Hotel valuation plays a critical role in development projects, as it determines the feasibility and profitability of hotel investments. You may have grand aspirations for a stunning hotel project, but without a proper valuation, you’re like a ship adrift at sea. That’s why being well-prepared and informed are the keys to unlocking your hotel’s full potential.
The hotel valuation process can be complex. It involves various factors and assumptions that are influenced by the purpose, timing, and market conditions of the project. But don’t panic; in this article, we outline key steps for hotel developers to maximise their hotel valuation success and how we can assist you in your ventures as part of our holistic services.
Key Steps for Hotel Developers in Preparation
There are several key points to obtaining a valuation that accurately reflects the value and potential of a hotel project.
You might find that hotel valuation software can best assist you with the process and methodologies. Programs like Preno, Hotel Valuation Software and HVS come equipped with user-friendly software and tools to guide you through your investment valuation process.
Despite these softwares, it’s still important to understand the steps involved to ensure you’re making informed and calculated decisions.
1. Independent Financial Projections
As a developer, it’s important to create your own financial projections based on your own market knowledge and industry experience. Relying solely on brand or operator projections may be misleading, as those projections are often designed to persuade developers to choose a specific brand or operator.
By using your independent projections, you can have a primary source of data for investment feasibility, while using brand or operator projections as a secondary source for validation. This is a much more reliable method to use when casting financial projections and ensures your decisions remain unclouded by third-party influences.
2. Understand the Valuation Methodology
Developers need to understand the various methodologies used to value hotel properties. While there are various methods and approaches to value a hotel property, the income approach is the most commonly accepted. This method essentially values a hotel property based on its ability to generate income or cash flow.
The income approach can be further divided into two sub-methods: the direct capitalisation method and the discounted cash flow (DCF) method:
- The direct capitalisation method values a hotel property by applying a capitalisation rate (or cap rate) to its net operating income (NOI). The hotel valuation cap rate is the ratio of NOI to property value and reflects the risk and return of the investment.
- The DCF method values a hotel property by projecting its future cash flows and discounting them to their present value using a discount rate. The discount rate is the required rate of return for the investment and reflects the time value of money and the risk of the cash flows.
Familiarising yourself with these methods and how they can be applied to your potential investment property is essential in accurately calculating the valuation.
3. Consider Timing and Market Conditions
Hotel valuation is not a static process. It evolves with time and market conditions. Developers must consider external factors such as COVID-19 and its impact on the hotel industry, including demand, occupancy, revenue, and costs.
Developers should be aware of how timing and market conditions affect their project and adjust their projections accordingly. Additionally, understanding how the appointed valuer perceives the market and the assumptions they make in their valuations is crucial, as it can lead to different outcomes.
4. Conduct a Sensitivity Analysis
A sensitivity analysis is a valuable technique that evaluates the impact of changing variables on project outcomes. As a developer, you should conduct a sensitivity analysis to assess how changes in occupancy rates, average daily rates (ADRs), operating expenses, cap rates, or discount rates affect the value of your hotel property.
This analysis also helps to identify components that add or reduce value to the project and enables you to address these factors beforehand. It also helps to assess risks and uncertainties while developing necessary contingency plans.
5. Present the Project to the Valuer
Last but not least, presentation matters. Developers should effectively present their project to the valuer in a clear and convincing manner. This includes providing comprehensive information on the location, market, demand, supply, competition, brand, operator, contract, design, construction, operation, and performance of the hotel.
It’s key to establish a coherent narrative that links your vision, market research, financial projections, and valuation assumptions. Supporting evidence and documentation should be provided to substantiate claims and validate arguments.
Benefits of Following the Preparation Process
By following these preparation steps, hotel developers like you can maximise their chances of success in the hotel valuation assessment. There are many benefits to following the process outlined above, including:
- Accurate and Reliable Valuation: Independent financial projections and a solid understanding of valuation methodologies ensure the valuation more accurately reflects the project’s value and potential.
- Risk Identification and Mitigation: Conducting a sensitivity analysis helps developers identify potential risks and develop contingency plans. This enables them to pre-emptively address factors that may affect the project’s value.
- Clear Communication: A well-presented project helps valuers understand the developer’s vision and the process employed to develop that vision. It enhances communication and clarity between the developer and valuer.
- Securing Funding and Achieving Desired Return on Investment: A thorough and well-prepared valuation report increases the likelihood of securing bank funding. Developers have a robust framework against which they can assess the valuation findings and challenge them if needed, thereby increasing their chances of achieving their desired return on investment.
The Bottom Line: Equip Yourself for Successful Hotel Valuation
Hotel valuation is a critical step in development projects. Hotel developers must be well-prepared and informed to ensure a successful valuation process. By following the key steps outlined above, you can maximise your hotel valuation success, identify risks, and secure bank funding.
Understanding the importance of independent financial projections, valuation methodologies, timing and market conditions, conducting sensitivity analysis, and effective presentation to the valuer are instrumental in achieving accurate valuations that reflect the true value and potential of their hotel projects.
Wondering what the next step is in your investment project valuation journey? At Axsia HTL, our experienced team can assist you with the management, planning, refinancing and support of your asset valuations. Speak to us today to get started.
