COVID-19 cost hotel sector €1.1 billion in lost profits
Government supports propped up sector
At Crowe’s 2022 Irish Hotel Briefing, partner Aiden Murphy outlined that there would have been widespread solvency issues for Ireland’s hotels if the Government had not quickly introduced payroll and other cost supports, which included €780m in payroll underwrites and €180m from the Covid Response Support Scheme, alongside other grants availed of during 2020 and 2021.Even with the benefit of the Government supports, hotels experienced cash flow pressures and the majority of hotels could not afford loan principal payments and needed to seek loan repayment moratoriums from their banks and defer capital re-investments, which in the sector are needed annually and are vital to maintain hotels at the required standard.
The deferred capital reinvestment projects have left an overhang of projects which will now need to be completed in 2023. Having availed of the tax warehousing scheme for over €250m to help with day-to-day cash flow needs, hotels needed trading levels to bounce back quickly to replenish and repair their balance sheets after the impact of the pandemic years to meet these commitments.
Fortunately, the continuation of payroll supports up to the end of April 2022 provided a foundation for hotels to rebuild their teams and regain some operational efficiencies while avoiding making losses as the sector ramped up in the early months of 2022. Thankfully, once pent-up demand was released, with deferred weddings rescheduled and a rebound in international travel numbers, hotels have regained occupancy levels similar to pre-pandemic levels and room rates for 2022 are well ahead of 2019 levels.
Price increases fuelled by cost inflation
For Dublin, it is expected that average room rates will be up €18 on 2019 levels to €160, with Regional Ireland average room rates forecast to be up €32 on 2019 levels to €133. While these increases look high at first glance, they are at levels necessary to cover the significantly increased cost of doing business which hotels now face.In the years 2016 to 2018, average room rates grew by c. €7 per year, at a time when cost inflation was much lower. Therefore a higher level of increase was required to compensate for the two years of disrupted trading during which hotel input costs have spiralled above their pre-pandemic levels.
Regional hotels, with a more extensive range of facilities like leisure centres, spas, ballrooms and conference centres, as well as large bars and restaurants which need to be staffed and maintained, have a more extensive cost base and thus require a greater increase in average room rates than Dublin hotels to offset cost increases.
Unless the costs of operations come down, we are likely to see the current prices forming the new baseline in hotel room prices. Considering the trajectory of rising payroll costs (including a higher minimum wage, which is going up by 8% in January 2023) and that payroll at 35% of revenues was the largest single outgoing for hotels pre-pandemic (likely to be over 40% in 2022 and 2023), the prospect of cost reductions and bringing down room prices any time soon is remote.
During the pandemic, hotels needed to quickly become far more cost-conscious, putting every aspect of the cost of doing business under the microscope. It appears that the lessons of past mistakes from the financial crash of 2008 have been learned and hoteliers are not interested in chasing revenue at any cost, but are taking a more medium-term approach to building a stable and sustainable business stream over short-term gains, which ultimately led to hundreds of hotels going into receivership before.
Scheduled VAT increase a threat to investment
The rate of VAT on room sales was put up to 13.5% for 2019, having been at 9% for the previous seven years. Weakening market conditions in 2019 actually meant that hotels were not able to pass on the higher VAT cost and had to absorb a drop of €4 on their average room rates, which had a direct hit on their operating profits.
Many hotels have had to defer capital reinvestment projects and hotels now fear that the scheduled increase in VAT to 13.5% at end of February 2023 will be challenging to pass on, and will damage their recovery prospects and reduce investment in the sector.
The cost inflationary pressures, challenges with recruiting and retaining staff in a tight labour market and their high consumption of energy means that hotels need to double down on investments in energy-saving initiatives, technologies for making the business less labour-intensive and reinvestment in annual upgrades to resolve normal wear and tear so hotel facilities meet the expectations of guests.
The VAT increase at this time will curtail the rollout of these initiatives as less funding will be available to invest in the business. This regressive measure will curtail the potential of the hotel sector to achieve attainable efficiencies and combat some of the effects of this period of very high inflation and labour shortages.
For a summary of the content from the 2022 Irish Hotel Briefing and to download the presentations from Crowe and JLL (our co-hosts), visit: 2022 Annual Irish Hotel Market Briefing.
For more information about how Crowe’s dedicated hotel, tourism and leisure team can assist you with any hotel or hospitality project, contact a member of our HTL team.
