Crowe partner and hospitality specialist Aiden Murphy contributed to a recent Sunday Times article alongside Pat McCann, CEO of the Dalata Group and Sean O’Driscoll, chief of iNua Hospitality, talking about the challenges facing the Irish hotel sector in the months ahead. The following is an abridged version of the article that appeared on Sunday 6 September 2020.
The stay and spend scheme, launched officially last Thursday by the taoiseach Micheál Martin, is supposed to help the crisis-hit hospitality sector survive the lean winter months by giving tax credits to those frequenting hotels and restaurants between October and the end of April. “It will encourage people to go out for a meal or take a staycation, and support the Irish hospitality sector, by enabling them to claim back 20% of their spend,” said Martin.
The Stay and Spend tax rebate is worth up to €125 to individuals (max spend €625) and €250 for couples.
The government has earmarked a cost of more than €200m for stay and spend, betting the incentive will prove generous enough to entice this summer’s staycationers to take another break in the long winter months. It is a hope shared by hoteliers, albeit without much conviction. “I’m not sure how well it will work, but the government has to be applauded for anything it does to help our industry,” said Pat McCann, the chief executive of Dalata, Ireland’s largest hotels group.
He suggested that the money might be better spent on extending an emergency waiver on commercial rates, due to expire at the end of this month, until next March. In the three months to the end of June, the waiver was worth €1.8m to Dalata. McCann is also holding out for a reduction in the special 13.5% rate of VAT for the hospitality industry — probably a forlorn hope when the standard rate of VAT was cut to 21% from last week for most other goods and services. Dalata has warehoused VAT and payroll tax liabilities of €9.1m in Ireland.
Aiden Murphy, a partner at accountants Crowe, believes the government has missed a trick by structuring the incentive as a tax break rather than a voucher redeemable at the point of sale. “The scheme has huge potential, but it needs to be tweaked so you get the benefit when you pay the bill rather than as a tax credit down the line,” he said. “It’s not an incentive if you only get the benefit in 12 months’ time.”
Overseas visitors have traditionally kept the hospitality industry afloat in the off-season, with 4.4 million coming from abroad between last October and March this year. The potential exists, at least on paper, to replace them with the 3.6 million Irish people who traditionally take winter holidays and city breaks abroad.
“There was very good substitution of international visitors with domestic holiday-makers over the summer,” said Murphy. “If we can keep this going, there’s a chance that hotels’ revenues will hold up over the off-season.”
Winter staycations should appeal to those confined to their homes by the pandemic — especially if assured COVID-19 precautions are sufficiently robust. “Destinations popular with the domestic market — Killarney, Westport, Galway, Kilkenny — should hold up,” said Murphy. “I’d have concerns about other regional centres — Athlone, Limerick, Tralee — that are not domestic holiday locations but still have a lot of hotels catering for the local corporate market.”
Dublin is a case apart. About 60% of business for hotels in the capital came from two segments of the market that have disappeared since the outbreak: international visitors and those attending big events such as concerts and sports fixtures. Revenues at Dalata’s Dublin hotels were down €73m, or 62%, in the first six months of this year compared with 2019.
The impact can be seen in a survey of hoteliers by Crowe. Those in the capital expect occupancy will slump to 30% this year, from 83% in 2019. Prices have also been slashed, with average room rates falling to less than €100 a night from €134 in 2019. “Rates are very soft in Dublin,” said Murphy. “You can get a room midweek in a three- or four-star hotel for about €90 a night, compared with €160-€170 last year.”
Outside of Dublin, hoteliers were similarly pessimistic as they emerged from lockdown in June, but were surprised by the demand for summer staycations. “They’ve had a good July and August,” said Murphy. “The concern is what will happen from October to March.”
McCann is reluctant to make predictions as the market has become turbulent with the disappearance of precontracted trade from tour operators and airline crews. They typically made up about 25% of business at Dalata’s Irish hotels, with corporate business making up 45%-50%.
“I haven’t given any guidance to the stock market because I’d only be guessing,” he said. “We’ll be OK. We’re a well-funded organisation and have just raised €94m in additional equity. It’s a very worrying place, however, for independent hotels where cash resources are tight.”
McCann is optimistic that corporate travel will return once a COVID-19 vaccine is available, which he hopes will happen by the second quarter of 2021. “There’s a lot of pent-up demand to get things moving again, especially in the FDI [foreign direct investment] sector,” he said. “A lot of what FDI does — training and development, for example — cannot be done remotely. Business travel will gradually start to come back. When recovery starts, it will happen quickly for Ireland because of the size of the FDI sector.”
Dalata’s biggest financial hit so far has come from writedowns in the value of its hotels, contributing to a loss of €70.9m before tax in the first half of the year. McCann expects the accounting writedowns, which reduced the average value of Dublin hotel rooms on Dalata’s books to €233,000, will be reversed fast as trading conditions begin to improve.
At the height of the lockdown last April, for example, rooms were valued at an average of €447,000 each when Dalata completed a sale-and-leaseback of Clayton Hotel Charlemont in Dublin.
There is deep frustration in the industry at the government’s approach to COVID-19. Current regulations, for example, limit indoor gatherings to no more than six people from three households.
“We’ve been allowed to reopen but the restrictions are keeping us in a zombie state,” said Sean O’Driscoll, chief of iNua Hospitality, which has nine hotels around the country. “About 70% of our business in winter comes from family occasions, corporate and other events, and from weddings, but the restrictions effectively limit us to three people per meeting.
“Even with the wage subsidy scheme, there’ll be huge layoffs over the next two to three months unless the restrictions are eased. Hotels cannot continue to employ people if there’s no work.”
With 80% of its business coming from the domestic market, iNua had a good summer, especially in popular centres such as Killarney, Sligo, Cork and Kilkenny. Its hotel in Tullamore was forced to shut in early August as Co Offaly returned to lockdown.
Having tapped investors for €5m in additional funding, iNua plans to keep all its hotels open over winter and even to add to its portfolio given the right opportunity. O’Driscoll hopes to break even this year despite a 45% slide in revenues.
The expectation is for a rapid recovery when COVID-19 restrictions are lifted. Inua has 430 weddings on the books for 2021, many postponed from this year. “We hope to return to some sort of normality by next April,” said O’Driscoll.
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