How can Ireland’s hospitality sector remain resilient

Donal Crotty, Associate Director in EY Ireland’s Debt Advisory team explores the changing landscape of Ireland’s Hospitality Sector, the resilience and the funding options available.

In brief

• Despite inflated business costs and capacity constraints, the sector has remained resilient and recovered to pre-pandemic levels of trade.
• There is a diverse pool of funding options available to stakeholders. 

Landscape of the Hospitality Sector

The Hospitality Sector in Ireland is split into two-tiers comprising 1) large hospitality groups and 2) standalone independent pubs/hotels. This has evolved over time and has been shaped by dramatic socio-economic events such as the financial crisis of 2008/09 and more recently the pandemic, which forced businesses to close for the better part of 2 years. The pandemic resulted in further consolidation of the market with large hospitality groups, private equity firms and institutional investors coming to the fore as purchasers of asset portfolios.

Traditionally, large hospitality groups tend to focus predominately on the main urban tourist locations of Dublin, Cork, Kilkenny and Galway as they possess the capacity to sustain high volumes of food and beverage sales. Standalone independent pubs/hotels typically to operate in more rural areas, however larger hospitality groups have recently been acquiring existing stock and land with planning permission for hotels in more regional areas. JLL Ireland Hotel deal statistics for Q1 2023 cite that 79% of deal volume occurred in provincial Ireland with deals closing in Galway, Meath, Wicklow, Dublin, Cork, Donegal and Kilkenny.

Resilience and Recovery

Trading performance in Ireland’s hospitality industry has remained resilient in the face of inflationary business costs, increased interest rates, staff shortages amongst other challenges. The 2 linchpins of Ireland’s hospitality sector continue to defy the odds and managed to produce exceptional results in 2022 in terms of trade and transaction volume. 23 pubs were sold for a combined €51.5 million in Dublin in 2022.

The rebound for hotel trading performance in particular is noteworthy, considering that 2022 started under travel restrictions. According to statistics produced by STR, hotel occupancy levels across Ireland are on the cusp of full recovery. This aligns with data from Failte Ireland which shows that hotel room occupancy rates rose to a new high in Q4 2022 of 86.9% since the pandemic began, almost identical to the equivalent rate of 87% in 2019. Revenue per Average Room (“RevPAR”) is in positive territory across the board driven by Average Daily Rates (“ADR”).

In terms of transactional activity, circa €500m of hotel and pub trades took place in 2022 according to JLL. There has been €69m of Irish hotel deal volume in Q1 2023, which is an increase of 27% when compared to Q1 2022.

According to Daniel O’Connor, Head of Hotels & Living at JLL Ireland:

“We in JLL are forecasting €500m of Irish hotel transactions for full year 2023, up from €400m in 2022. Interesting that the deal flow was dominated by smaller deals from a buyer profile of private high net worth individual/operator and mostly all cash purchases. While there were no Private Equity buyers in Q1, we expect some bigger hotel deals to complete in Q2, which may see a re-emergence of these players. Whilst Irish hotels are performing very well on the trading side, we all know that some capital structures are now coming under pressure and that should lead to some more deal flow too”

Market dynamics

At a macro level, benchmark interest rates have been increasing steadily, driven primarily by global supply and demand imbalances and the recent geopolitical conflict, both of which have compounded to drive inflation and increase risk. Significant liquidity has continued to underpin markets; however, these macro headwinds and continued uncertainty have made lenders significantly more considered in respect of credit decisions. This credit risk will ultimately lead to slower decision making and a heightened focus on due diligence. EY’s Capital and Debt Advisory team expect that the remainder of 2023 will see:

• Central banks cautiously proceed with rate hikes
• Banks tightening credit conditions and lowering risk appetite
• Stickier pricing
• More aggressive lender behaviour for non-performing loans
• Potential consolidation of debt funds
• Diverse pool of funding options involving a mix of debt and equity instruments
• Early engagement of borrowers looking to refinance upcoming maturities
• Return of hedging strategies/policies

While 2023 is expected to be another robust year for trading performance and transactional activity, the sector is not without its challenges which will once again test the resilience of the industry.