Monday, 1st March 2010

BANKING SYSTEM MUST FACE UP TO THREAT
CAUSED BY INSOLVENT HOTELS

Failure to foreclose on insolvent hotels is damaging to the long term interests of the tourism and hotel sectors. The lack of foreclosure against fundamentally insolvent hotel businesses is now undermining the remainder of the sector, including businesses which are fundamentally competitive and sound. This was the stark statement on the present crisis within the hotel industry outlined by economist Peter Bacon at the Annual Conference of the Irish Hotels Federation (IHF) in Galway.

Hotels that are in receivership and are effectively run by banks, or where the ownership of the businesses has been taken over by banks or their nominees are, through their practices of deep discounting of prices, undermining the long term viability of an industry which employs about 54,000 people.

This is borne out by the findings of an IHF survey carried out in February which reveals that some 70% of hotels and guesthouses saying they have experienced unfair competition from otherwise unviable hotels being supported by banks. In addition, some 88% say that they are highly concerned about the viability of their businesses for 2010.

As outlined in a report for the Federation compiled by Dr Bacon last November, there is excess capacity in the Irish hotel sector, of 12,000-15,000 bedrooms. This overcapacity was brought about principally by the addition of 27,000 new hotel bedrooms between 1999 and 2008 which resulted in there now being over 60,000 hotel bedrooms.

Dr Bacon said that banks should fully recognise bad loans within the hotel sector. Unless all bad loans are clearly identified and written down with foreclosure if necessary, the financing and stability of the entire hotel sector will remain on an unstable foundation.

“We are living in a fool’s paradise if we believe that the offering of deep discounted and below cost hotel room prices will be a long term benefit to the economy. The industry will not survive in such circumstances. Businesses which could be viable, even with a struggle, are being driven into insolvency by the facilitation of the continuing trading of competitors who are not meeting the basic requirements of covering their costs and servicing their debts. This is resulting in hotels being unable to invest in maintaining standards and the Irish tourism industry will suffer irreparable damage, if these conditions are allowed to prevail,“ Dr Bacon stated.

“All barriers to exit from the hotel sector should be removed, particularly the overhanging risk of claw back or the tax benefits of capital allowances, that have already been claimed in respect of any hotel, where that hotel ceases to trade within its seven year tax life. Banks should be forced by the Regulatory system to recognise the losses on loans to insolvent hotel properties, and should be forced to foreclose on these properties if necessary. If these properties cannot be disposed of to a business which is properly funded and capable of servicing its borrowings, they should be set aside and closed down.

“Burying heads in the sand and hoping that the market will recover is undermining the stability of the entire hotel industry. At current rates of hotel occupancy of close to 50 per cent, there is little likelihood that the removal of overcapacity will lead to upward pressure on room prices, rather, occupancy rates would tend to rise, supporting the viability of competitive enterprises remaining in the sector.”

Dr Bacon concluded that we have one opportunity, in this country, to get the banking situation right. Over-lending and an irresponsible level of bank debt made available to part of the hotel sector have to be addressed within this opportunity.

FOR INFORMATION:
Siobhan Molloy / Eoin Quinn              Dublin office: 01 6760168
Weber Shandwick                              Mobile: 086 817 5066 / 087 233 2191