‘Hotel sector can’t sustain €5.3bn debt’

The Irish hotel industry still needs a further €1.4bn in restructuring to bring hotel debt to a sustainable level according to a new report by economist Professor Alan Ahearne.

The total debt in the sector has been estimated at €5.3bn which given the hotel sector’s income prospects, interest rates and the average maturity of the debt at the time, is not considered a sustainable debt level.

Prof Ahearne said that the indebtedness of the sector, particularly outside the capital, was dragging the whole industry down as it leads to under-investment in maintenance, refurbishment, renovation and innovation.

In his report, ‘The Next Steps — Restoring Financial Sustainability to the Irish Hotel Industry’, Mr Ahearne said that a source of finance for rural Irish hotels was required.

“Many hotels outside of Dublin remain under capitalised and require the restructuring of their balance sheets and an injection of new equity investment to survive and prosper. Unlike larger hotels in urban areas, however, these smaller hotels have not been attracting overseas investors or real estate investment trusts.

“As a result, many viable hotels remain in the hands of receivers. Moreover, outside of the bank-owned hotels, there are still many viable hotels in need of equity investment to bolster their balance sheets. Domestic sources of equity capital will be essential to the restructuring and restoration of financial sustainability to these hotels,” he said.

President of the Irish Hotels Federation, Stephen McNally said that for the hotels industry to play its role in creating jobs based on tourism it needs to eliminate the debt overhang.

“A financially sustainable hotel industry is crucial if Irish tourism is to live up to its full potential in terms of growth and employment. Since 2011, tourism has created more than 23,000 additional jobs and it has the potential to create 40,000 more by 2020 based on conservative estimates.

“However, this can only be achieved by bringing overhanging debt down to manageable levels and making investment funds more accessible to hoteliers,” he said,

The key stumbling block to the industry returning to health is a lack of access to finance to allow an upgrade of the hotel stock. Prof Ahearne said that the lack of access to funds was snarling up the whole industry.

“This lack of funds constitutes a market failure that is gumming up the recovery process in the hotel industry,” he said. “It is in everyone’s interest to ensure that hotels have strong balance sheets and access to equity finance allowing hotels to invest in product development, maintain and upgrade hotel room stock and take advantage of anticipated growth in overseas visitors over the coming years,” said Mr McNally.