Hotel Industry Sentiment

Distressed activity

Compared with a year ago, a third more respondents expect to see distress in the year ahead with 77% of respondents expecting to see some distress activity in 2023 including one in four (27%) in Q1 2023, twice as many as for the same period last year (13%).

Top priorities

With 85% mentioning ‘managing inflationary pressures’ as their top priority, players in the industry are shifting to a more defensive stance, with a clear focus on performance improvement and cash flow management. With labour shortages still an issue for the sector, hiring and re-staffing remains a high priority for 63% of respondents.

Risks for the next five years

Rising costs, shortage of skilled labour, increased staff costs and rise in interest rates are seen by respondents as risks already threatening growth this year. Linked to the issue of labour shortages, staff productivity issues, and political tensions have also moved up as key risks this year compared to 2021. Meanwhile, lack of economic growth, inability to raise prices, climate change disruptions and non-compliance with the growing sustainability agenda are all perceived as key risks for the industry in the next one-to-three-year timeframe.

Disruption to the hospitality sector

With the impact of the pandemic expected to recede by Q3 2023, issues related to surging inflation are rising, meanwhile disruptions due to labour shortages are expected to increase and last into and beyond 2025.

Focus on Europe

Top priorities

Amsterdam remains the most attractive European city for hotel investment in 2023. Lisbon moves to second position while London falls to third place. Cities fast attracting more investment this year include Paris, Barcelona and Istanbul.

This year saw Dublin retain its place on the ‘Top 10 European Cities for Investment’ in 2022, placing 10th overall.

European investment opportunities

Hotels are taking the top spot from serviced apartments as the most attractive asset class in which to invest in 2023. Assets with a focus on sharing experiences such as co-living and student housing are popular among investors, this could be due to more people looking for affordable housing.

Financing the European hotel market

Although 27% expect private equity to remain the main source of equity capital for hotel acquisitions in Europe in 2023, it lost 20 percentage points compared to last year.

Alternative lenders are expected to be the most common source of debt financing in the European hotel market in 2023. All other sources (Corporate bonds, Family offices etc) have lost momentum compared to the same period a year ago, with the exception of traditional debt financing.

Two thirds of respondents (62%) expect hotel investment to be sourced from Europe but the importance of financing from the UK has decreased and the importance of investment from North America and the Middle East and North Africa has increased since last year.

European outlook and investment cycle

UK (37%), Germany (29%) and Ireland (28%) are mainly seen to be on the downturn whereas Greece (31%) and Spain (33%) and Portugal (33%) are more on the upturn.

Spotlight on Ireland

Performance in the Irish hospitality market

• After a tremendously challenging two years for the industry driven by the global pandemic, the Irish hospitality sector recovered well in 2022 albeit against a backdrop of macro uncertainty.
• Following the removal of most pandemic restrictions in February 2022, recovery within the sector has been faster than anticipated. This has been buoyed by pent-up leisure demand, a return to in-person events and an increase in discretionary spending as the record level of household savings begins to unwind in the post-pandemic economy.
• Moreover, the increase in air travel to Ireland in 2022 (c.96% of 2019 levels) has also supported the bounce back in hotel trading with the requirement for Covid testing on entry for all air travellers removed in March being a key milestone.

• The rebound in the sector is well-demonstrated by the performance statistics. In 2021 we saw the disparity between the Regional and Dublin hotels driven by the prevalence of domestic tourism. Occupancy levels on a year-to-date (“YTD”) basis in Dublin reached 78% to the end of September, supported by its strong calendar events, ahead of the same period in 2021 (31%) but still behind 2019 (84%) due to pandemic restrictions at the start of the year. Regional occupancy levels recovered YTD to 77%, just below the 2019 level of 79%.
• Occupancy on the books looks healthy into the winter season at this point providing evidence of a sustained recovery heading into 2023, albeit with economic headwinds.

• Similar to other geographies, rate has recovered in line with demand with YTD September 2022 ADR outperforming the previous 3 years across the country. The YTD Sep 2022 Dublin ADR increased by approx.€66 versus 2021 and represents an approx.€28 increase on the 2019 pre-pandemic ADR. Improvement in Regional ADR was less pronounced albeit the 2022 rate of €126 rate is well above pre-pandemic levels.
• Rising payroll, energy and general operational costs are likely to see the current rates become the norm. It is unlikely these cost pressures will subside in the near term and ability of hoteliers to pass on further price increases in 2023 to cover cost increases such as the potential increase in VAT remains to be seen.

• It is worth noting the Irish Department for Children, Equality, Disability, Integration and Youth has recently stated that it has contracted approximately 25% of available hotel beds in Ireland for emergency humanitarian use. This is having a discernible impact on both availability and room rates which is unlikely to dissipate in the near-term.
• On the supply side, several new hotels opened their doors in Dublin during 2022 with some of these being deferred openings from 2021 contributing c.2,700 new beds and bringing the total hotel stock for the capital to approx. 26,000 keys.

Funding the Irish hospitality market

The Irish hospitality industry was one of the sectors most negatively affected by the pandemic however the strong recovery experienced in 2022 is testament to the resilience of the sector. Government and lender support was critical during the pandemic, without it there would have been widespread solvency issues.

Considering the short-term outlook, there are a number of pressures squeezing the industry and slowing the strong post pandemic recovery. Inflation, labour shortages, and weakening consumer confidence are holding back the industry at a time when the pandemic induced standstill is still fresh in the mind.

The prevalence of refinancing, restructuring and disposals is likely to increase. Banks’ risk appetites regarding new hospitality opportunities has improved since this time last year however it remains limited, therefore it is likely that financing solutions will continue to become more diverse with direct lenders becoming increasingly active owing to their tolerance for a greater degree of risk, albeit at a higher cost to the borrower.

Moreover, greater risk tolerance is generally reflected in greater covenant headroom versus traditional bank lenders, this headroom could prove invaluable considering the operational pressures which are not expected to soften as we move into 2023.

The transactional market is set to continue with traditional banks, specialist equity houses and debt funds looking to deploy capital with borrowers seeking to reconfigure their capital structure, rebuild their balance sheets and execute deferred capex strategies.

The Deloitte Hospitality team is recognised as a leading advisor to the sector, supporting owners, operators, developers and investors with market leading advice across the whole business and real asset lifecycle. Deloitte is at the forefront of providing solutions that maximise value for our clients and ensure competitive advantage in what is a fast-changing, competitive and often volatile market.