Dublin hotel room oversupply good for traveler

By Patrick Mayock
July 19, 2010

Dublin, IE — Plagued by massive oversupply and stagnant levels of demand, the travails of Dublin’s hotel market is in many ways a microcosm of the struggles of Ireland’s hotel industry at large.

There were 26,802 new rooms added to the country’s existing supply from 1999 to 2008, a development boon fueled not by the industry fundamentals—though tourism did account for 7,435,000 oversea visits and ¤1.5 billion (US$1.9 billion) in taxes during 2008 alone—but by capital tax allowances, according to an analysis conducted by economist Peter Bacon and commissioned by the Irish Hotel Federation.

The pace of growth far exceeded that of demand, a discrepancy further exacerbated by the worldwide economic crisis beginning during the end of 2008.

Last year saw occupancy in the Irish hotel industry at a 15-year low, with tourist numbers down 12 percent, according to an analysis from CB Richard Ellis, the country’s largest commercial real estate services company.

The result has been an industry crippled by price cuts, insolvency and cries from insiders to remove a considerable amount of supply.

Too many rooms

The Dublin market comprises 216 hotels with 21,278 guestrooms, according to STR Global. Most are properties with approximately 200 rooms, built to house leisure travelers from North America and weekend holidaymakers from the city’s neighbors in the United Kingdom.

The Best Western Premier Academy Plaza Hotel, for example, offers 285 recently refurbished guestrooms, including 185 that were added as late as 2007.

The property has weathered the global financial crisis reasonably well, said GM Peter Collins, due largely to the hotel’s renovated rooms and ideal city-center location.

The grass in the Emerald Isle’s capital city is anything but green, however, Collins said. The influx of new rooms in recent years has put a tremendous strain on existing supply—and not just hotels, but the Irish real estate markets in general

According to Bacon’s analysis, there was an estimated total investment of ¤5.2 billion (US$6.7 billion) in the Irish hotel industry from 1999 to 2008 (much from the 26,802 new rooms cited above). That represents ¤4.1 billion (US$5.3 billion) in debt.

“In aggregate, the hotel sector has been insolvent since 2008 given the level of debt and asset values based on current profitability,” Bacon said. “The stock of new hotels has been seriously insolvent since 2005. The analysis shows that in every year since 2002, new hotels on average have been insolvent from the year of their construction.”

The situation is particularly bad for the 217 hotels with 15,600 rooms constructed between 2005 and 2008, he continued.

In a normal market, insolvency would be contained to the weakest performers and the problem would resolve itself as they exited the industry. However, Ireland’s most insolvent properties have stayed open as investors scratch and claw toward the seven-year threshold required to take advantage of the government capital allowances and to avoid the creation of tax liability.

Banks, reluctant to realize losses by foreclosing on underperforming properties, have done their part to contribute to the crowded market.

But perhaps most daunting was the introduction of the National Asset Management Agency, or NAMA. The program was designed to take over toxic assets throughout the country, and it could end up with more than 100 hotels, according to estimates from the Irish Hotel Federation. (Other industry sources claim the figure might top 200, the Irish Times reports.)

What NAMA does with those properties in the long-run still has yet to be decided. For the number of hotels it has taken over already, it has yet to take action. “It’s still business as usual,” said Collins, adding that such “business” is running at basement-bottom pricing to maintain any semblance of cash flow.

“We have a lot of hotels that are owned by banks that are dropping rates and causing a lot of issues across all properties,” he said.

Or, as Bacon reported: “The result of these factors is that the insolvency problem is being spread through the industry and is damaging the whole stock of hotels by pushing prices down to non-viable levels.”

Hotel performance

Not all hotels are feeling the pinch. In addition to the moderate successes of the Best Western Premier Academy Plaza Hotel, the Hampton Hotel was running at 90 percent occupancy in June, said Christiane Foller, rooms division manager.

The Hampton is something of an oddity in the Dublin market. Not only is it a solvent new hotel (it opened in February 2009), but it’s only a 24-room boutique property.

The hotel also is one of a handful that has been able to push rate, Foller said.

“People are starting to say, ‘if I pay this much for a room, what am I going to get?’” she said. “We’re slowly starting to raise rates again.”

For most hotels in the city, rate erosion is commonplace. During May, the market’s average daily rate was ¤80.32 (US$98.53), a 6.6-percent drop from the year before. Year to date, ADR decline has been even steeper—to a tune of 10.5 percent.

Fortunately, occupancy has shown improvement, with a 3.2-percent increase through May 2010. And on the horizon, the opening of a new convention center in September should attract some much-needed meetings, incentives, conferences and exhibition business, said Konstanze Aurenheimer, director of marketing and analysis at STR Global.

But true recovery will come when the oversupply and resulting price cuts are addressed.

Bacon recommended that between 12,300 and 15,300 rooms be removed from the market as soon as possible.

“One approach would be that the burden of adjustment would fall on the 15,600 rooms introduced since 2005 as many of these should not have been built given the emerging imbalance between supply and demand and the fact that the levels of associated debt make these the group with the highest degree of insolvency,” he said. “Doing so would result in an industry with about 44,000 rooms in 700 hotels.”

In its analysis, CB Richard Ellis called for a more pragmatic approach.

“Rather than arbitrarily closing down the most recently developed properties as suggested in the report, we believe that market forces should be the determining factor in deciding which hotels are ultimately viable and have the best chance of survival.”

Whatever is done, hoteliers operating properties on all ends of the spectrum are left to hang on by their fingertips.

“For the Dublin market, it’s still very much a matter of survival,” Collins said.

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