Green light – the hospitality industry in Ireland

At the height of the Republic of Ireland’s property crash in 2010, just two hotels were sold – while 30 passed into receivership. With meagre yields and an €85-billion EU bailout on the cards, the vast majority of owners opted to await a more clement market. Fast-forward to 2014, and 60 hotels changed hands at a combined total of €555 million, according to property advisory firm DTZ Sherry FitzGerald. And despite total spend receding a little in 2015, it still comprised a healthy €377 million across 59 hotels.

With Ireland tipped by Brussels to have the fastest-growing economy in Europe for a third year running and overseas visitors last year surpassing the peak of 2007, the prospects for hospitality look to be in rude health. In Dublin, RevPAR growth was the highest in Europe last year, up by almost a quarter from 2014, and comparable rises could be found in Ireland’s other major cities. Limerick posted the highest at 23.2%, as reported by real-estate broker Christie & Co. At the same time, the company’s Maureen Bayley, director advisory – Ireland, notes that a degree of caution is necessary when reading these seemingly impressive regional figures.

“The Dublin growth is realistic – it genuinely has risen by that amount – whereas, in Limerick, yes it’s risen by 23%, but you can effectively discount that because it was coming from a very, very low base.”

Dublin’s standout strength has been supported by high foreign direct investment; flourishing IT and financial services sectors; and corporate attractions such as the Docklands’ new convention centre, completed in 2010, engaging the MICE market. Likewise, developments such as Daniel Libeskind’s Grand Canal Theatre, also completed in 2010, attract domestic and overseas leisure visitors. Progress within Ireland’s next-largest cities – Cork, Galway and Limerick – meanwhile has been sluggish but largely positive, Bayley concludes.

“Obviously Dublin came first but, throughout Ireland, we saw quite an uplift in the economy and, with it, consumer sentiment,” she says. “The other regions of the country are probably leading a little bit slower than we would have hoped, and we’re not quite back to where we were in 2007, but we are definitely getting there.”

Single market

Growing regional confidence is reflected in changed transactional behaviour for 2016. DTZ Sherry FitzGerald’s report for the first quarter showed that just two of 17 hotel deals were located in the capital, but the Dublin market is also distinct from the rest of the country because of a unique characteristic: a major undersupply of rooms. The resultant growth in room rates – the primary driver for the city’s rapidly climbing RevPAR rate – could soon be something to fear rather than celebrate, according to DTZ Sherry FitzGerald’s director and head of trading assets, Kirsty Rothwell.

“The occupancy levels in Dublin are at a very high level, so the ADR has a little bit of room for growth, and that is expected in the next couple of years because of lack of stock,” Rothwell says. “It is a bit of a concern, because we obviously don’t want to become uncompetitive, and we want to still be able to attract the tourism and keep that growth.”

It worries Bayley too. “In the past three years, we’ve had probably 200 rooms open, with one hotel in 2013, and another two years ago,” she says. “At the moment, people are saying it’s impossible to get a room midweek in Dublin. Tuesday and Wednesday nights in particular, as well as Saturday nights, you just cannot get a room.”

With many developments planned but few making visible progress, room volumes are unlikely to increase until around 2018. Competition for office buildings, which are also in very short supply, can make financing difficult, and many proposed projects are stalling.

“It seems to be extremely expensive to build at the moment,” Bayley says, “In particular, the costs are high, because there’s a shortage of construction workers to actually undertake the projects.”

Stock take

Dalata Hotel Group’s Dermot Crowley is well aware of the need for new stock in Dublin: more than half of the group’s rooms are in the city, and the combination of increased demand and low supply has played a key part in driving Dalata’s growth over the past four years. As deputy CEO business development and finance, Crowley has overseen a very active two years for Ireland’s largest hotel operator as it buys up hotels around the country as well as, crucially, development sites in Dublin.

“Since we raised money in 2014, we’ve spent about €750 million on assets, in Dublin primarily; then Cork, Galway and Limerick; around the UK; and other, smaller towns in Ireland. The reason was that we could see the economy was recovering and we felt that, not just in Dublin but in the cities outside of Dublin as well, there was going to be very strong demand and very strong recovery in average room rates.”

With receivers and banks looking to sell hotels on, many were available for less than replacement cost, making the investment case very strong. Dalata has been effective in targeting the mid-range in terms of value. 

“Between €10 million and €40 million, we’ve had a huge success rate because they’re too big for local buyers and too small for international buyers,” Crowley says. “That’s probably been our sweet spot in terms of buying assets. We look at the location, and we look for hotels where we can see massive efficiencies when we take them on, in terms of cost and revenue management.” 

Just this year, Dalata’s purchases of existing hotels have included the Tara Towers Hotel Dublin, the Clarion Hotel Sligo, and the Choice Hotels Ireland business comprising hotels in Cork, Limerick and Dublin. However, the investor climate in which these purchases were made has started to evolve.  

Rothwell points to a greater number of high-net-worth funds looking for a longer-term investment, rather than private-equity buyers looking for a short-term profit. The sellers have changed too.

“This year, we’ve had an increase in the number of loan sales, and so we might see a few of those properties start to trickle through on to the market,” Rothwell says. “We’re also seeing consensual sales – either owners that purchased in the past five years looking to sell on at a profit or owners that have been there for a longer time that are starting to see value in selling now that they can get a price that is attractive to them.”

It’s primarily this change that has led Dalata to set its sights upon new builds. As Crowley explains: “We don’t see value as good as we would have seen over the past two years, so that’s why, in Dublin, we switched to looking at development sites. There’s also been no net increase in hotel rooms in Dublin since 2007, which, for a capital city, is extraordinary.”

While Crowley acknowledges that proposed new developments overall have been slow to materialise, he is confident in Dalata’s ability to deliver and plays down the costs.

“I wouldn’t say that constructions are expensive in Dublin at this stage,” he reflects. “I think it’s more that it is difficult to get contractors unless they are confident that you know what you’re doing. We have a lot of experience through many of us previously working at Jurys Doyle [now The Doyle Collection], and between the UK, Ireland and the US, we probably would have built 20 new hotels. To be honest, we’ve been inundated with calls from contractors interested in working with us, so I think it’s different as the number-one operator in the city and the country.”

City centred

Dalata’s development purchases have indeed been concentrated in Dublin, with two new-build Maldron-brand openings targeted for 2018 and another site with planning permission, but a proposed 206-room development is also in the pipeline for Belfast and a part-complete hotel site in Cork has been acquired too.

Crowley, Bayley and Rothwell all emphasise that the case for new rooms outside the capital city is far less potent. While a high proportion of Dublin’s leisure guests are international, visitor numbers in the rest of Ireland are largely domestic. Additional rooms in Cork and Galway will therefore likely come as the result of extensions rather than new builds, and in Limerick – overdeveloped during the boom – no additional volume is expected.

For now, mid-market hotels dominate transactions and development plans, with luxury hotels in slight oversupply and the budget sector barely catered to at present. As for continuing growth, one particular cloud hovers overhead. In 2015, the UK accounted for 41% of overseas visitors to Ireland, with many analysts citing a very favourable exchange rate as a primary driver. Reports in early 2016 also identified the UK as having overtaken the US as the largest foreign investor in Irish hotels, at 7% – albeit small fry in comparison with the dominance of domestic buyers, at 69%. Most importantly of all, the UK is Ireland’s largest trading partner.