Friday 12th October 2012

Scarcity of New Equity Finance Represents a Market Failure, says economist Alan Ahearne

  • Total hotel indebtedness estimated at €6.7bn
  • Debt restructuring of 38 per cent required to return to hotel sector to sustainability
  • Range of policy initiatives proposed to improve access to equity finance

The Irish Hotels Federation (IHF) today received a major, independent economic report undertaken by economist Alan Ahearne which stresses the serious challenges arising from unsustainable levels of indebtedness in the Irish hotels sector and severely restricted access to equity finance. The report proposes a range of Government policy initiatives to restore financial stability to the sector so that it can realise its potential as an engine for job creation across the country.

With total hotel debt estimated at €6.7bn, the report reveals the extent of overleveraging in the sector following an unprecedented destruction in equity. The report recommends that decisive action be taken by lenders to restructure the debt of otherwise viable but over-indebted hotels, showing that debt restructuring of 38 per cent (€2.5 billion) will be required to bring the debt overhang to sustainable levels. This would return hotels to a financial position where they can attract equity investment, allowing them to operate on a long-term sustainable basis.

Tim Fenn, CEO of the IHF states the report provides a frank assessment of the impact overhanging debt is having on the hotels sector. He says: “Now is the time for the Government to take decisive action to help improve access to equity finance and restore financial stability to the sector. This issue cannot be allowed to fester and jeopardise future growth and job creation in the wider tourism industry. If we don’t act now, we’ll be picking up the pieces of a failed tourism industry in five years time.”

Along with debt restructuring, the report explores three specific Government initiatives which, if implemented, could improve access to equity finance to hotels and restore financial sustainability to the sector:

  • The existing Employment and Investment Incentive Scheme should be extended to include restructured hotels, thereby providing incentives to private investors to invest equity in restructured hotels.
  • A new Hotel Restructuring Fund could use funds from the National Pension Reserve Fund and the sale of state assets to invest in hotels that have a commercially sound prospect for profitability, growth and providing sustainable employment.  
  • A Qualifying Investor Fund for Hotels may be attractive to private investors, especially from abroad, who would like to invest in Irish hotels but do not wish to own hotels directly.

“The reality facing the sector is that the banks will only lend to potential domestic investors to buy or refinance viable hotels if sufficient equity capital is available. However, there is a severe lack of funds available to new and current owners, preventing the repair of individual property balance sheets,” says Mr Fenn. “This lack of funds represents a market failure that is choking the recovery process in the sector. In the meantime, unsustainable levels of debt are damaging the sector and the wider tourism industry through underinvestment in the hotel stock.”

Mr Fenn states that the hotels sector has a critical role to play in contributing to recovery in Ireland’s tourism sector and in the wider economy. Tourism provides an estimated 196,000 jobs, equivalent to 11 per cent of total employment in the country of which more than 50,000 are directly employed by hotels and guesthouses. Tourism accounted for €5.3 billion in spending and €1.3bn in taxes to the Irish economy in 2011 and represented 4.5% of Ireland’s services exports.

The onset of the crisis saw a dramatic deterioration in profitability within the sector, with revenue per room falling 30 per cent since 2007 and profit per room dropping 44 per cent. Average room rates achieved fell from €97 in 2007 to €72 in 2011. However, this failed to stimulate demand with occupancy rates declining from close to 70 per cent in 2007 to 61.4 per cent in 2011.

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