Tuesday 19 June 2018

Dublin's hotel boom goes into overdrive

Dublin has been crying out for hotel rooms for year - now, with more than 3,000 set to hit the market, will the city's hotel bubble burst, asks Dan White

Dan White

Dan White

Hyatt became the latest of the major international hotel groups to move into the Irish market when it announced plans for a new four-star Dublin hotel last week. With over 3,000 new rooms set to be added to the capital's supply over the next three years, is the market in danger of saturation? The new Hyatt, which will be located opposite St Patrick's Cathedral and have 234 rooms, will cost €50m, employ 240 people and open in May 2019. It will be operated under franchise by Irish hotelier John O'Sullivan, whose Hodson Bay group already has two hotels in Athlone and another one in Galway.

This is the latest in a series of new hotels and extensions to existing properties to be announced for the booming Dublin hotel market.

Property consultants Savills estimate that almost 1,200 new hotel rooms will be added in Dublin this year, with at least another 1,000 likely to come on stream in 2019.

After that things become a little more uncertain.

"A lot of new hotels have been talked about. You can at least divide the number by two before you get to the planning stage," says Savills' head of hotels and leisure, Tom Barrett. "Planning is tight, finance is restricted and building costs are going only one way - up".

What this most likely means is that the number of new hotel rooms being added to the Dublin market in 2020 will be at or about the 1,200 set to be achieved in 2018 and 2019. Add it all up and approximately 3,000-3,500 new hotel rooms will be built in Dublin by the end of 2020, a 16pc-18pc increase on the existing stock of 19,000 rooms.

However, these latest estimates of the number of new Dublin hotel rooms are much lower than those predicted in a 2016 Failte Ireland-commissioned report by economic consultants Fitzpatrick. The Fitzpatrick report predicted over 1,500 new Dublin hotel rooms in 2018, almost 2,500 in 2019 and a further 1,000 in 2020, to bring the total number to about 24,000.

This still significant increase in the number of Dublin hotel rooms is happening at the same time as Brexit is beginning to bite. The number of UK visitors to Ireland (almost 40pc of all overseas visitors) decreased by 5pc last year as the fall in the value of sterling pushed up the cost of travelling to Ireland for British tourists.

However, there may be less to that fall than meets the eye.

"While the UK is our largest overseas market in terms of arrivals, it represents a much lower percentage in terms of hotel rooms. This is because many of these UK arrivals are visiting friends and relatives," says Pat McCann, chief executive of Ireland's largest hotel group, Dalata.

The recovery in the Dublin hotel market from its post-crash low in 2009 and 2010 has been spectacular. Back in 2009 average occupancy levels fell to just 64pc - meaning that more than one-third of all rooms were lying empty. This forced hoteliers to slash room rates to pull in guests, with the average daily room rate for Dublin hotels bottoming out at just €77 in 2010.

By 2017 average occupancy levels had hit 83pc while the average daily rate was €137, getting on for twice its 2010 level.

And the recovery looks set to continue into 2018, with occupancy levels for all Irish hotels up 3.4pc to 67.9pc and average daily room rates climbing by 6.2pc to €113.67 in the first quarter - traditionally the quietest period of the year for hotels - according to data firm STR.

This recovery is likely to continue for the rest of the year, with STR predicting a full-year average Dublin daily room rate of more than €140, up 3pc on the 2017 level.

But are we in danger of allowing history to repeat itself? All of the extra capacity signed off in the mid-noughties hit the market just in time for the 2008 crash. How can we prevent the same thing from happening?

"Most of the new supply that hit the market in 2008-9 was tax-driven and financed by banks that no longer exist," says Savills' Tom Barrett. He believes that the Dublin hotel market has changed significantly over the past decade.

"Ryanair and the other budget airlines have changed the travel market. People are taking far more short breaks. This means that seasonality has largely gone in European markets. It is no longer quiet in January and February."

This strong recovery in the Dublin market has encouraged some of those who bought distressed properties at the bottom of the market to cash in their chips. After a relatively quiet 2017, when only just over €400m worth of hotels changed hands throughout the entire country, hotels worth €199m were sold in the first quarter of 2018. Two of the four hotels that changed hands in the first quarter, the Citywest Hotel and Hilton Garden Inn, were in Dublin.

Further hotel sales are likely in the coming months as investors who bought properties after 2011, and who were originally locked in for a seven-year period if they wanted to avoid capital gains tax, can now cash out tax-free following the changes announced in last October's budget. In March, the Goldman Sachs-backed TIFCO, Ireland's second-largest hotel operator with 18 hotels and sites for two new hotels in Dublin, was put on the market. It is expected to fetch up to €500m.

The recovery in the Irish hotel market has so far been largely confined to Dublin.

"There is very little new hotel activity outside of Dublin. This reflects the fact that you can still buy hotels outside of Dublin for less than their replacement cost," says McCann. "You will not see it [new hotel building] in most of the rest of the country. It just does not make economic sense."

Most of Dalata's new hotel rooms, including three new hotels and extensions to three existing hotels, are in Dublin, with up to 656 new rooms planned by the end of 2020. The only significant Dalata development outside of Dublin is in Cork, where Dalata is developing a 164-bedroom Maldron Hotel on the South Mall.

Strictly speaking, the Cork hotel is not a new build. Dalata acquired a partially-built 125-bedroomed property on which work had stopped after the crash and extended it to 164 rooms.

"Cork is still performing well, but it will take time to catch up," he says.

After more than a decade in hibernation there are also the first faint signs of a recovery in new hotel activity outside of Dublin.

Apart from Dalata's new Cork hotel, demolition work has begun on the site of a proposed 220-bedroomed hotel on Cork's Sullivan's Quay. Meanwhile, several hotels in Limerick and Galway have announced plans to increase the number of their rooms.

Underpinning the increase in the number of Dublin hotel rooms is the continuing strong increase in visitor numbers, with the overall number of overseas visitors growing by a further 4pc to 9.9 million in 2017.

This increase continued into the first quarter of 2018 with a 7pc rise to 1.92 million being recorded with the number of UK visitors being virtually unchanged at 798,000.

While it is still early days, the first-quarter visitor numbers would seem to indicate that the UK market has bottomed out and that any post-Brexit referendum weakness is being offset by the strength of other markets.

"We have greatly increased capacity on the north Atlantic routes, we have direct links to China for the first time. These are more than making up for the any softness in the UK market," says McCann.

So is the glass half full or half empty for the Dublin hotel market?

"Our argument is that demand in the city can more than absorb the extra capacity," says McCann, who points to a slew of recent jobs announcements in the capital from tech giants such as Microsoft, Google and Facebook.

The strong recovery in the market means that average room rates in the city are now comparable to those being charged in cities such as Amsterdam and Barcelona. That's about where they should be, Barrett reckons.

"We can't compare ourselves to the likes of London or Paris. We are a large European city. We can't be complacent," he says.

Barrett believes that each new hotel that is built in Dublin will make it progressively more difficult for the next one to be built as the gap between supply and demand narrows. While most of the early construction consisted of four and five-star rooms, much of what is on the drawing boards is of the three-star, budget or aparthotel variety.

With finance still tight the danger of the hotel market succumbing to a noughties-style mania is probably limited.

"The way the Dublin economy is looking for the next five to seven years there is no cause for concern. However, once we get to 22,000 rooms funders may begin to look at things differently", says McCann.

Sunday Indo Business

Business Newsletter

Read the leading stories from the world of Business.

Also in Business