Irish Zombie Hotels Revive as John Malone Checks In: Mortgages
In Ireland, the zombie hotels dotted across the landscape are beginning to revive or die.
Four years ago, the country’s debt-laden hotels were contending with falling visitor numbers and new competitors financed by surging mortgage lending during Ireland’s Celtic Tiger boom. That’s when zombie hotels emerged, slashing room rates to stay alive and keep tax breaks granted during the boom.
Now increasing demand for rooms, led by Dublin, is prompting investors from American billionaire John Malone to Russia’s richest woman to buy Irish hotels. The Irish capital generated more revenue growth per available hotel room than any other major European city in the 12 months through June, according to a survey by lodging-data provider STR Global.
“There’s a fair bit of capital in the marketplace looking for what people now believe is a good investment again,” said Kevin McGillycuddy, managing director of Brehon Capital Partners. The Dublin-based private-equity firm and partner Midwest Holding AG bought the Ritz-Carlton Powerscourt near Dublin in February and opened the five-star Marker Hotel in April.
Brehon also might have purchased the city’s Trinity Capital Hotel if its bid hadn’t been trumped by Malone, chairman of Liberty Global Plc. (LBTYA) Malone, who controls the international cable company, paid about 35 million euros for the 195-room property this month, said a person with knowledge of the transaction who asked not to be identified because the information is private.
“It’s a personal investment with friends,” Malone said in an e-mail.
Tourism, Ireland’s largest indigenous industry, was devastated by the global financial crisis, with visitor numbers plunging 23 percent between 2008 and 2010. Demand for hotels evaporated, causing the occupancy rate to fall to a 16-year low of 59 percent in 2009, according to a survey by Crowe Horwath LLP, an accountancy and consultancy firm.
Since then, visitor numbers have begun to pick up. The occupancy rate climbed to 64 percent in 2012 from 61 percent a year earlier, Crowe Horwath said. Dublin’s hotels did even better, with the rate rising to 74 percent from 71 percent.
That’s reflected in the property market. Hotel values have climbed about 20 percent in downtown Dublin since September 2011, more than any other part of the Irish property market, brokers CBRE Group Inc. and Savills Plc estimate.
“Trade is very strong,” said Peter MacCann, general manager of the five-star Merrion Hotel, opposite the government buildings in downtown Dublin. “We have to be careful -- and this goes for every hotel -- that we don’t get greedy. We have got to protect the business to get it to come back.”
Prices at the Merrion range from about 200 euros for a standard queen room to 2,695 euros for a penthouse suite, according to the hotel’s website.
The hotel hosts officials from Ireland’s bailout masters -- the International Monetary Fund, the European Commission and the European Central Bank -- when they arrive to appraise the rescue program the country entered in 2010.
At that time, the hotel industry symbolized the boom and bust that devastated the economy. About 200 hotels opened during the previous decade, creating a glut of rooms and 7 billion euros of debt by the end of 2009 just as visitor numbers started to decline, according to a study commissioned by the Irish Hotels Federation. Two years later, the debt amounted to 113,250 euros per room.
“The Irish hotel industry became highly leveraged,” said Alan Ahearne, the author of the report. “The severity of the downturn destroyed the market value of equity in the industry,” the former adviser at the finance ministry said.
Even so, many of the hotels built between 1997 and 2007 stayed in business. That’s because the owners received a tax break that depended on the hotel operating for at least seven years.
Now, though, the zombie properties are beginning to disappear because the owners no longer have a financial incentive to keep them open. The number of hotels is set to drop for the fourth straight year, falling 8 percent from a peak of 915 in 2009, according to Failte Ireland, the National Tourism Development Authority.
As many as 300 of 800 hotels in Ireland are in financial difficulty, Pat McCann, chief executive officer of Dalata Hotel Group, said in a May report by Allied Irish Banks Plc. (ALBK) Dalata operates 31 hotels in the country.
“Ireland seems to have lost its sparkle,” he said. “We punched above our weight during the Celtic Tiger and we need to recapture some of that sparkle.”
For many banks, that means taking losses on loans handed out during the boom. The lenders often take control of struggling hotels, write off most of the debt and then look for a buyer. Alternatively, they may forgive all or some of the debt and allow current owners to stay on.
“Most hotels in Ireland are economically viable, but in many cases balance sheets will need to be restructured to reduce the debt burden,” Ahearne said. “After restructuring, viable hotels are returned to a financial position where they can operate on a long-term sustainable basis.”
With occupancy levels rising, overseas investors such as Malone and Yelena Baturina, Russia’s richest woman, are checking in. Baturina bought the Morrison Hotel in Dublin for $30 million last year.
Owners have sold or agreed to sell 21 hotels in Ireland for more than 170 million euros so far this year, Savills said in a report this week. More than 300 million euros of lodgings may be sold by Dec. 31, according to Tom Barrett, head of Irish hotels at the broker.
The Clarion Hotel in Dublin’s International Financial Services Center is one of the few in the downtown area that’s for sale. The property, put on the market by receiver KPMG in June, will probably be bought for about 30 million euros, according to Barrett at Savills, the broker for the sale.
Ireland’s enduring popularity as a tourist destination won’t prevent more hotels from succumbing to mounting debts, particular outside hotspots like Dublin. However, those that survive will benefit from the industry’s shake-out.
“There are lots of properties that should never have been built,” Brehon’s McGillycuddy said. “You’ll see some of those hotels coming off the life support. That will improve the industry for the hotels that are in the good shape.”