The Irish Times - Friday, February 26, 2010

Can Nama give hotels the five-star treatment?

Up to 200 hotels are set to transfer to the State, many of which are very expensive to run, writes GRETCHEN FRIEMANN 

THREE LANDMARK London hotels, the Berkeley, Claridges and the Connaught, which are owned by financier Derek Quinlan's Maybourne Hotel Group, may end up being controlled by the National Asset Management Agency (Nama) within the next few months as the transfer of an initial €16 billion in loans nears completion.

According to well-placed sources, the first tranche of properties earmarked for Nama will also include five prestigious Irish hotels: the Shelbourne, the K-Club, the Ritz-Carlton hotel in Wicklow, and the Radisson and G Hotel in Galway. All these high-profile establishments are linked to the top 10 developers whose multi-billion-euro portfolios will form the first wave of €80 billion in loans being moved into the State's asset recovery agency.

Although the debts on these properties may not be in default, the hotels qualify for Nama because they are associated investments of the developers, and the borrowings have been provided by Irish banks covered by the Government's "bad bank" scheme.

If the Maybourne Hotel Group is shifted into Nama's control, along with the five designated Irish hotels, the State agency will rank among the top hotel owners in the world. But there is growing anxiety in the industry over Nama's perceived lack of expertise in this sector.

The Irish Hotel Federation (IHF) estimates that up to 100 hotels may ultimately end up in Nama, but other industry sources claim the figure may be as high as 200 by the time Irish banks have been relieved of their toxic assets.

One expert who has been assisting Nama describes the initial portfolio of luxurious hotels as "the tip of the iceberg", and predicts that the agency will have to employ a team of industry specialists to deal with these businesses. "Hotels," he says, "are not simple assets, they need daily management, and I don't think anyone in Nama has come to grips with that." There is also mounting concern over the funding of these hotels. A number are racking up heavy losses, and industry experts predict Nama will need millions just to keep the first tranche of hotels in business.

The Maybourne Group and the five Irish hotels constitute some of the Celtic Tiger-era's most famous achievements. Their acquisition by Ireland's leading developers symbolised the strength of the economy, just as their transferral into the State's control signifies the disastrous consequences of that period's excessive lending to the property sector.

But industry experts point out that while the Irish taxpayer will effectively own some of the UK's and Ireland's most expensive hotels - the cheapest rate in the Maybourne Group is £570 (€643) a night at the Berkeley, and prices can soar to over £8,000 a night at the newly refurbished Connaught Hotel - this change in ownership will not be evident to well-heeled customers. According to one informed source, the developers "who bought the properties will stay on and manage the asset on behalf of Nama. There may be one or two cases where the agency decides to install a new team, but most of these businesses are solid, they were just bought and developed at inflated prices."

It is understood the Maybourne Hotel group is being considered as a candidate for Nama because Anglo Irish Bank and Bank of Ireland have both advanced hundreds of millions of euro in loans to the company, which is 80 per cent-controlled by Derek Quinlan and developer Paddy McKillen. Both these property tycoons number among the top 10 borrowers whose debts will be the first to be transferred into the State agency.

Quinlan, who has quit Ireland for Switzerland, hit the headlines in 2004 when he and a consortium of investors acquired the three hotels along with the Savoy for £750 million - amounting to what was then a record-breaking price of £1 million per room. Quinlan subsequently sold the Savoy to a Saudi Prince for £200 million, booking a £50 million profit.

Alongside Quinlan and McKillen (a member of the so-called Anglo 10), the consortium also included Riverdance bosses John McColgan and Moya Doherty, and Kyran McLaughlin from Davy Stockbrokers.

The Maybourne Group is controlled by a company called Coroin. The latest filed accounts for Coroin show the group's operating profit decreased by 12.2 per cent in the year ended June 30th, 2008, to £33.9 million, while it posted a pretax loss of £7.8 million in the same period. The accounts also show the company has £646 million owing after one year, while its total fixed assets are valued at £654 million. Barclays Bank is named as the group's third banker.

It is understood that valuations for the Shelbourne, the Ritz-Carlton and the K-Club, and the G Hotel and Radisson in Galway, have all been submitted to Nama as the agency prepares to take over the loans on these assets.

As with the Maybourne Group, the Shelbourne also carries an unprecedented price-tag of about €1 million a room after its owners bought the property for €140 million in 2004 and then stumped up a further €125 million in refurbishment costs for the 262-bedroom hotel. These development works are incomplete, with a pool and spa yet to be installed.

The Shelbourne is owned by a consortium of investors that includes Bernard McNamara, one of Nama's top 10 developers, and businessman John Sweeney, whose 33 per cent stake in the hotel is owned by his holding company, Black Shore Holdings. That firm is insolvent, and a liquidator was appointed to it by the High Court earlier this month.

Two other stakeholders in the Shelbourne, real estate agents David Courtney and Bernard Doyle, are locked in a legal battle with Barclays Bank over the non-repayment of €9 million in development loans.

In addition to the travails of its owners, there is also a bitter dispute over the management of the five-star hotel, which is set to be resolved at an arbitration hearing next month.

However, as the financial dramas of the leading developers are being played out across the media, many in the hotel industry are wondering whether Nama will ultimately prove a boon or a liability to the crisis-hit sector.

A number of international hotel brands are pulling out of the country. Last October, the five-star Mount Juliet in Kilkenny parted ways with the Hilton's Conrad brand, while the upmarket Johnstown hotel in Enfield, which is owned by Sweeney, a stakeholder in the Shelbourne, recently ended its franchise agreement with the Marriott Group. Industry sources claim there have been further big-brand exits around the country in the past six months.

Yet few expect the transition into Nama to result in any change in the management contract of the five lavish Irish hotels. The Ritz-Carlton, which is owned by Treasury Holdings, one of Ireland's largest property firms with close to €2 billion worth of assets on its books, is expected to maintain its brand at the 200-room resort in Enniskerry. The Palladian-style property was opened in October 2007 and room rates have been shrinking there ever since. The hotel houses Gordon Ramsay's first Irish restaurant.

Ironically, the Nama-listed developer, Treasury Holdings, also owns the Treasury building in which the State agency is housed.

As with the Ritz-Carlton, industry analysts anticipate the Radisson brand will remain in situ at Bernard McNamara's Galway property. The former Fianna Fáil councillor, who declared himself "broke" in an interview earlier this year, also owns half a dozen other hotels around the country, including the Parknasilla in Kerry, but it is understood this property does not qualify for Nama.

The high-rolling patrons of the K-Club are also unlikely to notice Irish taxpayers' new position of authority. Nama will take over builder Gerry Gannon's stake in the internationally renowned golf club and resort, though it is not clear how this will impact upon his co-owner in the business, Michael Smurfit.

Alongside Gannon in the Nama top 10 is Gerry Barrett, owner of Ashford Castle and the G Hotel. It is understood Ashford will not be included in Nama's portfolio because the loans on it are issued by a bank that is not covered by the Government's asset-recovery scheme.

The five-star G Hotel is one of Galway's most prominent buildings, and was designed by milliner Philip Treacy.

However, Weldon Mather, a leading hotel consultant, claims Nama has "massively underestimated how much" the management of such a large hotel portfolio "will cost the State". He argues that many of the 100 or more hotels likely to be controlled by Nama are "not turning a profit - some aren't even servicing their loans".

Mather adds the State agency's control of so many hotels will have major implications for Ireland's tourism industry.

According to John Power of the IHF, "15,000 rooms need to be removed from the sector" if quality businesses are to survive, and he stresses Nama must formulate a strategy to "get rid of" so-called zombie hotels, being sustained by banks despite being insolvent.

"Hotels are not simple assets, they need daily management. I don't think Nama has come to grips with that

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