Difficulties of Management Contracts

Looks like Jim Murphy of the Prem Group agrees with some of the difficulties with management contracts in Ireland. An old posting but relevant!

D4 Hotels
I was saddened to read the reports in the media over the weekend of the falling out between Developer Sean Dunne and Hotelier John Brennan. Business is tough enough without having to deal with problems under the gaze of the national media. Mr Dunne had recruited John Brennan to reopen and manage the three former Jurys Doyle Hotels in Ballsbridge. Some newspapers claimed that the split was “extremely acrimonious”.

PREM Group operate a number of Hotels under management contract and are all too aware of the challenges that such contracts can bring. It is essential that both parties fully understand the concept of a management contract from the outset. Certainly if the relationship is not managed from the outset difficulties can arise very quickly. Good communication is essential especially in the early months while both sides are getting to know each other. Once the business settles down (usually after over a year), relationships between the owners and managers become more relaxed. These relationships take a lot of time and effort from both parties, good communication is critical in developing the trust between both parties.

Whatever happened in Ballsbridge it would be great if the detail could be kept out of the media and whatever differences the parties have could be sorted behind closed doors. The problem the rest of us Hoteliers in Dublin have is that these Hotels are dumping hotel stock onto the market at very low rates. The Burlington Hotel is about to reopen in the near future and already they have stolen some Tour Group business from one of our Hotels. The problem in Dublin is that room rates have hardly grown since 2000 while costs have risen substantially over the same period. These hotels are not in the business for the long haul and they could potentially inflict serious damage on hotels in the Dublin market who are trying to meet their commitments in a market that is sluggish to say the least.


ORIGINAL http://www.premgroup.com/blog/2008/02/25/d4-hotels/

Who Manages Expectations?

Ireland has been a strange place for luxury hotels in the last year. With a very poor summer in '07 and a weak dollar and a credit crunch in '08 rates have been nowhere near forecast.

However, the question should be asked ... Where did the forecasts come from?

Once developers got their hands on the capital grants for hotels that the Irish Government were giving out in the early 2000s it seemed the only thing they were interest in was luxury hotels - even in locations that did not justify them.

They brought in international management companies to run them or indeed often created their own and somewhere along the line they got the idea their average rates would be €400 plus ... and nobody told them otherwise.

Did the consultants get it wrong? Did they use the right consultants? Did the hotel management companies not carry out due diligence? Was everybody blinded by the money available in Ireland at the turn of the century and felt they could get their share? Did the management companies not talk to local consultants?

Who knows, but we are seeing the fall out now.

The Shelbourne and Marriott are going at it hammer and tongs displaying their dirty linen in public as it is all widely reported.

"Marriott claims the owners have demonstrated "a lack of understanding" of the realities of returns on investment in the luxury hotel industry. On the basis of the investment, the Shelbourne would have to have an average room rate of more than EUR 300 when the average room rate for luxury hotels in Ireland is some EUR 170, Marriott claims."

Surely the room rate was discussed as part of the negotiations for the management contract? Is Marriott not responsible for their clients lack of understanding?

Meanwhile the Capella Castlemartyr opened with great fanfare as Horst Schulze's Westpaces new brand has also closed with much less fanfare and thankfully less animosity. The new management company there should be ready to give a lot of bad news.

For more problems see this article in the Irish Times - "Chill winds of recession close some hotel doors"

The scary thing for me is that I was recently approached by another developer in the UK this time who was looking for a management company to run his proposed 5 star hotel. The 'consultancy firm' they had used suggested that an average rate of £150 with a 50% occupancy was achievable in year one. I won't tell you what the profit margin they suggested was! Even in the bast of recent times that would have been a struggle, especially given the location of this project. The problem was that the 'consultancy firm' was a estate agent/realtor/property agent/commercial property consultant they were not a hotel consultancy. Their main interest is in selling property!

So the answer?

Developers should employ a hotel consultant/specialist to sit between themselves and the management company and translate each others speak make sure that the project is viable and that misunderstandings do not happen.

Management Companies without experience in a country should employ consultants who do to make sure that what the developer is telling them is realistic.

Developers can make good hotel owners but they need expert eyes and ears to review what they are being told as indeed do management companies.