If you take the words of the Irish Hotel Federation (IHF) at face value, then the future of 150 of the 915-odd hotels in the State will be at risk following the shock news yesterday that Bank of Scotland will be closing down its operations as regards new lending and effectively exiting the Irish market at the end of 2010 (a rump organisation will remain to deal with an estimated €33bn loan book over an estimated 8 year period).
The IHF is particularly concerned for its members as they rely on working capital advances to tide them over what is a seasonal business, and by seasonal they are referring to busy summer periods and some specific holidays and occasions at other times which are offset by quiet trading for much of the winter. The IHF calls today for a government guarantee to ensure funding is put in place to replace the funding that would have been available from BoS.
As previously noted on here, NAMA will have a major role to play in the Irish hotel sector, particularly with newer hotels built for tax breaks. With 4-star hotel rooms going for €45 per night for a double room with two occupants, it is clear that for consumers who are willing to plan their stays there is terrific value available but the flip side is that hotels are operating at losses and face closure.
For NAMA who are starting to look at loans which underpin smaller hotels, the consequences of BoS’s exit represent good news. After all if the non NAMA hotel market loses 150 hotels then that will reduce supply and push up the value of NAMA’s portfolio. This may seem perverse but NAMA is founded on a principle that property prices will increase over a 7-10 year period and regardless of the causes or consequences of the increase to the wider economy, NAMA’s narrow focus on the profitability of its portfolio is paramount.
UPDATE: RTE are reporting that NAMA is responding to the latest unease amongst the hotel fraternity. “A spokesperson for NAMA said: ‘NAMA is very sensitive to the particular challenges facing the hotel sector over the coming years and has engaged in constructive dialogue with various interests from the sector in recent months. ‘The agency has recently recruited a hotel specialist to develop an informed strategy for the sector and looks forward to further dialogue continuing over the months ahead. ‘However, it should be noted that the agency is still focused on the acquisition of loans from relevant banks and in the first tranche of loans acquired only 17 hotels were used as security for debts.’
UPDATE: 21st August, 2010. Anne-Marie Walsh and Laura Noonan report in the Independent that with the second tranche “it is understood that the number of NAMA hotels will rise to around 45 — 30 of which are in Ireland” Perhaps take it with a pinch of salt because in the article they also quote John Brennan, managing director of the Park Hotel, Kenmare, who “said some hotels should never have been built and estimated that there is an excess of 62,000 hotel rooms countrywide”. In fact there are about 62,000 hotel rooms in total countrywide and economist Peter Bacon, in a report for the IHF, estimated that 15,000 of these were “excess”.
UPDATE: 21st August, 2010. Elsewhere in the Independent there is what appears to be a frank interview with John Loughran of the Mount Herbert Hotel in Sandymount who crystallises one flaw in the NAMA model from the point of view of the wider economy “If you have one hotel with €50m in debts, and another beside it that owes €4m, the bank and eventually NAMA is going to keep the one that owes €50m open, because they see that as the only way to get something back.The hotel that owes just €4m will probably be forced to sell, because the bank knows it’ll get most of that back on the property, and that enhances the value of the heavily indebted hotel because it’s one less competitor”.
UPDATE: 21st August, 2010. No-one can accuse the IHF of sitting on its hands with the news of BoS’s exit from the Irish market. The Examiner today adds flesh to the proposed IHF guarantee which is aimed at ensuring that working capital is made available to hotels who were dependent on BoS. The details given by the Examiner are “It must last for a maximum period of two years , €150,000 lending cap per hotel , government guarantee for up to 50% of advance and a premium 2% per annum to be paid by the borrower”. The article also notes a commitment from BoS to convert working capital loans to term loans repayable in 2012 subject to terms and conditions. The guarantee suggestion doesn’t appear to be getting a warm reception at the Department of Finance. According to the Independent “But a department spokesman last night pointed out that a credit review office already offered an appeals mechanism “so that viable businesses can get finance”"