Hey guys! Look, there's another sector full of "zombie" stuff!

Quickly-written post after seeing the off-lede in the Business section of today’s Irish Times; “Nama may have to keep ‘zombie’ hotels open“. Excuse poor prose and missing conjunctions (and over-use of parentheses).

I find it quite bizarre that the following will have been the process which will have been gone through if Nama keeps developers’ hotels open;

1996: Government incentivises non-hoteliers – property developers – to enter hotel industry by offering large tax incentives and massive grants. The incentive amounted to 15% of the capital costs for the first six years and 10% for the seventh.

1996-2002: Developers, often without any consideration for whether a hotel is needed in the area, are granted planning permission to build by local authorities. They invest minimum equity and borrow as much as possible from the banks. They write-off capital allowances (furniture, domestic appliances, fittings) for the hotel against rental incomes from their other properties – thus reducing the State’s tax income for the developments yet further – and watch the value of the hotel increase.

2002: Minister for Finance Charlie McCreevy proposes that the tax scheme be closed. He is lobbied by property developers and decides the scheme will continue for another two years.

Late 2003: 217 applications for hotel developments are lodged, proposing the introduction of 15,000 extra hotel rooms country-wide. Context: in the previous ten years 16,000 hotel rooms were added to the national stock.

Early 2004 to mid-2008: Almost €100m annually is being lost to the State due to the tax scheme, though Fianna Fáil say it has been recouped through VAT and jobs. A massive oversupply of hotel stock is created. The profit margin in the hotel industry falls dramatically.

Mid-2008 to mid-2009; Banks verge on collapse because they’ve loaned developers too much (many of these loans are for hotel developments – €80 billion in loans sold to Nama will be for hotels). Government guarantees the banks. Term National Asset Management Agency enters national consciousness.

Today: We’re now in the last year of the tax scheme. Developers with a toe in the hotel industry (most of them) see the light of Nama on the horizon. In contrast many long-term hoteliers, without Namability, are considering the viability of their business.

At present developers are keeping their hotels open, often simply ticking-over day-to-day without profitability (hence ‘Zombie’) as to close them would be accepting that they are not viable; which they don’t want to admit to Nama. They’re doing this by offering loss-leader deals and cut-price rates which are financially not possible to maintain in the long term.

By doing so they’re undermining the profitability of nearby hotels run by locals and small-time business people which could be profitable (and support jobs etc). But hey, that’s capitalism, isn’t it?… No? What? No? Whaddaya mean “no”?

Now, according to today’s paper, it appears the developers’ hotels which continue to benefit from the tax breaks will be kept open by Nama as closing them could “lead to widespread ‘tax contamination’ across the wider businesses of property developers”.

Basically, developers who became hoteliers are pushing hoteliers out of business. Nama, say the Times will in some cases, continue this. At the very least Nama will continue providing competition against struggling small-scale hoteliers.

Strangely, the developers only became hoteliers because of an ill-thought-through Government incentive (the tax scheme) and can only remain so because of another Government incentive (Nama). Again, capitalism?

Definition of ‘tax contamination’ gratefully accepted below.

Hotel industry tax policy and Nama previously covered here.

2 thoughts on “Hey guys! Look, there's another sector full of "zombie" stuff!”

  1. Of course, why did local authorities up and down the country give planning permission for such huge hotels?

    Commerical rates is one major reason.

    I understand there have been 13 separate reports to the Minister for the Environment, Heritage and Local Government over the years, all calling for the reform of how local government is funded. In the absence of this reform, every authority wants its own hotels, shopping centres, etc. to boost its commercial rates income.

    Failing to deal with one problem helped cause another.

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