Hotel Valuation

How to Undertake a Hotel Valuation Study

To make informed decisions about a prospective or an existing hotel investment, all parties (owner, operator, and lenders) need to have accurate estimates of the value of the hotel property. There is a range of different methods used to produce these estimates when conducting a hotel valuation. Over the last three years, HTI Consulting has been involved in 10 hotel valuation assignments for different types of clientele across the continent.

Different parties require hotel valuations for different reasons. The first reason to conduct a hotel valuation is to inform the a) investment decision of a potential buyer and b) the lending decision of a financier/bank. Investors will contract appraisers and hospitality consultants, such as HTI Consulting, to determine the market value of the property, so that the initial investment and underwriting can proceed.

Secondly, a hotel valuation is a critical element when deciding whether to hold or sell the hotel from an asset management prospective. Traditionally, owners of hotel assets decide on an annual basis whether to hold a property and continue to receive the annual returns, or whether to sell the asset and utilise the proceeds to refinance future developments. This decision cannot be made without a thorough hotel valuation to determine the market value of the hotel.

The third reason to conduct a hotel valuation is to calculate the holding period returns, also known as the appreciation of the asset, over a select period. Finally, a hotel valuation process informs portfolio decisions. This refers primarily to investment funds that have incorporated hospitality assets into their investment mix. A hotel valuation can assist investors in gaining a better understanding of whether or not the current returns are beneficial to the overall fund.

As the majority of hotel valuation processes do not start with the sale of the hotel, which is why there is no sale price, one of three methods can be utilised for the hotel valuation process in order to determine the sales price. The hotel valuation methods commonly utilised include:

1. The Market Comparison Approach – the value should be similar to a comparable property that has recently been sold within the market.
2. The Cost Approach – the hotel should be worth what it cost to build, minus any depreciation.
3. The Income Approach – this approach is based on the present value of the future cash flow.

The availability of recent hotel transaction data in Africa, however, is a challenge with the Market Comparison Approach. Given HTI Consulting’s extensive hotel valuation experience throughout Africa, the income approach has proved the more accurate methodology. During a hotel valuation, the capitalisation rate and discounted cash flow models are analysed to provide a more accurate hotel valuation for the proposed hotel.