Carlton Hotel, Kinsale

Profits earned by Irish hotels have plummeted by 50% since 2007 and room rates across the country have dropped to levels that have not been seen since 1999.

Horwath Bastow Charleton's annual survey says Central Bank figures for the end of 2009 show total loans outstanding for hotels at €6.4bn. Over 40% of Irish room stock or 25,000 rooms were developed over the last 10 years and Horwath Bastow Charleton estimates an average debt per room of these hotels to be in the region of €135,000 per room or €3.4bn of total loans outstanding. This has resulted in over one third of Irish hotels experiencing difficultly in paying the interest on these loans and they are now in a position where they are experiencing severe cash flow problems.

The newly developed four and five star resort market has been hit hardest. Profit before finance costs per room at luxury hotels have fallen dramatically from a high of €13,954 in 2007 to just €3,092 per room in 2009. The costs of developing these resorts, particularly if they included golf and spa elements, were extremely high. Much of the development cost was borrowed leading to substantial interest payments. Hoteliers are now trying to maintain these payments against a backdrop of declining sales and profit as a result of the economic downturn and oversupply issues.

Aiden Murphy, partner of the accountancy firm said: "We are entering a period where profit levels in the hotel sector have reached an all time low, with many hotels seeing their profit levels plummet by 50% over the past two years. The collapse in average room rate for Irish hotels is the most significant factor. Average room rate has plummeted from €97.69 in 2007 to €77.81 in 2009, a €20 reduction in every room sold which has had a dramatic impact on profit levels."

The report says Dublin hotels achieve an average room rate that is c€16 higher than the regional room rates and c10% higher room occupancy levels. Recent investment in infrastructure in the capital including the Grand Canal Theatre, the Aviva Stadium and the Convention Centre Dublin (CCD) will help the Dublin market rebound quicker. Simiarly, Ireland is now well positioned to aggressively target the business tourism market, with business tourists spending an estimated twice the amount of leisure tourists. They are also more likely to extend their stay and to include additional leisure activites. The knock on effect of this is that hotels located outside the city centre will be boosted by the increase in occupancy levels.

Outside Dublin, the hotel sector will continue to be very dependent on the domestic economy, employment stability and the pace of job creation will play a significant role in the recovery of the hotel sector going forward.

Horwath Bastow Charleton says the exuberance of the Irish property development sector provided 16,000 extra rooms between 2005 and 2008, when 6,000 rooms would have been sufficient. The market now finds itself in the position of having 10,000 excess hotel rooms to fill. The impact of this over capacity also means that occupancy levels have fallen from 63.5% in 2008 to 59.4% in 2009. Room rates have also dropped by €10, from €87.25 to €77.81 during the same period, this follows 2 years of discounting strategies.

It is currently estimated that there are over 30 hotels in the hands of administrators. Horwath Bastow Charleton anticipates that this number is set to increase in the coming months and that some form of restructuring will be required to reposition at least 300 of our 900 hotels where solvency issues exist. The market is essentially only 10% of the way through the fallout. Because of the fragile hotel property market the decision is being taken to hold the hotels, rather than putting them on the market for sale and instead using experienced hotel management companies to operate the businesses in a stopgap manner.

SEE: Finfacts report August 2008; Davy says Irish Tourism troubles are threat for economy and banks; Hotel bedroom numbers jumped from 26,000 in 1996 to 64,500 in 2008 - a surge of 150% - while tourist numbers rose just over 70%