Tourism Minister Mary Hanafin has said  that 'something will have to be done' about 'zombie hotels'. She was speaking after Irish Hotels Federation ceo John Power repeated the Federation demand that hotels 'with unsustainable debt levels' should close.

Addressing the Joint Oireachtas Committee on Arts, Sport and Tourism, he said that failure to address the oversupply of hotel accommodation, estimated at up to 15,000 bedrooms , is damaging the long term interests of the tourism sector and threatening the viability of hotels which are otherwise fundamentally competitive businesses. He said that that the burden of excess capacity is not being borne by new entrants to the sector that caused the problem or by the banks that have financed bad investments.

The IHF view was not shared by Failte Ireland chairman Redmond O’Donoghue who said that, while the continued operation of 'zombie hotels' presented a serious challenge to the sector, the market would decide which hotels would close and which would remain in business.

John Power told the Committee that under normal conditions, the market would force hotels with unsustainable borrowing and debt levels to fail. However, this has not happened primarily due to the reluctance of banks to realise losses and write down loans advanced to hotels that have no prospect of recovery. This is because of the additional pressure this would place on the capital adequacy of banks’ own balance sheets and a reluctance by banks to act in advance of the introduction of NAMA. Furthermore, hotels which benefited from tax allowances need to remain open for seven years to allow investors to retain capital allowances, thereby creating a barrier to exit the market.

According to the IHF, occupancy rates have fallen by 15 per cent since 2007 and are now at 55 per cent, a level not witnessed by the sector since the early 1980s. Prices have collapsed with falls of over 20 per cent during the last 18 months due to serious overcapacity of supply, continued weakening of overseas markets and unsustainable pricing tactics by hotels owned and supported by financial institutions with high levels of funding exposure. This, combined with historically low occupancy levels, is threatening the survival of established and viable businesses ­­- many of which are vital to the long-term strategic objectives of Ireland’s tourist industry. 

He said that the solution to over-capacity must involve the removal of all barriers to insolvent hotels exiting the market such as the removal of claw backs on tax reliefs where hotel ceased to operate or changed their use within their seven year tax life. 'There must be pressure on the regulatory authorities to take into account the consequences for the hotel sector of a lack of foreclosure against fundamentally insolvent hotels. The authorities should ensure that banks fully recognise bad loans within the hotel sector and face any capital adequacy issues that might follow.'

The IHF submission to the Committee said that 'excessive' local authority rates are an emergency issue for most hotels and guesthouses which do not have the trading income or cash-flow to pay the current levels of rates and charges. It is now eight years since the Valuation Act 2001 came into force - providing for the revision of all rateable properties throughout the country. Since then, only two of the 88 rating areas in the country have had the revisions carried out by the office of the Commissioner of Valuation. 'Those revisions which have been completed to date have resulted in the local authority rates liability of hotels being reduced by on average more than 30 per cent. Based on this experience it is reasonable to suggest that if the revisions were completed in the remainder of the country similar results would be achieved. In the meantime hoteliers are being forced to pay excessive rates particularly at a time of very difficult trading circumstances.'

In recent weeks, the Irish Hotels Federation wrote to most of the rating authorities requesting that a 30 per cent waiver of rates on hotels be introduced; every reply received to date indicated a refusal to introduce such a waiver scheme. It is now the view of the Federation that the only option remaining is for the Government to introduce emergency provisions for a 30 per cent reduction in Local Authority rates applicable to hotels and guesthouses until such time as these properties have had their rateable valuations revised as provided for in the Valuation Act 2001.

The reluctance of banks to provide working capital to potentially solvent hotels is leading to liquidity problems that further undermine their businesses. The IHF calls on the Government, as a matter of urgency, to increase the flow of working capital credit to enterprises at affordable terms by introducing a guaranteed loan scheme with the banks along the following lines:

•A limit of €150,000 in additional credit per enterprise
•A guarantee provided by the Government for up to 50 per cent of the advance
•A guarantee premium of an extra 2 per cent per annum to be paid by the borrower
•The scheme to last for a maximum period of two years
Joint Labour Committee (JLC) system

The IHF maintains that radical changes to Ireland’s economic and regulatory environment over the past century have made the JLC system obsolete, particularly in light of the National Minimum Wage Act 2000 which has provided Ireland with the second highest gross minimum wage in Europe. John Power  says , 'It is our belief that employment law should be created by legislation introduced by the Oireachtas and that is should apply to all employments and not be created by organisations such as the Joint Labour Committees or the Labour Court.'

The IHF maintains that, in order to facilitate growth in overseas visitors to Ireland, the Government must be ever vigilant to remove any likely obstacles or barriers that are put in the way of visitors. The introduction of the air travel tax last in 2009 created such a barrier and the likely shortage of car hire cars for the coming summer season is likely to be an issue for the industry.