When it comes to property valuations, hotels differ from many other class of property, because they are operational assets. This means that there are factors that need to be taken into account when determining the potential value of the property that are not taken into consideration for other commercial properties.
Knowing what to look for takes both extensive experience and a level of attention to detail that our commercial valuation team have taken care to hone throughout the course of their careers. In this article Mario Pericleous MRICS and Louise Manners MRICS outline a few elements of what the valuation of a hotel involves.
Using the right valuation method
When carrying out a valuation for a hotel or provision of serviced apartments, the valuation method used will vary based on the instruction given by the lender. Typically these fall into three types of valuation:
- Trading Valuation
- Bricks and Mortar, i.e. vacant possession
- Investment Valuation
In this article we will primarily focus on what a Trading Valuation involves, as it is by far the most common type of valuation requested for hotels, followed closely by the Bricks and Mortar valuation. However, it is worth noting that there also many instances when a lender will require an Investment Valuation, and we may therefore occasionally refer to the differences between the valuations.
In comparison to the valuation of many commercial properties, which are normally done on a rental basis, a Trading Valuation is carried out using the profit method. Therefore, rather than basing the value of the property on the income produced by renting out parts or the whole of the building, our Valuers base their calculations on how much income can be generated by running the property as a business.
In this method, a number of financial factors are analysed to determine what the Fair Maintainable Operating Profit (or FMOP for short) could be in the hands of a fair and competent operator. To arrive at the FMOP, our experienced Valuers go through the hotel’s business accounts, preferably once they have been accredited, analysing the historic trading, with particular emphasis on declared profit and loss. The financial factors that are used are referred to as EBITDA, which stands for:
- Earnings, referring to the net income
- (Before)
- Interest
- Taxes
- Depreciation
- Amortisation, referring to the gradual writing off of the initial cost of an asset
By doing this, our valuation team is able to determine:
- How much income could be generated based on the number of rooms the property has;
- What the achieved average room rate is;
- Whether the current operator is under-pricing their services, which may result in not achieving the possible income;
- Or whether they are over-pricing the rooms, which could result in a lower occupancy rate.
Next steps
Having arrived at the EBITDA FMOP, our valuation team proceed by comparing these figures to the average room and occupancy rates for similar hotels or serviced apartments in the local area. To do this, professional benchmarking data is utilised, to ensure that the comparisons are as accurate and up-to-date as possible. The benchmarking data consists of a pool of data collected from traders, in order to determine the local and national averages. Making use of this data allows our valuation specialists to estimate what the possible profit could be, if rooms were chargeable at comparable and competitive rates.
Having calculated this profit, our Valuers go back to the business accounts to review the outgoings. These are once again assessed against the benchmarking averages from other sources as well as the experience our valuation team have gathered over the years, to get an understanding of what the outgoings should be.
Mario Pericleous MRICS comments:
Once you know the profits and the fair operating trade, we can then apply a multiplier, or a yield. This is similar to an investment valuation where you apply a yield to a rent, but in this instance you apply a multiplier to the profit. To ensure we are making an accurate comparison, we use different multipliers for national firms, which tend to be higher than they are for independents.
The experience our Valuers have gathered over the course of their careers gives them valuable insights into the differences between regional markets. For instance, the London market tends to have a much higher multiplier than the North of England, while purpose-built properties also yield better than converted residential dwellings.
This experience, combined with the benchmarking data, ensures that the best possible comparisons are made, both in terms of locality as well as services offered. For example, how many of the rooms are rented with breakfast included.
Investment Valuation at a glance
As previously mentioned, there are different valuation methods that are requested by banks seeking to lend on a hotel. Which one is required is dependent on whether their client is seeking to run the hotel as a business or rent it as a property. The former is referred to as an owner-occupier market, while the latter is used for the investor market.
Mario explains:
The hotel industry is quite lucrative, because you can either get income from running the hotel itself and taking a profit, or by owning the assets of the hotel and renting the property, to get the rental income.
When the property is owner occupied, our Valuers would use the previously described EBITDA and profits method to determine the value of the property. In these cases our Valuers would also exclude national covenants and only compare against benchmark data from similar operators, to ensure that the valuation is completed on a true like-for-like basis.
Alternatively, if the hotel is being rented, especially by a national firm such as Premier Inn or Travelodge, our valuers would use an investment approach to calculate the value. In these instances, the same benchmarking comparisons would be utilised, albeit using the values that the relevant national firm is yielding within the region, such as London or the South-East.
Other factors taken into account
Of course, not all hotels are the same and there are a number of non-financial factors that play a significant part in the valuation. When carrying out hotel valuations, our experts take the following areas into account:
Location
From hotels situated in bustling city-centres to those hidden away in peaceful, rural settings, the location of the property can greatly influence the determined value. The ease of access by public transport, local amenities and sites of interest all play a part in the profit that can be achieved by the hotel, which therefore affects the valuation.
Number of rooms
How many rooms the hotel has, and the types of room offered, will also be taken into consideration when comparing the property with similar assets.
Facilities
The types of facility and service provided by the hotel range from whether a spa or swimming pool is part of the property, through to whether breakfast is included in the room rate are reviewed. The availability of parking is also something to be considered, as this is of vital importance for hotels both in urban and rural locations.
Mario clarifies:
We also compare based on the facilities the property includes, so if ours had a swimming pool, we would ensure we benchmark against other hotels with a swimming pool to see what rates they are achieving. We would also then see what rates could be achieved without a swimming pool and what the difference between the two would be. This gives us the most rounded comparison possible, and ensures the lender is able to make a truly informed decision.
Find out more
It is clear to see that specialist valuations require a high level of skill and experience. Our Valuation team have carried out valuations on hotels of all sizes and types, from smaller, independent converted period properties through to purpose built hotels owned by national chains.
Their experience and dedication ensures that the valuation report submitted to the lender is as thorough and detailed as possible, also highlighting areas not covered by the valuation which may need to be considered. This allows the lender and their client to make an informed financial decision.
To find out more, speak to Mario Pericleous, Louise Manners or another member of our Commercial Valuation team on 0800 071 5517 or email admin@awh.co.uk.