent– average drop in accommodation rates over the past year, according to the CSO;

25 per cent– what the IHF says is the annual fall in revenues per room over that period.