Hotels owe banks €113,250 per room

THE REPUBLIC’S hoteliers owed the banks €6.7 billion – an average of €113,250 per room – at the end of last year, according to a report published by the industry.

The report, Time to Invest: Proposals to Restore Financial Sustainability to the Irish Hotel Industry, by Alan Ahearne, NUI Galway economist, adviser to former finance minister Brian Lenihan, and member of the Central Bank Commission, warns that the debt is unsustainable and needs to be cut by at least €2.5 billion.

The report, commissioned by the Irish Hotels’ Federation, states that the sector needs to double profits or reduce debt. Last year, hotels earned an average profit per room of €5,220. However, Mr Ahearne calculates that in order to service current levels of debt, profits would need to double to €10,750 per room.

Assuming yearly growth in profit per room of 6 per cent, Mr Ahearne reckons that the figure would reach €6,662 by 2016.

“Such a level of profit could sustain, at a maximum, a level of debt per room of €70,200,” he says.

On that basis, the economist calculates that the sector’s liabilities need to be cut by 38 per cent, or €2.5 billion.

He says that this can be done in three ways – new equity that can be used to pay down debt, a write-down in the debts themselves, or a combination of the two.

Mr Ahearne argues that the evidence suggests that hotels in the Republic are now beginning to look like an attractive investment.

While there are few transactions, he says that hotels are selling at about six to eight times annual profits, or between €31,320 and €41,760 per room.

This leaves the overall industry with €4 billion of negative equity. Modest growth and a return to normal market conditions would still leave the sector with a €3 billion debt overhang.

However, he argues that hotels are beginning to represent good value to investors, as the prices they are fetching translate into yields that are high by historic standards, even with zero growth.

Mr Ahearne says that the main barrier to investors is the lack of capital as banks are unwilling to lend to the sector. To counter this, hotels need access to new equity. However, they do not qualify for mechanisms such as the Employment and Investment Incentive Scheme (EIIS) or the Development Capital Fund.

He proposes that the EIIS be extended or that the Government establish a special restructuring fund for the sector.