IHIF insights

If you were wondering why so many of your hospitality colleagues were out of office April 15-17, 2024 — they were likely attending the International Hospitality Investment Forum (IHIF) in Berlin. IHIF is a zeitgeist for the hospitality industry and is attended each year by over 2,500 hospitality investors, owners, operators and developers. This year's theme, 'Making the markets,' informed the conference programme, including demand, revenue, profit, asset management, development, segmentation and deal-making. Many of the sentiments and discussions were all too familiar for Irish hoteliers, including challenges with rising inflation, interest rates, cost of labour, geopolitical instability, and the shift towards environmental, social, and governance (ESG) influencing investment decisions.

Our Hotel, Tourism & Leisure team at Crowe Ireland attended this year's IHIF where Horwath HTL is a sponsor of the conference. As we reflect on the industry attitudes poised to shape the future trajectory of the hospitality industry, let's dive into what they mean specifically for the Irish hotel market.

1. Chinese outbound tourism returns
   The Chinese market is set to make its long-anticipated return to international travel in 2024. The size of the market and increase in middle-class households and wealth in China means that significant outbound tourism will find its way to Europe and Ireland. In 2019, Ireland welcomed 83,000 Chinese tourists, with most visiting during peak season between April and August (source: Tourism Ireland). Visitors from China tend to stay longer and spend more compared to other source markets, making them a pivotal demand driver, particularly among 4- and 5-star hotels in Dublin and regional Ireland.


2. Enthusiasm in deal flow
   Investor sentiment towards deal flow was largely positive, driven by favourable timing and available capital. A year after inflation peaks, interest rates have stabilised, with a potential drop anticipated in the second half of the year. Keith Evans, CEO of Lifestyle Hospitality Capital, who recently acquired the Dean Hotel Group, suggests that the 'new normal' could settle around 3%, with a 'more sticky inflation'. Despite economic uncertainties, there remains a significant pool of capital looking for a home to invest in. Moreover, many properties acquired before the pandemic are now due for refinancing, contributing to a narrowing bid-ask spread between buyers and sellers in the market.


3. Consumer demand and quality spectrum shift
   Holidays remain an integral part of consumer spending. While Q1 2024 saw a slight softening in accommodation demand, pent-up demand for short breaks and experiential tourism continues. Travellers, particularly millennials and Gen Z, are allocating larger shares of disposable income to travel. While this is good news for tourism demand, it also means travellers are asking more and more, “Am I receiving the right value for my money?”. As a result, we've seen a shift towards either end of the hotel quality spectrum. Some operations have adopted more budget-friendly models to deliver competitive rates, with others shifting towards luxury experiences to drive rates and ancillary revenues.
   
   Despite optimistic consumer demand, businesses must focus on maintaining profitability. We have seen significant rate appreciation in Ireland, with luxury hotels seemingly better positioned to absorb these price hikes compared to budget properties. In the long term, high-end hotels may weather market fluctuations better than their economic counterparts. However, increased prices also mean increased consumer expectations, and high-end operators need to keep a relentless focus on service quality.


4. Brands and developers align on asset conversions
   Internationally, the big listed hotel brands are actively diversifying their portfolios by growing soft and conversion brands while also expanding through partnerships and bolt-on M&A. For example, Hilton's Spark is a catch-all soft brand targeting smaller hotels who benefit from the brand association while retaining local identity. Concurrently, property developers are exploring conversions of existing buildings such as office blocks into hotels. JMK Group is set to unveil Western Europe's first Home2 Suites in Dublin, converting the former Telephone House office block on Marlborough St. ITIC projects 11,500 additional bedrooms are needed by 2032 to support the tourism economy's growth, and office conversions may be one path towards meeting demand.


5. Investor sentiment about Ireland
   Ireland's consumer demand is still strong, coupled with strong ADR and stable air access. This gives confidence to owners to invest in their product, while at the same time, investors are either looking to buy into the sector or the incumbents are looking to exit, having made a healthy return through repositioning, investment and asset management. The recent sale of the Shelbourne Hotel for approximately €230m (€900k per key) demonstrates confidence in the market. International capital and private equity (PE) are constantly looking for yield on investment, and where there are strong fundamentals such as business and leisure demand and limited new entrants, these markets will attract strong interest for trading assets and conversions into hotels (such as office blocks). Demand for 'trophy assets' is still strong where high-net-worth individuals are running the rule over luxury properties in a bid to leverage on strong existing business. Regionally, properties like Mount Juliet Estate and Slieve Russell Hotel are also attracting significant attention.

What does this mean for Irish hotel owners?

This environment presents opportunities and challenges for hotel owners. Opportunities include achieving high sale prices for assets and increasing property valuations as EBITDA margins improve. Challenges include new entrants investing significantly in asset quality, putting pressure on incumbents to refurbish. It also presents a scarcity of investment opportunities for domestic owners looking to expand their portfolios. To navigate these dynamics, owners can take proactive steps by preparing their property for potential unsolicited offers for sale and future-proofing the business through investments in systems and operational expenditure aimed at enhancing overall operations and guest experiences. Obtaining planning permission for additional bedrooms can also be attractive to a buyer and adds value to the asset (€60-80k per unbuilt room in Dublin).

What does this mean for Irish hotel operators and managers?

In such a buoyant market, hotel operators and managers will be happy with strong demand and ADR. However, this also leads to resourcing challenges in terms of labour and availability of skilled tradespeople to operate and maintain the hotel. New entrants can lure away skilled and long-serving employees and existing corporate business, causing significant disruption in a smaller market. Managers can take proactive steps like embracing new and emerging markets and doubling down on retaining existing clients through loyalty schemes, appreciation events and redoubling the focus on customer care. Maintaining competitive advantage in a growing market with new entrants is critical to remaining relevant and highly regarded by repeat customers, while also attracting first-time guests through innovative and effective marketing campaigns.

The hospitality and tourism sector remains one of the most dynamic and important for the Irish economy, providing much-needed employment for over 250,000 people across the island. It is estimated by Fáilte Ireland that for every €1 spent on accommodation, €2.50 is spent in other downstream businesses, underpinning the importance of maintaining air access and the provision of high-quality products and experiences for visitors. Tourists will always need somewhere to stay, so hotels and other forms of tourist accommodation will always be in demand. Those investors and operators that can capitalise on this with fit-for-purpose products and services will reap the rewards in the long run.

With strong tourism demand fundamentals, opportunities remain for existing hotel products to grow and for new ones to be established in the right location.

At Crowe, we have a deep understanding of the Irish hotel market, regularly acting for owners, investors, developers, funders and industry stakeholders. As one of the leading hotel, tourism and leisure consultancy firms in the world, Crowe can provide you with the reassurance and expert advice you require in assessing your hotel investment opportunities.