Irish developers receive strong debt signals from banks
Irish developers receive strong debt signals from banks
17 APRIL 2017 7:19 AM

Irish banks are becoming more selective in providing hotel debt, but is this a bad thing for hotel development?

All looked so well in Ireland, but its banks have raised real concerns regarding development capital.

Banks perhaps are starting to be more selective when it comes to providing debt, which in and of itself is not a bad thing.

In an 11 April article in The Irish Times, analyst firm Davy Research quoted Ireland’s largest hotel group, Dalata Hotel Group, as saying Irish banks are demanding developers come to the table with 50% equity before any conversation on debt provision can be started.

That number is for hotels in Dublin, where it is generally believed there is a shortage of hotel rooms, although The Irish Times article does suggest this is for “new firms,” not established players with sound track records.

Hoteliers in Ireland already are predicting a slowdown of sorts. Bankers presumably still bear the scars of the crash.

Ireland became the poster child for sensible and rational disposal of hotel and other real estate debt following the calamity of the financial crisis, which hit this country harder than most.

The National Asset Management Association’s success in getting a good return to the taxpayer, after corralling its hospitality debt, has been well noted. And hoteliers have shown the organization genuine sincerity and praise.

After all, NAMA and organizations like it start almost every situation with a no-win scenario on the horizon.

Occasionally someone pulls it off, but now that the landscape is calmer, new development has started to see roadblocks.

On 12 April, The Irish Independent newspaper wrote that investment concerns hinge on both site pricing and building inflation costs, especially in Dublin, which have increased robustly of late.

The sense is that it has become less economical to build, so the more sober lenders are slowly backing away.

Will this result in the new breed of lender—which have been increasing in number in Europe over recent years—filling the gaps, with the inherent risk of cheaper, less-risk-averse capital entering the market?

That problem would also apply to other markets, I’m sure.

My one memory of the Irish crunch was in 2012 when I was driven from Cork Airport to the picturesque Irish town of Killarney.

The taxi driver was a colorful sort with, shall we say, rich language skills, and he ranted to me for 40 minutes on what he saw as the irresponsibility of his fellow countrymen and women in terms of buying up real estate.

“Third homes in Bulgaria! In Bulgaria!” was the general thrust of his argument. It was his stance that none of the buyers would ever go to the far east of Eastern Europe to delight in their acquisitions.

One difference, of course, is that Dublin needs more hotel rooms. Demand remains high, but do the banks know something we do not about long-term demand?

Is the rush to add supply indicative that we are heading back on the road to Bulgaria?

Email Terence Baker or find him on Twitter.

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1 Comment

  • Weldon Mather April 18, 2017 2:17 AM Reply

    Over 200 of the ±800 Irish hotels (60,000 rooms) are under new ownership, giving the sector much needed capital & growth. However it is still cheaper to buy an existing hotel than to build (€120k average build cost per room excluding site cost etc) so banks are correct to be cautious seeking LTV ratios of no more than 50-60%; Dublin does need between 3,000 - 5,000 new rooms (Highest EU Occ% and 9th ADR; 5th RevPAR: PwC) however Terence's Taxi driver is a salutary reminder of the effects of over exuberant lending. Brexit poses the biggest threat to Ireland with the UK inbound traffic (43% of all overseas tourists) already down 5% YTD, so bank caution is well founded in such an open economy reliant on strong sterling.

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