Report on Hotel Sector

Many of these hotels would make fine nursing homes.

@ Brian, that is an excellent idea. I wrote something over the summer as part of a larger report asking if NAMA would become Ireland’s largest hotelier, it’s here: http://stephenkinsella.net/WordPress/wp-content/uploads/2009/08/NAMA.pdf.

When looking at just how bad the oversupply is in this important sector, it’s important to remember that hospitality sectors also employ more people than the public sector–it’s also ‘too big to fail’, in a sense.

@Karl

You may or may not recall, but 4 or 5 months ago there were complaints from “solvent” hoteliers (i.e. well-established ones who had not gone on a recent borrowing binge) that the root of the problem was the type of tax break used in connection with recent hotel investments. The argument was that if the hotels closed, the tax breaks would cease. Therefore the banks were keeping things going just to keep the tax breaks alive, and in the process threatening to destroy the fundamentally more sound businesses.

Zombie hotels financed by a mixture of zombie banks and zombie tax-breaks?

So shortly, the hotel business will be another one of “our” businesses compliments of NAMA. How is NAMA to make money out of these assets?

Should they be closed down or should we use some of the 10bn set aside for “redevelopment” of NAMA assets and keep them in business?

If we keep them open, people in the real world, the non NAMA world, will find themselves servicing a national debt some of which is being used to finances their NAMA hotel competitors making it almost certain they go out of business!

The pre-privatization of these hotels will amount to nothing less than nationalization of part of the hotel industry along with all the attendant protectionism and cronyism. Their NAMA business plans will be little more than form filling exercises.

In who’s constituency the “hotel” resides will be the most important factor.

Forget about laws saying there cannot be any interference, we have had 14 year tribunals which have not reported yet and whose reports cannot put anyone in jail or even be used to put anyone in jail.

Our government puts a 10 Euro tax on any visitor that dares to ignore our Irish winter and tries to book a room in one of these near empty hotels and that is another government policy contributing to their insolvency.

Correction: The corridors are TOO small.

De Cuzzin runs a hotel in Killarney, has done for 25 years. His reckoning back early summer was 1/3 have to go, and massive investment in the “product” to bring it up to international best standards.

Isn’t this the defining characteristic of NAMA; that all taxpayers bailout insolvent banks and their creditors?

Given that taxpayers comprise in the main productive workers and solvent businesses this represents a huge transfer of income from the solvent to the insolvent.

Solvent hoteliers now find themselves in the double-bind that they will be competing against zombie hotels, many created specifically to take advantage tax breaks. But they are unlikely to be the last as productive resources are diverted towards NAMA entitities and away from all areas of the property and construction sectors, as well as leisure facilties too.

@Karl Whelan
I was asking the other day why Peter Bacon hates the citizens of the country so much. Now this. I can’t help feeling I brought it down upon on us in some way.

Let’s see, Golden Circle Relief Project so far:
Bank shareholders
Bank bondholders
Developers
Hoteliers

What’s next?
Huge oversupply of golf clubs? I’m smelling Bacon already!

@Michael Hennigan

Might I recommend that you read a website called Finfacts occasionally. If you did, your post wouldn’t have contained such glaring errors. A few months ago, Finfacts reported on an international survey, which found that hotel prices in Ireland have fallen more than in any other European country in 2009 and that average hotel prices in Ireland are now the lowest in western Europe and the fourth lowest in the whole of Europe.

I tried looking for the Finfacts report on the internet just now, but was not successful. Perhaps you can dig it up. However, I think that the following link is for the same survey.

http://www.traveldailynews.com/pages/show_page/33123

As I travel a lot, I can confirm what is in this survey, namely that hotel prices in Ireland are extremely cheap. I stayed in Jury’s in Christchurch the week before last and it cost me 69 euros, about £60. A similar hotel in London would now cost at least 50 per cent more, despite the fall in sterling.

@Karl

John Sheehan and Eoin have both hit the nail on the head. The reason, pure and simple, why they are allowed to stay open is the preservation of the tax break.

If the building ceases to carry on the trade of a hotel within 7 years (I think it is still 7 years) after its construction, the tax write offs will be clawed back.

So what is happening is that banks may be having their debts serviced by these tax partnerships even though the underlying trading operation is impaired. If the tax clawback occurred, it is the same as the owning partnership, it is usually a partnership or co-ownership, incurring a cost of 41% of the overall project costs.

As an aside, does anyone remember the owners and friends/advisers of the Westin all checking into the hotel which was still a building site on the 5 April a few years ago so as to commence the carrying on of the trade within that tax year?

I am not saying this is a good by-product of the tax break (capital allowance) system but it is unfair to say the banks are acting in an uncommercial way and that it is down to NAMA.

There are many wrong things with NAMA but propping up zombie hotels is not one of them. For that you have to look at the tax incentives that were in place (without good cause) in the recent past.

@ JohnTheOptimist

I agree with you to a point. I think the hotels that cater for city break tourists or business people have slashed their prices, but im not sure about the weekend country break and wedding hotels.

I’m of the age where im currently going to quite a few weddings (none of them my own!), and i find the accomodation rates extortionate when you consider the problems the sector is suffering as a whole. I’ve noticed almost no change in prices over the last 18 months. It still costs around €175-200 per night for a double room in a moderate four-star hotel. This is more like price-gauging for a special event, so im not sure how you can use it to judge the industry as a whole, but its probably one of the reasons why people have a negative view on prices in the industry as a whole.

@JohnTheOptimist

Where did I imply that prices hadn’t fallen when I said most rooms were in the price range €60 – €100?

Hoteliers are reluctant to fill empty rooms at a marginal cost.

Go check out Lastminute.com and you will find deals for hotels in Dublin with the tag “Top Secret hotel.”

Rossa White of Davy said in a report in 2008 that bedroom numbers jumped from 26,000 in 1996 to 64,500, an increase of 150%.

In the same period, tourist numbers rose just over 70%.

“Tax incentives for hotel development have been generous. In effect, many investors could claw back income tax at their marginal rate at the end of seven years. That amounted to a return on investment over that period of 45-47% in most cases. Values were rising too due to easily available credit, so the final kicker was even greater,” he said. “One problem is that, as the lock-up period ends, the supply of hotels for sale is set to rise significantly due to the amount of building over the past ten years. Sales are problematic because there isn’t much of a bid in any segment of the property market right now.”

Peter Bacon mustn’t be expecting much of an impact from the National Conference Centre.

Brian Lucey spoke about innovation in the hotel sector and improving the product to international standards.

I just happen to have listened to a podcast a while back, which took some very interesting views at hotels, what is good about a ‘good hotel’ and what customers really respond to.

Have a listen to it, if you are interested in hotels.

http://itc.conversationsnetwork.org/shows/detail1777.html

Bob Glushko and Annalee Saxenian talking about hotels etc.

I sent the link to a bunch of designers I met last weekend at an inclusive design event – i.e. designing environments so that aging populations can cope and negotiate their environment indpendently. As someone said, our environments are often created with younger people in mind. Houses are often like ‘obstacle courses’.

Someone else said, his aging father loves his Citroen motor car. He sits into it and everything is accessible to him and he can get about. The ‘product’ is well designed for him. He comes home and his own house is not well designed for him and it becomes an obstacle course.

Later in the evening we began to talk about ‘interaction design’, things like ticket sales machines at LUAS stops or Dublin rent-a-bicycle terminals. That is when I began to think about Saxenian and Glushko’s podcast.

You know when the property boom is over when petrol stations are opening up where apartments were going to go where there used to be a petrol station.

I see Apple Green are building a petrol station on the Stillorgan Road (not far from the Stillorgan Park Hotel which I doubt is 4 star and is about 6 miles from the city centre). There was a Shell garage there, it got demolished to make way for apartments which never got built. Now it’s going to be a petrol station again. This happened on the Ballinteer Road also – Apple Green again.

So the land value has reverted back to its previous use. I wonder if LTEV will take this into account.

Interesting comments above.

M.B, I can see where you are coming from. I wrote up something fencing around this subject a long while ago, to try and get my head around it.

http://designcomment.blogspot.com/2009/11/hotels-and-working-life.html

Basically, the problem is one to do with sequence of development. This is something that NAMA should obey in a very general sense of things too. The shoebox king was stuck in a situation where he had apartments, but no inhabitants, because there were no jobs in the areas he was building in.

Furthermore, the Dublin docklands masterplan passed into law back in the 1990s, doesn’t really address that difficulty of improper sequence. The argument of build the apartments and people will come doesn’t quite apply to the East Lotts unfortunately.

It is more like build an triving economy first in the remote docklands areas, and then hope that people like the area enough, that it creates demand for residential accomodation in the area. Overlaid on all of that, is this idea that business is now turned global – Ireland being an open economy etc.

Meaning that business people from all over the world may be based in Ireland for periods of time while they set up operations here. In other words, they work here for a time and then move on. They don’t want to set down roots in Ireland, but they are needed here for a time. A lot of them spend their lives touring around the world on these kind of high executive gigs and to be honest, hotels is not their ideal way to live/work during these short period.

They want something shorter term like a hotel, but they want their own four walls too and are willing to pay for that facility. This is where the shoe box king is going with the apartment short let. Bear in mind, many of the executives living in the said developments operating on short term lease agreement, may even be top level Irish business men and women, who are working on short term contract in Ireland.

But given a better opportunity somewhere else around the globe, and if Ireland didn’t present a similar option, they would be gone like that. My best pal is over in the US, and yeah, come weekends and stuff it is not easy to skip over to Manhattan for a few beers and back again. So it drags, but that’s life I guess.

One final issue I could mention on the broad discussion on hotels. This sort of hinges around my mention of the ‘virtual office’ in my blog entries referred to above. This notion, that your needs as a startup business may be taken care of, at various stages simply by virtual officespace and facilities. I do recommend Nicholas G. Carr’s lecture about ‘Cloud Computing’ and digital infrastructure, linked from his blog site.

http://www.roughtype.com/archives/2009/10/atmospherics.php

The basic point being that capital that business had tied up in real hardware in the past, might be moving to more productive uses. This means the facilities to support business are becoming more flexible, and this perhaps means that the workforce is literally getting mobile. This are all wonderful ideas, but how does it retail back to hotels?

Basically, I guess, hotels, shared facilities, conferences, airports, efficient transportation, global-isation – it is all happening, Ireland is affected by it, so is the hotel trade. The hotel trade is changing. It is about short term let apartments as well as traditional rooms. The trick is to provide the same friendly service associated with the traditional model, but extend the model into the next century. It is important for Ireland to get this right.

That is my proposal – why not take the distressed hotel industry in Ireland, and take all of those developers with office space they cannot rent – and we all get together and brainstorm some system, by which we can offer up a brand new concept, a new idea for the provision of office space in Ireland to young startups (who will have funding once NAMA is set up no doubt) and get the hotel industry up and working again. But not in the old traditional sense. It doesn’t have to be like that.

I was trying to hammer this into my old employer, Zoe developments about a year ago. Because contained within this idea, is the chance for hotel companies to earn an entirely new revenue stream, and for a property developer to distinguish themselves and open up a new market. As you can see by the fact I am writing this comment, I haven’t got very far in terms of advancing my ‘big idea’.

“For instance, a lot of the new city centre hotels will begin to see their capacity absorbed as the new theater and the new conference centre come on-line.”

Agreed.

Reading a design manual published by Birkhauser,

Office Buildings: A Design Manual –
By Rainer Hascher (Editor), Simone Jeska (Editor), Birgit Klauck (Editor)

It notes a trend in office space usage – I think that DEGW architects were key in developing this idea too. That an office is rarely now used as a place to work. But rather as a meeting place.

The conference centre and the theatre is like a hyper extension of that trend, where people use a building to come together and get updated on trends and thinking, before dispersing off in all different directions again. In fact, in some industries, there is what is described as the seminar or conference circuit. Where lots of people all attend the same events, and those events are key within that industry.

“There are problems with this though. Although it is interesting to observe the convergence of requirements for hotels and offices, the way you construct a hotel appears to me to be quite different to how you construct an office, the principal difference being that offices are built to allow an open-plan configuration with flexible underfloor wiring, but whilst hotels are built with walls which are as thick as possible and relatively limited ducting in order to contain the movement of noise, smoke and flames.”

For sure. Although, the hotel that Liam Carroll built in Tralee, could very easily be re-organised again as office space. Because the basic structure is a series of horizontal concrete floor plates, in which they studded together a whole series of cellular rooms using special British Gypsum wall systems for that purpose. So in other words, the internal divisions are all non-structural and easy to modify.

But that was how the design team working with Liam Carroll operated. They didn’t want to back themselves into any corners. Carroll was notorious for changing the strategy and/or tenant at the last minute. In fact, he did walk into the hotel at Tralee towards the end of the construction period and demand a whole plethora of alterations. In this regard, the purely structural dimension, Carroll was extremely flexible in his operations.

On another level though, I didn’t find them very flexible to work for at all. From the point of view of any building work, the key was to sign lease agreements with huge organisations who would be able to manage themselves – Google, Dell etc. Zoe weren’t interested in management of buildings, more is the pity. It wasn’t part of the organisational DNA.

That contrasts strongly with Corcoran Jennison for instance in Boston, who grew up doing similar high density residential projects over there. But they didn’t turn them over when built. Then have managed those properties for three decades in some cases. I was talking to them about my ideas earlier in the year.

Basically, Carroll wanted to provide office space on demand for whoever wanted to commit to a lease agreement. All the better if that tenant was large, as the involvement of the development company would end as soon as the tenant occupied their building(s). There is nobody big enough in the development business now, with the vision to see this way forward. A prime example being Elm Park office development at Botterstown, which should be an ideal location, given the right management approach. It stands un-occupied so far. Presumably waiting for the one big tenant I guess.

@E20
“Let’s try to increase tourism by 50% – not make say a sixth of hotel staff redundant.”

Unfortunately the number of tourists is down not helped by the stronger Euro. There are too many hotels, which for now has driven down prices but in the medium term is unsustainable. Capacity needs to be taken out to allow the better hotels to survive. We can’t save everybody!

The problem with tourists is that they will only come if there is something worthwhile to see or do, that they can’t do or have at home. Ireland is coming up short on this score at the moment. We don’t have a product that has wide enough appeal. We could have, but it takes work, well beyond the hotel industry.

The problem with hotels is that you have to get a significant average occupancy and room rate in order to make it worth opening the doors, even if you completely write off the capital investment. The room rate is going to work out in the order of 40 or 50 euros. The only way to reduce this is to reduce the wages you pay. This requires structural change in the economy as a whole.

The airline industry is one thing that is critical. But the cost base for flying into our country is just not right. It is just too expensive to fly here.

Equally, the restaurant/cafe/bar industry is just not right. It is very difficult to run the simplest of cafes if the minimum wage is 9.32 an hour, with extra on Sundays. You cannot expect to have a growing tourism industry at these rates.

@Antoin
If it’s dirt cheap to fly here and dirt cheap to stay they will come.
As Kevin Costner did not say in Field of Dreams, reduce the prices and they will come. Also could Dermot Desmond or anyone else come up with any IFSC like wheeze? We could really do with it. What about Super Casinos? I know we have just lost massively in a de facto one but why not the real thing? We have lots of empty hotels and lots of empty holiday homes and apartments. We should go all out for tourism.
Euro Disney Wexford?

Again I must agree with Antoin. My business is outside Dublin. Our biggest overheads are our fixed costs. Energy, wages and rates.

Ireland is an excellent product but it is an expensive product. We are currently pricing ourselves as a cheap product but we are operating at a loss to do so, we need our govt to help with this as they are directly responsible for our high costs.

Having said that we could always do with a new dimension, such as a theme park or casinos to improve us as a destination.

I do not speak for Michael O’Leary, but I’d guess he will say that he can increase it, maybe not by 50 percent, but certainly by 10 or 20 percent, and he is probably right. But to do it, he would need much lower landing charges.

Again, landing charges are a structural issue of the state-controlled aviation industry. The airports are designed to operate on quite a high cost base. All the big airports are now saddled with debt. They have built enormous, high-spec terminals that far exceed the demand. They are staffed at a high cost by international standards.

You can talk about opening another airport, but really that makes it even worse. You need some sort of critical mass to make an airport successful, and duplicating infrastructure like roads and public transport adds to the expense.

It will take a lot of hard decisions to restructure this part of the tourist industry.

http://business.timesonline.co.uk/tol/business/article570308.ece

– Mick says: DUB should have an independently owned terminal

http://www.rte.ie/news/2007/0109/dublinairport.html

– Mick says: a second airport for Dublin is ‘stupidity’ and that DUB has plenty of runway capacity.

These are pre-recession, but wouldn’t think his views have changed.

Even a road costs a lot of money to build. Building a runway is expensive. Yes, I know there is Baldonnel, But the runway there is too short to be regularly landing fully laden 737’s, and there is no chance of developing it as a hub, even in a minor way.