Investors Eye Room For Growth In Dublin’s Hotel Market
Travellers are back, and from Europe’s sun-soaked Mediterranean resorts to the continent’s popular city getaways, most locations are achieving soaring demand and high occupancy rates.
With Americans among the most active and highest-spending tourists, Dublin has been well-placed to capitalise on a flow of tourists, and active development should see the city’s room capacity increase by around 8% in 2023 and next year.
As uncertainty has impacted other asset classes, including offices, retail and residential, the strong fundamentals of the hotel sector are making it an increasingly appealing market for institutional investors, and despite a relatively slow start to the year, the sale of the Brooks Hotel on Drury Street could be the catalyst for more activity.
However, poor transport infrastructure and an undersupply in the luxury and budget categories need to be solved to see the city reach its potential.
In terms of transactional activity, circa €400M of hotel 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% compared to Q1 2022.
“We are forecasting €500M of Irish hotel transactions for full year 2023, up from €400M in 2022," JLL Ireland Head of Hotels and Living Daniel O’Connor said. "Interestingly, the deal flow was dominated by smaller deals from a buyer profile of private high net worth individual/operators and mostly all-cash purchases.”
That meant the average transaction value was about €7M.
“While there were no private equity buyers in Q1, we have already seen some bigger hotel deals complete in Q2,” he added. “While 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.”
The second quarter saw the deal profile change with three deals, notably the four-star Brooks Hotel, which completed at the start of June for just over €50M — the largest deal since August 2022. That brings MHL Hotel Collection’s portfolio to 13 hotels, eight of which are in Dublin.
Publican and hotelier Louis Fitzgerald and his wife are also expected to buy the famous Imperial Hotel in Cork.
“The deals in Q2 total about €85M, so the lot size is much higher and that has brought more interest to the market, so we think total deal volumes will reach about €200M by the end of the half, and it doesn’t feel a stretch for that to be €500M by the end of the year,” O’Connor said.
“There is definitely life in the market.”
The Size Of The Prize
Whether Dublin can outperform European counterparts is dependent on a number of factors, including its value perception and ease of travel, according to travel analytics specialist STR Director of Client Relationships Sarah Duignan.
“Dublin is talked about a lot as an expensive city, but that is a perception," she said. "Certainly average room rates have increased, but that is the same situation as in other European markets, not least because of the huge pressure on costs for the sector.
“At the moment we tend to still reference 2019 as the comparison, and Dublin room rates for the first quarter of this year are up about 28% on the first quarter of 2019. But London has also increased 25%, Amsterdam 19% and Madrid 31%, so it is very much on a par with other major European locations.”
In terms of visitor demographics, Duignan said that Dublin so far has not benefitted hugely from travellers from the Asian markets, who are expected to start travelling in far greater numbers in late 2023 and early 2024 once a backlog of visa and passport applications is cleared.
The U.S. accounts for about 15% of Irish visitors, and Duignan said early bookings have been at very high levels as American visitors made the most of the strong dollar.
“This is primarily connected with flight routes,” Duignan said. “Pre-Covid there were rumours of direct flights starting between Dublin and China, but obviously the pandemic put an end to that. Direct flights to the UAE and the Gulf have increased Middle Eastern visitors, and overall occupancy in Dublin is up 8% in Q1 2023 compared with the same period in 2019.”
For future growth, she said that increased travel capacity is needed at the airports at Shannon and Cork, while the possibility of a third terminal at Dublin remains in discussion.
“There’s no real question over the fundamentals, which is making the asset class more attractive for investors,” he said. “What Dublin does need is infrastructure, including a third terminal and certainly more car parking, because the authorities are asking people not to drive this summer. Yet there is no rail link either.”
Those infrastructure challenges are the one question in what is an otherwise positive picture, although some political controversy surrounds humanitarian rooms, largely from the inflow of displaced people from Ukraine.
“Humanitarian rooms are taking around 2,500 rooms out of general circulation, with Citywest’s circa 750 rooms still dedicated to refugees, while many other hotels are providing a proportion of their rooms to the crisis,” Duignan said.
“Some politicians have been arguing that the humanitarian provision has been holding occupancy levels back, but as Dublin is not at full occupancy, that argument doesn’t hold.”
She said that luxury room rates recovered fastest in the immediate aftermath of the pandemic, but they are the slowest to recover to pre-coronavirus occupancy levels. Budget hotels have recovered the best for occupancy and rates. Taking inflation into account, rates have increased across the board by around a net 9%, Duignan estimated.
According to STR figures, Dublin occupancy rates overall are around 76%, with an average room rate of €162, while other major cities such as Galway, Cork, Limerick and Kilkenny are typically achieving around two-thirds occupancy and in the order of €150 average room rate.
STR estimated there to be around 3,400 rooms in construction in Dublin, with most of that new-build, plus some additional rooms from expansion of current locations. Dublin and the county have around 280 hotels and 28,370 rooms, with the central D1-D4 districts having 15,686 rooms across 176 hotels, with completions running at approximately 8% market growth this year and next.
“We expect 2,189 rooms to be completed this year,” Duignan added. “In 2024, a further 2,778 rooms are expected to come online, including the Sofitel and Aurora hotels at Dublin Airport, which will add over 800 rooms.”
New and impending openings include the Easy Hotel, which opened in Smithfield in January, plus a new Premier Inn hotel on Gloucester Street and an upcoming opening at The Liberties as it works toward a target of 4,000 rooms across Ireland. Motel One, Ruby Hotels, The Hoxton and The Nyx are among the well-known brands developing Dublin sites.
Regional Growth In Irish Hotels
Donal Crotty, associate director in EY Ireland’s debt advisory team, said the professional services adviser also expected increasing transactional activity in locations such as Cork and Gallway, and more interest in places like Waterford and Wexford.
“That is especially noticeable in successful planning applications for hotels in those places,” he said.
“That said, there’s no doubt that Dublin has been undersupplied in hotel rooms, and despite the forced closure of hotels during the pandemic, the sector has proven very resilient,” Crotty said. “While it may have been counterintuitive, acquisitions continued during that period.
“Dublin’s retail offer has seen a number of luxury brands come to Grafton Street, and that trend has also been evident in the hotel market, with more lifestyle luxury brands opening or announcing acquisitions. That’s an interesting new dynamic for the market.”
EY’s capital and debt advisory team expects the sector to continue being serviced by AIB and Bank of Ireland, together with an increasingly diverse lender base. For example, in December 2022, GWM Group’s Commercial Real Estate Debt Opportunities Fund refinanced a construction loan on a newly built Hampton by Hilton-branded hotel in Dublin. Other active alternative lenders in the market include Leumi UK, which recently agreed to a €42.55M deal to refinance the five-star Morrison Hotel in Dublin.
Crotty also said that since 2019 government initiatives such as the Commercial Rates Waiver, Employment Wage Subsidy Scheme, a reduced Value Added Tax rate of 9% — which is returning to 13.5% in September — and tax warehousing has supported struggling businesses.
“It will be interesting to see whether the end to warehousing of VAT has an impact when this ends in April next year,” he cautioned.
“However, 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. Despite inflated business costs and capacity constraints, the sector has remained resilient and recovered to pre-pandemic levels of trade, with a diverse pool of funding options available to stakeholders.”
O’Connor said transactional volumes are likely to pick up in the second half of the year, especially given uncertainty in other sectors. New stock will be vital to both the investment and operational markets.
“We need more hotels, especially in the luxury and budget markets, where we are undersupplied," he said.