Hotels on ‘Solid Footing’ - Crowe

Crowe and JLL were co-hosts for this year’s Irish Hotel Sector Briefing on Thursday 1 February 2024 in the Intercontinental Hotel in Ballsbridge, Dublin, attended by 200 industry guests. The briefing addressed the theme of opportunities to invest in a sector that is resilient in the short term and has excellent growth prospects over the medium term.

Crowe partner Aiden Murphy that the hotel sector in Ireland is back on a solid footing, having achieved EBITDAR profits in excess of pre-pandemic levels for two consecutive years. The results of the Crowe Ireland Annual Hotel Industry Survey 2023 illustrate that the Irish market was one of fastest to bounce back in Europe in 2022 and that 2023 has built on that momentum. Rooms revenue is well ahead in a marketplace where pre-pandemic occupancy levels have been exceeded, with the real driver being average room rate which is up €36 for Dublin between 2019 and 2023 and €39 for Regional Ireland over the same four-year period. Average room rate growth between 2022 and 2023 for Dublin was €9, taking the ARR from €169 in 2022 to €178 for 2023, while for Regional Ireland the equivalent metrics were an increase of €8 from €133 in 2019 to €141 in 2023. The excellent performance in the rooms department compensated for and covered the very significant increases in costs across all business activities.

For 2024, the increase in VAT rate from 9% to 13.5% will make it challenging for hotels to maintain the momentum of growth in average room rate. In the year following the last time the VAT rate was similarly adjusted, the average room rate for Dublin hotels fell by €3 and for Regional Ireland hotels by €2 as the VAT take for the Government was higher than what could be passed onto customers.

The hotel sector, being very labour-intensive, will in 2024 likely see loss of payroll efficiency as the impacts of new employment legalisation and wage agreements feed through. This will become a drain on profit and profit margins in a year where costs could continue to increase at a faster pace than revenues, as there is less potential to grow revenues especially after two years where strong demand recovery has already occurred.

While the opportunity to again grow profits in 2024 will be muted by cost pressures, the established profit levels achieved in the last two years provide cash flow to invest and to borrow to invest. Crowe noted that there is a change in approach to Environmental, Social and Governance (ESG) from something that has been voluntary to a core requirement that will be mandated by legislature and contractual relationships. Aiden Murphy advised that this needs to be a priority for all hotels and not simply left to the larger operators. Investment in people who can deliver on this agenda will protect the business and enhance profit levels and asset value. There will need to be willingness to take a cost hit upfront, but the returns will quickly be obvious as the hotel sector adjusts to the trickle-down of ESG regularity requirements as we move towards the 2030 deadline for the hotel sector in Europe to deliver a 50% reduction in its carbon footprint.

Dan O’Connor, Head of Hotels & Living, JLL, pointed out that, compared to other commercial real estate sectors in 2023, hotels outperformed both in terms of deal volume and price.