Print
<< Back
Hotels checking in to HAMS
11 June 2010
%20(100%20x%20127).jpg)
Over-supply of rooms, reduced corporate demand and the downturn in consumer spending has brought the hotel industry in Ireland to its knees. Last month alone, receivers were appointed to Lisloughrey Lodge in Mayo, Johnstown House Hotel & Spa in Enfield, Co. Meath and the Killeshin Hotel in Portlaoise while the Spawell golf and leisure centre also went into receivership. Claire Hartnett talks to Ronan King, chairman of Hotel Asset Management Services (HAMS) and head of the Chartered Accountants Ireland NAMA forum, about how struggling hotels can be managed through the downturn.
Back in 1990, the Irish Hotel Review published an article entitled "After the Goldrush" based on a seminar run by Simpson Xavier Hayworth (SXH) for a group of Irish hoteliers.
1989 had seen an unprecedented level of activity in hotel investment in Ireland and record visitor numbers. Hoteliers overall were satisfied and confident in the short term outlook, but were concerned that an over-concentration on numbers for the sake of numbers, and tax based, as opposed to market-led development, would lead to excess supply and inevitable casualties.
The article noted the precedent set by the US in the 1980s. Generous tax allowances led to a massive influx of property based investment and new hotel developments right across the country – by 1990, America had too many hotels.
In 1989, US hotels lost, on average, $400 per room – "hotels were built for the wrong reasons, in the wrong locations, with the wrong concept." The objectives of outside interests became "short-term, inconsistent with the economies of the asset" leading to an explosion of hotels which were over-leveraged with too little equity.
Sound familiar?
The article went on to issue an ominous warning – "in the past 12 months the effects of the recession have proven what many hoteliers knew all along – what goes up, will come down; be it demand for bedrooms, increases in eating-out, or fashions in the way leisure time is spent."
Fast-forward twenty years and history has repeated itself.
The mid-2000s saw an even greater explosion in hotel development leading to a vast oversupply of rooms in Ireland but few recognised the warning signs.
Ronan King, chairman of Hotel Asset Management Services, was directly involved in the "After the Goldrush" seminar through his role in the specialist hotels and tourism group in SXH consulting but he got out of the industry in 2001.
"i remember a property developer saying hotels were the best show in town and asking me why I was getting out of them," says King.
But as the Irish Hotel review article noted, what comes up, will come down and, indeed, the hotel industry came crashing down to earth. It's not just Irish hotels that have been affected by the downturn – across the globe occupancy rates are down and hotels are struggling to turn a profit.
King believes, however, that the Irish situation is more severe than in other countries. "While hotels globally are inevitably impacted by the recession in source markets, Ireland is undoubtedly suffering to a greater extent – it really is savage, the entire market has collapsed."
"Properties were built in the wrong locations and for the wrong reasons", explains King. "We have 64,000 rooms when the real market is closer to 45-50,000 rooms so the situation we're facing now was inevitable really."
The capital allowance system was also abused in Ireland, says King. "Ultimately, investment should focus on the inherent revenue potential of the underlying asset – not on tax breaks."
A meeting of minds between King and Jim Murphy, the former president of the Irish Hotels Federation, led to the establishment of Hotel Asset Management Services (HAMS) last year.
The agency – a joint venture between Irish hotel management company PREM Group and consulting firm Amethyst – manages properties on a short-to-medium term basis. HAMS helps to stabilise and secure the business with a view to selling the property at an appropriate time in the future.
"Even before NAMA was set up, we saw the need to manage property assets," says King. "Hotels are a special breed of property. Unlike normal leases, they're a mix of property and trading. Location is vital – but understanding your market segments and exploiting these is key."
After conducting a swift strategic analysis of a property to assess where its strengths and weaknesses lie, HAMS appoints an experienced team of professionals under a general manager: "Once the property has been stabilised, we formulate and implement an immediate business plan to drive value."
The agency's group purchasing model can also result in significant savings for hotels: "We have the purchasing power of 4,000 rooms as against 100 in one property."
The underlying theory behind HAMS is that prudent management, rather than fire-sales, is the most likely way of realising value for creditors – at least at the moment. "The fact is that there is little or no appetite to purchase hotels – in Ireland at least – for the foreseeable future. Yet closing properties which could capitalise on the upturn when it comes will severely impact on their value and break up the skilled workforce which will be difficult and expensive to re-instate," says King.
And many financial institutions have come around to this way of thinking.
The agency's biggest advocates are bank executives and people who have worked with HAMS before, according to King. "If banks are considering developing [a hotel], it's a full time job and it eats away at profits. We can bring the benefits of group purchasing and transform a situation that could be a nightmare for them."
HAMS has been operating Tulfarris House and Golf Resort since it reopened in April 2009 and in May, it was appointed to manage the 120 room Clanree Hotel in Letterkenny, Co. Donegal.
Both hotels are trading "extremely well" according to King.
A number of other deals are going on behind the scenes but the company are selective about who they take on.
"We've been involved in assessing a lot more properties but we're quite choosy in terms of those where we believe real value can be achieved and we won't touch some because we can't see the long term value. Rescue only works if it's brought in early to save the patient – by acting too late, you're dealing with a corpse. So we take a very objective view, if there's no value, we won't take it because essentially we take a share in the value at the end."
With the shadow of NAMA looming over many properties, King believes there has been a reluctance in advance of NAMA transfers to act for fear of negatively impacting on perceived values "but leaving under-resourced management in place for fear of the negative impact may be a contradiction", he says.
As more loans are transferred to NAMA, however, King believes HAMS will become busier later in the year. "We believe that the next eight months will be critical. We're not trying to corner the market and are seeking involvement in cases where we can realise real value."
"NAMA will manage loans but the security underlying these loans will include hotels, golf courses, leisure facilities etc and we're keen to work closely with NAMA at both individual and industry level as we all seek to achieve the national “work-out."
Things may be bad now, but King is confident that the hotel industry will bounce back. "Good hotels in good locations will survive. There are potentially some very good investments in the hotel sector at the moment but there are going to be casualties. Some hotels are going to go out of business and we need to decide which ones. But the market will come back, there'll be a lot of pain but we wouldn't be in business if we didn't think it would come back."
<< Back
