Demand for Dublin hotel investments remains strong
As appeared in the Sunday Times 04 February 2018
This week Deloitte’s Debt & Capital Advisory team hosted their second annual Hotel Investment Breakfast Briefing.
The briefing, based on recent research, included an overview of European Hotel investment, trends in the Irish hotel market and concluded with industry leaders, Dave Collins, COO Great National Hotels, and Dermot Crowley, Deputy CEO of Dalata Hotel Group Plc, discussing their company’s market approach and expansion plan.
Overall the outlook for the Irish hotel sector is seen as positive with the Irish Tourism industry estimated to be worth a record €8.7bn annually. Dublin is the third most attractive city for hotel investment in Europe, according to the survey published last week by business advisory firm Deloitte.
Despite strong interest in the Dublin and wider Irish market for hotel investments from domestic and international investors, 2017 was a relatively quiet year for hotel sales. The sector saw €500m worth of transactions last year, following the €850m recorded in 2016 and €1bn in 2015. Some €3bn worth of hotels have changed hands locally since 2012.
Interest in the Irish market is being driven by strong performances in the main cities and good economic fundamentals. In Dublin, the occupancy rate reached 84% in 2017 while revenue per available room (RevPar) hit €149. In Cork, occupancy was 81% and RevPar was €79, while Galway’s figures were 76% and €80.
In 2016, Bord Failte estimated that 5,000 rooms were required to boost Dublin’s existing stock of around 19,000. Since then, just 300 new rooms have been delivered but the pipeline is promising. Construction projects in progress or planning will add 3,000 rooms in the capital by 2020, increasing total stock by 15%.
Amsterdam remains the most attractive European investment destination, ahead of Barcelona in second place, followed by Dublin, London and Madrid. Over half of the survey participants said they believe the UK is at its peak in the investment cycle, with Spain, Ireland and Germany in the upturn.
The survey suggests that traditional bank debt will be the most common source of financing in the market (60%) over the coming year, followed by private equity (45%) and alternative lenders (41%).
Terrorist attacks and lack of economic growth are considered the main risks to the industry over the next five years. Black or gray swans, political tension and a rise in interest rates are also high on the list of concerns. Interestingly, in the European Survey Brexit is low on the agenda for the industry in general, ranked just seventh out of 13 potential risks. However, unsurprisingly it is seen as a greater risk by in Ireland with 95% of Irish Hoteliers concerned about the impact of Brexit.
Speaking at the breakfast briefing Andreas Scriven, head of hospitality and leisure at the firm’s UK office, talked about the key trends expected to impact the industry over the coming years. He noted that China is projected to become the world’s biggest economy by 2026 and that the proportion of Chinese citizens with passports to increase from 6% of the country’s population in 2016 to 12% by 2025. The world’s 60+ age group, meanwhile, will more than double by 2050.
In terms of travel trends, the outlook is positive, with air passenger numbers forecast to increase by 3.7% a year to reach 7.2bn annually by 2035. Arrivals in emerging destinations will increase by 4.4% per year by 2030, twice the rate of those in advanced economies.
Opportunities for the hotel industry over the year ahead include big data and analytics, employee empowerment and a focus on local services, experiences and activities, said Scriven. Risks, he said, will include a failure to innovate, cyber security and terrorist attacks.
He sees significant opportunities for consolidation of hotel chains, with just 17% of hotel rooms globally currently controlled by the three biggest players – Marriott, Hilton and IHG. He added, however, that even a minor shift in consolidation would require a major merger.
Going forward, Scriven expects millennials to become the most important consumer generation for the travel industry and to fuel a shift in emphasis from consumption to experience. It’s a view shared by survey respondents, with 32% expecting this demographic to drive business for the hotel and leisure sector over the next five years.
In the longer term, Scriven said travel and hospitality brands will find themselves increasingly subject to high expectations set by non-travel brands. Artificial intelligence (AI) is also becoming a reality in the sector and he predicted that wellness could be a big area for growth.
On the finance side of things, John Doddy, head of Debt and Capital advisory at Deloitte, noted an increased appetite from traditional and alternative lenders to fund the hotel sector, both on an investment and a development basis.
“It’s a feature of the fact that the Irish economy is performing very strongly,” he said. “From a macro viewpoint there’s strong demand in Ireland, albeit there is a risk around reduced visitor numbers from the UK, due to sterling weakness caused by Brexit. But that is being more than compensated for at the moment by US and mainland Europe visitors.”
“Particularly in Dublin and Cork, lenders are seeing undersupply, strong demand and strong levels of occupancy and rates. Therefore the investment criteria and lending case stack up well.”