Investors weigh up Irish hotels

AS MORE and more Irish hotels are coming to market, the question of investor appetite raises its head.

A precedent for overseas investment in the Irish hotel market is rapidly being set, according to new research from Christie + Co, the international property adviser and broker.

Recent sales of hotels like the Four Seasons, The Grand Canal Hotel and the Morrison in Dublin, all point the way to greater overseas interest in the Irish market. A number of international investors have recently given indications that acquisitions made in the Irish market will not be the last.

Of the 854 hotels in Ireland, it has been reported that approximately 80 are in receivership, and many others are being treated as ‘distressed’ or ‘challenged’ by the banks that fund them. Having watched and waited for months and years, a trickle of hotel assets is finally being released to market, with big names such as Fota Island, the Burlington, Parknasilla and the Clarion group, either on or about to come to market.

Christie + Co, which sells hundreds of hotels and leisure businesses across Europe each year, is constantly in touch with the international hotel buyer community. Hotel investors tend to be categorised in pools, including Hotel Funds, Private Equity, Property Investors/ Developers, High Net Worth Individuals (HNWI), and Sovereign Wealth Funds (SWF).

Hotel Operators, with the exception of some budget brands, are no longer considered key contenders as they have shifted to asset-light models, with a focus on achieving fees through management contracts and franchise agreements.

In recent years, there has been a clear shift in the investor and ownership landscape across the hotel industry. As hotels established themselves as a credible asset class, a larger number of investors who historically viewed it as too risky or having too much operating risk exposure were attracted to the sector.

Each one of the investor types named above will typically require a unique set of key investment criteria to be met for them in the Irish hotel sector, however these vary from investor to investor.

That being said, there are also some common threads that run through each one of the investor groups, which include the following:

* Commercial: The vast majority of investors will view their investment as a commercial deal, which requires a minimum return. While there may be the occasional ‘trophy’ investor who builds/ buys hotels for non-commercial, status-driven reasons they are in the clear minority.

* Opportunistic: The majority are very opportunistic and will react to opportunities as they emerge. The amount of risk an individual investor is willing to assume and how far they are willing to stray from their key investment criteria varies significantly from investor to investor. However, if the return potential can be clearly articulated then investors will typically be found.

* Currency Play: Recent currency fluctuations have meant that Euro opportunities have become of increasing interest to GBP£ and USD$- denominated funds, where a 25-30% improvement in Euro buying power compared to the dip of mid 2008 can be witnessed.

* Debt Availability: There are currently clear issues faced by the debt markets, and while this should not be overlooked, it is worth highlighting that it is an issue facing all investor groups. While there are a few signs that there is some (limited) activity returning to the debt markets, the lack of funding remains an issue in the short to mid-term. A return to the cheap debt days of 06/07 is deemed most unlikely. We in Christie + Co find that some investors we deal with have taken a ‘buy it, then fund it’ approach, as they seek to get cash deals done while the ‘iron is hot’, and source funding thereafter.

In principle, the vast majority of investors Christie + Co speaks to on a regular basis would consider investment in Ireland, assuming an attractive opportunity was to emerge, especially in Dublin and potentially Cork or Galway. For those not looking to invest in Ireland (or the UK) this is typically driven by an alternative geographic focus (closer to home, emerging markets, etc)and has little to do with the investment climate in Ireland.

The profile of buyers across Europe has recently seen a more balanced spread of investment amongst the various investor groups, with property investors at the forefront. It is expected that there will be increased hotel investment originating from HNWI and SWF from the Middle East. The latter however are less likely to consider Ireland, with the exception of trophy assets. In addition, as the home economies of the SWFs remain under increasing pressure, some of that interest in Europe may subside.

Given the present economic climate, reports of poor trading conditions and over-supply in the hotel sector resulting in declining performance, investor confidence is suffering. These trends will rule out a number of investor groups. However, for groups with a long-term view and a strategy for long-term investment, the current economic climate is an opportunistic one, particularly where sensible prices are being guided.

The accompanying table (see table at bottom, left, of this article) summarises the investment criteria of the five key investor groups.

The complexity of the hotel sector as an investment class means that investors are buying into an income stream, a cash flow, a trading business. Stabilised performance and realistic pricing relative to performance are key factors in how investors will view a hotel opportunity. Capital expenditure is also a key factor, with evidence of ‘price chipping’ never more evident than today, as investors look to structure a deal that takes account of the spend that an asset will require to remain competitive in the coming years.

Following substantial recent hotel development, Ireland boasts excellent quality amongst its hotel stock. Ireland, and in particular its key cities, is an attractive location for investors. It benefits from a globally recognised brand, an established tourism economy, and excellent infrastructure. The quality of Ireland’s attractions and the reputation that it holds for heritage, sports, hospitality, activities, golf courses, food and beverage, all give it a worldwide appeal. The recent opening of the Convention Centre Dublin, the increased capacity at Dublin airport, the presence of pharmaceutical and information technology multinationals and a clear vision to boost its tourism economy all contribute to its attraction as somewhere to invest.

* Maureen Doyle heads up the Irish offices of Christie + Co (www.christiecorporate.com) who have recently entered the Irish commercial property market, specialising in advisory and brokerage services to the hotel industry.