Ireland’s Zombie Hotels

They are called “zombie hotels,” and they are creating major problems for the sector in Ireland.

The name was coined by economist Peter Bacon to describe more than one hundred hotels built around Ireland during the economic boom known as the “Celtic Tiger,” which lasted from 2001 to 2007.

With overseas visitor numbers achieving double-digit growth over several successive years, employment reaching record levels, and economic growth roaring along, developers saw hotels as a safe bet. Initially they built in key tourism centers like Dublin, Killarney, and Galway, but when sites became scarce, they looked elsewhere and began to build hotels wherever a piece of ground became available. The result was scores of brand-new hotels opening in business parks, along major roads, and occasionally “in the middle of nowhere.”

Initially these new hotels achieved reasonable occupancy and yields, although room rates were generally somewhat below the national average.

Then came Lehmann Brothers, sub-prime lending, and worldwide economic chaos. In 2007, a pin burst the property bubble, and the Celtic Tiger lay dead. Within a year, tourism growth ground to a halt and the number of overseas visitors to Ireland fell by a third.

Thousands of Irish home-owners saw the value of their properties decline by more than one-third, and many fell behind in their mortgage repayments as rising unemployment took its toll. The new generation of hoteliers found themselves in deep financial trouble, unable to pay their financial charges and barely able to keep their doors open. In order to generate cash, they slashed rates and cut overhead to the bone.

Then it was the turn of the Irish banks, which had financed the new hotels alongside office blocks, holiday homes, shopping centers, and indeed anything made of bricks, mortar, and glass. The nation had never seen such a spending spree, and millions of euros were available to developers, often by making a single phone call to their friendly banker.

When the bubble burst, the Irish banks veered to the brink of collapse and were only saved by a blanket government guarantee, which has since proven to be exceptionally costly to the Irish taxpayer and is currently funded by a bail-out from the IMF, the European Central Bank, and the EU.

An under-siege government created the National Assets Management Authority (NAMA) with power to buy bank loans and manage the supporting assets. As a result, NAMA became the biggest hotelier in Ireland. Its policy to date has been to seek business plans from the hotel investors, and if they are approved by NAMA, the business can continue to operate. In the interim, however, the operation of most “zombie hotels” has been handed over to professional management companies whose brief is to merely keep the business afloat and break even on operations.

This strategy has resulted in intensive competition on rates, which has angered “traditional hoteliers” who need to meet financial charges and provide funds for regular refurbishment. The Irish Hotels Federation has repeatedly called on the government to force the closure of the “zombie hotels’ and to take up to 15,000 rooms out of the market. So far, however, its please have fallen on deaf ears.

The Department of Tourism has remained neutral on the issue, allowing market forces to dictate the fate of the hotels. There is also a school of thought that the hotels constitute a valuable tourism asset, which will be needed when visitor numbers rise again. Indeed, this has already begun to happen with a 6 percent rise in tourism arrivals in 2011 and a further increase predicted for 2012.

Meanwhile the “zombie hotels” remain in business under the loving care of receivers, examiners, banks, and NAMA.