Investment in luxury hotel sector provides dividends

Investment in luxury hotel sector provides dividends - Crowe Ireland

Ireland’s five-star hotel classification, with just 36 properties out of Ireland’s 827 hotels and providing 4,215 out of a total of 59,609 rooms, is the smallest classification but generates the highest profit per room of any hotel class.

Over the last three years, profit per room for 5-star hotels has increased 39% from €20,860 per room in 2015 to €29,063 in 2018. The key driver of this profit growth is average room rate, which has increased €47.10 over the last three years from €181.08 in 2015 to €228.18 in 2018.

Over the same period, visitors from the US to Ireland have increased by 869k to 2.383m visitors, a jump of 57%. This has increased the market share of guests in 5-star hotels from 24% to 34% of all rooms sold as these higher-spending tourists favour premium accommodation and facilities with a higher level of service.

The significant upgrades and investment in Irish 5-star hotels – whether in Dublin with the Shelbourne and the Conrad or in regional Ireland at properties like Ashford Castle and Adare Manor – has helped attract these higher-spending tourists and it appears there is capacity to grow this market further. Ireland remains attractive as a destination for US visitors and with flights to Ireland available from over 30 US destinations and low cost options such as Norwegian Air, American travelers have greater choice than ever before.

The profitability of 5-star hotels is further enhanced through their food and beverage offering. Gross margins on food at 5-star hotels are 70.9% compared to 69.4% for 3-star hotels. Beverage gross margins are 71.2% versus 69.3% for 3-star hotels.

Five-star hotels require highly trained staff to deliver the service levels required and the sector faces a significant challenge in finding and retaining staff, especially with the increased competition from the wider services sector.

Luxury hotels invest significantly in training, uniforms and supervision. Payroll costs represent 36.1% of revenue, the highest of any classification. This translates to an average payroll cost per room of €44,644 for 5-star hotels in 2018 versus €20,956 for 3-star hotels. But in many instances wage levels have not kept up with the increased cost staff face in renting accommodation near the hotel.

Of the 36 five-star properties in Ireland, ten are in Dublin (1,723 rooms) and 26 are in regional Ireland (2,492 rooms). You might expect that accommodation pressures would ease when outside of the capital. However, many regional 5-star properties are located in key tourist areas and with the growth of Airbnb many of the properties normally available to hotel staff are switching to short-term tourist rentals.

Hotels are realising that providing staff accommodation is a key tool in recruiting and retaining employees, especially for staff relocating from overseas. Certain hotels will rent houses or apartments nearby and make these available to staff at reasonable rents so taking the hassle away from the employee. Other supportive arrangements like this will likely be required going forward as the rental market remains expensive and difficult to access.

Hotels such as Hotel Europe in Killarney and Ashford Castle have even gone as far as to invest over €3m each in staff accommodation facilities to ensure retention and continuity of their trained staff. These levels of investment emphasise the importance of continuity and retention of trained staff for 5-star operations and how important this is for the guest experience.

Five-star hotels have broadly doubled in value over the last five years. This increase is based on both a growth in profits and lower investment yields being applied to this small group of properties where the outlook and prospects look very positive. The financial and time investment needed to build a new 5-star hotel is significant. This barrier to entry causes investors to switch their interest to investing in existing stock, looking for opportunities to expand existing properties rather than any new build. There is also potential that after a refurbishment certain high-end 4-star hotels may look to re-position their product in this luxury category to benefit from the higher room rates and guest spend that 5-star hotels enjoy.

The current strength of the 5-star market is underpinned by the recent sale of The Conrad in Dublin for a reported €115m. The Marker Hotel in Grand Canal is also on the market with a similar price tag. Outside of the city centre, there are two golf resort 5-star properties also on the market: The Portmarnock Hotel with a price tag of €50m and the K-Club, whose guide price is down to €60m, having been reduced by €20m since its sales launch a few months back.

Many of Ireland’s 5-star hotels have changed ownership since the downturn. Luxury hotels, with a high fixed cost base, saw profits fall dramatically during the recession, reaching as low as €128.33 average room rate and profit per room of just €5,305 in 2011. Many owners were forced to sell. For those who acquired the properties, they are now sitting on handsome property gains. Some will be enticed to take their return with the strength of the current market, while others are happy to maintain their investment for the longer-term.

Crowe has a specialist hotel, tourism and leisure team. If you would like to find out more about how we can support your hotel or hospitality project contact Aiden Murphy. If you would like to order your copy of the 2019 Crowe Hotel Industry Survey please contact sinead.orourke@crowe.ie