COVER STORY expects the average hotel discount to be up to 50%, while other commentators estimate average discounts could range from 30% to as high as 70% in some cases. Recent accounts filed by hotel companies may go some way to identify some of the discounts which can be expected however. Accounts for the Clarion Hotel Dublin Airport which were reported in The Irish Times, for instance, claim that the hotel is now worth e12m, down 72% on the e43m it was valued at in 2008. The hotel’s Anglo loan has been transferred to NAMA. ‘We have heard some horror stories,’ says an industry stakeholder with his finger on the pulse of the market. ‘There could be up to e100m spent on Kilternan which could be sold at a 70%-80% discount. In Cork, a resort that cost between e30m-e35m to the build now has a guide of e10m.’ Receivers are starting to recognise the discounts required. For example, Kilkea Castle in Kildare was on the market with an asking price of e16m last year. Now the receiver, Jim Hamilton of BDO, is looking for e6m for the sale.
Location, Location, Location
The old property adage ‘location, location, location’ couldn’t be more apt in today’s market, with little interest displayed in hotels on the market outside the capital at present. However, to say there is no interest in Irish hotels is false, says Paul Collins, executive director of CBRE’s hotel and licensed division. ‘There is a misconception that the market is dead, it’s not dead. There are quite a lot of cash buyers out there, and they are active up to a certain level – e3m, e4m, maybe e5m. We are also seeing a lot of international buyers but they
EBITDA whereas in the past in Dublin it was calculated on the value of the site, not EBITDA.’ While basing decisions on EBITDA makes sense, the problem for hoteliers and banks trying to sell out in the current market is that EBITDA has hit the floor due to plunging rates and revPAR. ‘Values based on current EBITDA will not be reflective of how hotels can perform once the market improves,’ notes Jim Murphy. ‘People will price in some element of recovery,’ believes Tom Barrett, head of hotels and leisure at Savills, who points to CityOccupancy’s 2010 Hotel Index which noted a slowdown in the rate of decline in the sector (see this month’s News). ‘Some stock is exiting the market little by little and there are some positives that can be seen. The trouble is that there’s nothing to benchmark against. If the sales of the Four Seasons and the hotel at the Grand Canal Square go through they will go some way to providing a benchmark, but buyers will need to remember that these deals are complex – the Four Seasons is losing money and the hotel at Grand Canal isn’t open yet – and so they will have been priced accordingly.’ While investors may be looking to buy now at a bargain in the hope of future growth, one estate agent warns that the initial buying price is only part of the picture. ‘Most hotels will need further spend, whether through capex, working capital, or even bank-rolling it if it’s loss-making for a few years. Purchasing the hotel is only the first step. Buyers may also need to put another 20%-30% in before they see a return. Many investors are asking themselves if they would be better off putting their money into international bonds.’ A private equity adviser who has been approached by hotel management firms seeking investors ponders the same question.
‘If the sales of the Four Seasons and the hotel at the Grand Canal Square go through they will go some way to providing a benchmark, but buyers will need to remember that these deals are complex – the Four Seasons is losing money and the hotel at Grand Canal isn’t open yet – and so they will have been priced accordingly.’ are very specific about what they want – they require prime city centre hotel assets which are branded or could be brandable and are 100 bedrooms plus. Their preferred locations are in Dublin 1, 2 and 4.’ The improving fortunes of the hotel market in Dublin – Paul Collins anticipates a positive revPAR growth in Dublin this year – coupled with recent developments such as the new Convention Centre Dublin makes the city an interesting option for many buyers. While there are many investors who are put off by the negativity surrounding the Irish economy and the Irish hotel sector, there are many more – both Irish and international – who are circulating in the hope of picking up a bargain. ‘There are guys flying in to Ireland thinking they can buy The Shelbourne for e10,000 a room but then they soon realise that Dublin is not for sale,’ says one agent, reiterating the banks’ and NAMA’s reticence at selling at a major loss. ‘We have been approached by a number of people interested in the hotel market,’ says Brendan Curtis of Vision Hospitality. ‘They’re coming mainly from a business background or large private equity houses or wealth funds, and they are both Irish and international. A lot of people in the industry have been put off by what has been going on for the last few years but there are those outside the sector who are interested in investing.’ Jim Murphy of PREM Group, which has been busy expanding its business overseas in the downturn, has witnessed a significant pick up in Europe. ‘We have never made so many presentations as we have since Christmas. There is a lot of interest in the European hotel market at the moment,’ he says, adding that this may extend to Ireland, and predominantly Dublin, providing the right hotel in the right location came up at the right price. ‘Dublin, particularly between the two canals, will always have appeal but investors today are very specific about what they will buy. The value is dictated by
20 HOTEL & CATERING REVIEW ❖ FEBRUARY 2011
Management companies are touting returns of 7% for investors today, but that is not enough, he maintains. ‘A liquid investor who invested 50% of his portfolio in fixed interest and 50% equity would have received a return of 8.2% per annum from 1988-2008. Any investor in hotel space would need to beat this liquid hurdle rate of 8.2% if they were to invest in a project. The investor needs to be paid for tying up his capital in a private equity deal with the expectation of a return higher than this hurdle rate. If you’re offering a 7% return this is not attractive.’
Show Me the Money
Of course, agreeing the deal on whatever the discount is immaterial if you don’t have the money to back it up – which explains why it is largely venture capitalists, high net worth individuals and private equity houses which are interested in the Irish hotel market at present and not, as Brendan Curtis notes, existing industry operators. With little chance of the banks loosening the purse-strings, young hotel managers who saw the crash as an opportunity to get on the ladder themselves will need to find investors willing to take a chance on them and on the Irish hotel market. ‘The cost of entry is a lot more accessible now but the difficulty is that funding of any sort is challenging. At the moment most of the activity is around cash buyers. We look for proof of funds before we enter into serious negotiations on any transaction now,’ explains Paul Collins of CBRE. What is needed is a change in the system, notes Jim Murphy, who believes that there are great opportunities for Irish hotel managers if they can get the backing. ‘Somebody needs to get behind the young managers in the industry. If there was someone willing to get behind them, like a small business bank, it would make a huge difference and help get the market moving again.’ u