The Dublin market has seen a strong rebound in economic activity, with the Dublin hotel market benefiting from a surge in demand. Hotels in Dublin city have been experiencing occupancy levels of over 80 per cent, and there is an immediate need for new hotels in prime Dublin city locations. In the next five years Dublin needs 5,000 additional rooms. However, the construction and development sector is slow to ramp up activity, with planning and funding of these projects the key hurdles.
In terms of funding, the challenge is that the time needed to deliver a hotel from the planning stages through to opening is at least three years, assuming funding is in place. While Dublin has queues of international funds keen to buy established city- centre hotels, as these hotels represent a quality asset class, there is limited funding available for a building project that brings the typical construction risks.
The need to fast-track hotel projects in Dublin city is critical and displacement should not be a concern. The issue is gap funding. While investors seeking to acquire an established hotel are plentiful, a gap exists around the necessary development capital. So what’s the solution?
In the past, government invested in hotels through the Great Southern Hotel Group, which worked well in delivering rooms where they were needed – Killarney, Galway and the national airports. This investment later allowed the established hotels be sold and capital recouped without distorting the marketplace.
More recently, Nama assuming control of over 100 hotel loans steadied the hotel sector during the recessionary period, as they recognised the need to allow for reinvestment in the hotel product, and in many cases Nama has reaped good returns through investment in these assets.
Indeed while Nama announces plans to deliver new houses in Dublin, there should also be a review of prime land suitable for use as hotel sites. The Nama mandate is changing as they are now tasked with delivering 20,000 homes over the next five years and so one might ask why their new strategic direction should not also be targeted to help expand Dublin’s hotel capacity by way of providing suitable sites or being development partners.
As an additional solution, I believe the Ireland Strategic Investment Fund (Isif) should invest part of its €7.2 billion fund to finance the building of up to 50 per cent of the required hotel supply for Dublin city. This could require up to €400 million, but would represent a strategic investment, as hotel rooms are vital infrastructure to support economic and tourism growth of the city and would deliver on the Isif's mandate "to deliver a commercial return and support economic activity and employment in Ireland".
For many, the call for a 33 per cent increase in hotel room capacity in Dublin seems surreal considering not long ago the hotel sector tale was one zombie hotels, receiverships, declining profits and Dublin 4 hotels selling rooms at €49 per night just to create demand. The green shoots of recovery came with the resurgence of inbound tourism to Ireland. From a low of six million tourists to Ireland in 2010, this figure is expected to increase to eight million this year and the target for 2020 is 10 million annual overseas visitors to Ireland.
Dublin acts as the principal gateway for international tourists to Ireland, with Dublin Airport as the key transport hub. In 2010 Dublin Airport handled over 18 million passengers; this has now climbed to over 19 million, and numbers are expected to rise to 29 million by 2023.
The newly launched €1 million tourism campaign for Dublin under the brand “A Breath of Fresh Air” is expected to support growth in overseas visitors to the city by 6.5 per cent annually, which would see 6.2 million visitors coming to Dublin in 2020.
Factors such as the advantageous currency trends, the lower VAT rate of 9 per cent on hotel accommodation and food, and international campaigns such as the Wild Atlantic Way and The Gathering have supported continued growth in visitor numbers. Events in the 3 Arena, Croke Park Stadium and Grand Canal Theatre also stimulate additional demand from the domestic market. The confluence of higher international visitor numbers and increased demand from domestic visitors to Dublin means the real concern now is that the Dublin hotel market will not have the capacity to cater for a further lift in visitor numbers to Ireland.
Already we have reports of coach tour operators who are unable to quote for inbound tours due to lack of availability of hotel rooms. The Dublin Convention Centre is also concerned about the challenge of securing rooms as part of the tendering process to win international conferences.
The limited availability of rooms in Dublin city is becoming a bottleneck that is likely to damage the full potential of Ireland’s economic growth and needs urgent attention. If Dublin is considered the gateway to Ireland, what happens when there are no rooms to be found?
They say a good start is half the battle and our slow start to dealing with this supply issue is likely to leave us with a battle lost. We need to remove the funding handicap that now exists if we are to fix this obvious problem and continue to support Dublin’s growth strategies.
Aiden Murphy is a partner, corporate recovery, at accountancy and business advisory practice Crowe Horwath
