Heartbreak hotel: the state should not become junkyard for investors

THE Irish Hotels Federation (IHF) indicated recently that new hotels built since 2002 have been insolvent since their construction.

They also say the entire hotel sector has been insolvent since 2008 as a consequence of high debt, low asset values and poor profitability. Now they want the taxpayer to clean up this mess through state intervention to reduce industry capacity by 15,000 bedrooms in 217 hotels on terms that are utterly outrageous.

Chief among their demands is that hotel capital tax allowances granted since 2003 should not be clawed back by the Revenue should any hotel exit the industry less than seven years since its completion.

The value of allowances claimed so far is in the region of €1bn with potential claims of a further €600m pending.

These allowances were made available because the IHF demanded them in 2003. They stated then their intention was that 3,707 bedrooms in 45 new hotels would be constructed. This would have brought the industry capacity to 45,000 bedrooms in 894 hotels by 2005.

They argued then that there was a significant increase in the number of wealthy Irish people with excess funds available for investment who also had high potential tax liabilities in subsequent years that could be avoided through availing of hotel capital tax allowances.

If these were not made available the IHF stated that a number of investors would take their funds abroad, or purchase holiday homes in such overseas destinations as Spain and Portugal and this “would have very serious consequences for the industry as a whole”.

Their advocacy was so successful that the hotel industry expanded to almost 60,000 bedrooms since 2005 in 917 hotels. Sadly for them, this surge in capacity greatly exceeded market demand. The IHF admitted in 2006 that “the traveller is becoming more demanding in securing value for money”. They now argue that allowing hotels to exit without consequences for investors in terms of the value of the €1bn hotel capital tax allowances already availed of would have no financial implications for the Exchequer. That is rubbish.

Such a sum would pay the Christmas welfare bonus four times over were it to be clawed back now. This sacrifice was made on behalf of the taxpayer in return for something of proportionate value. These people are implying there is no value and, furthermore, they want you, the taxpayer, to bear all the unforeseen risk.

Our prudent banks increased credit to the hotel sector by over €4bn (188%) since 2003. The IHF points out that the banks are reluctant to acknowledge loans that become bad because a consequence for the banks is the obligation urgently to replenish their own core capital so as to maintain confidence and comply with regulatory requirements.

The IHF blames the banks for keeping deadbeat hotels on a lifeline and starving viable businesses of working capital. The equity component of a new hotel investment was typically a very modest 50% of the value of the capital allowances with the bank lending the balance and only having recourse to the hotel asset that was being developed as collateral.

The proposed IHF exit strategy would have clear implications for the capacity of the borrowers to repay this €4bn – but the IHF does not mention the impact and high risk of that on taxpayers. The entire concept seemed as safe as prize bonds when it was dreamt up.

The state ought to have no function in determining the architecture of an industry and the creation of another deluded, feather-bedded monster, nor is it in the business of the state to become the junkyard for the risk element of investments by speculators.

Commercial survival is a function of the marketplace. It is determined primarily by the value perceived by consumers, not merely by the price. The current asset bubbles were created because price and value diverged from each other excessively.

Having provided €1bn to the hotel sector in revenue foregone, Irish taxpayers are at least entitled to participate in the benefits that will arise in the pending slugfest as these hotels compete intensely for survival in a withered market.

Myles Duffy

Bellevue Ave

Glenageary

Co. Dublin