extract value from hotel properties


Hotel Valuations


The process of hotel valuation is strictly linked to the unique features of hotel, accommodation and tourist buildings.

In fact, classic real estate valuation methods have to be reformulated according to some peculiar elements of hotels and other accommodation structures. Such elements include:

  1. Direction of a business activity, with the production of cash flows generated by the typical management of accommodation business
  2. Atypical hotel buildings, compared to other categories of commercial buildings
  3. In some cases, presence of different owners of rights on the real estate and management components, with following differentiated roles and responsibilities of such subjects.

The most accredited professional practice is inspired by rules established by third-party certification bodies, professional associations and best practices. It tends to identify the valuation process with the final result of such process, which is the identification of a monetary value to be attributed to a property in given market conditions. According to the definition of RICS, Royal Institution of Chartered Surveyors, the market value is “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

Furthermore, there are other definitions of the value intended as “investment valuation” or “future estimate of the most probable market price”, that can create the need to change the adopted valuation method, in order to better respond to a necessity of different valuation.

The professional approach that can be adopted to conduct a hotel valuation consists of three main methods:

Cost Approach – The cost approach, or replacement cost approach, subtends the hypothesis that the hotel property value is equal or similar to the replacement cost of the same property. Therefore, the value attributable to the hotel can be associated to sustainable total costs in order to rebuild exactly the same hotel in the same place. Such approach is often difficult to apply and produces property values that are not in line with the market value of the real estate, namely that value created by the exchange between sellers and buyers.

Sales Comparison Approach – The sales comparison approach is commonly used for residential units and is based on the analysis of historical hotel real estate sales data that can be compared to that which is object of valuation. The logical prerequisite is that a given hotel can have a similar value to other hotels that have been formerly sold on the market and whose characteristics can be assimilated to those of the hotel analyzed. Such approach is often used as a test and can be adopted only in the presence of significant comparable values, which allow an effective comparison against previous sales in similar markets. If such elements are missing, the approach can create not significant and even misleading values.

Income Capitalization Approach – The so-called income capitalization approach is based on the analysis of monetary flows produced by the hotel. These flows are expressly capitalized through financial discounting methods and allow identifying the real estate market value.

Such approach was originally adopted in the United States and it later spread in Europe. Today it is the most recognized and adopted professional approach, especially by those subjects who need an economic and financial analysis for the purposes of investment.

Such approach is therefore related to business valuation practices and considers the hotel as a real company, where the presence of the building, as well as other company assets, is instrumental for the production and supply of services.

The approach involves the creation of economic projections of the hotel unit management according to historical performance achieved, in order to determine management cash flows for a period of 5/10 years. On the base of such economic projections, the approach adopts a financial discount model, the so called DCF (Discounted Cash Flow), through which the discounted value of future cash flows is identified, taking into account the Terminal Value of the hotel.

Through a suitable application of discount and capitalization rates, future cash flows represent the economic benefit that investors or potential buyers may expect, identifying the property value according to specific market conditions.

The hotel valuation is generally carried out by qualified professionals and consists of drafting and issuing a written and signed report, which also contains the definitions that univocally identify the determinate value type, the conditions to which the report responds and the references to certification bodies – on a voluntary or compulsory basis – such as the RICS.

Snapshot

  • The process of hotel valuation is linked to the unique features of hotel, hospitality and tourist assets, identifying a monetary value to be attributed to a property in given market conditions
  • The hotel valuation is generally carried out by qualified professionals and consists of drafting and issuing a written and signed Report, which also contains the definitions of value determined

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