The start and end point is “Market Value”, as defined in the RICS Global Standards – “The Red Book”. This boils down to the price that the valuer considers the property would have sold for with an exchange of contracts and completion on the valuation date.
So how do we get to “Market Value”?
1) We value interests in property not simply land and buildings. With hotels we look beyond leasehold and freehold to combinations of operating or management agreements, franchises and owner operator models. For this article we will start with owner operators so effectively a freehold property with vacant possession.
2) Hotels, like pubs, conference centres and similar, are generally referred to as “trade related” meaning that they are valued having regard to their estimated future trading potential. “Market Value” therefore reflects a fully equipped operating entity rather than a simple “bricks and mortar” valuation. This means it includes the land, buildings, trade fixtures, fittings, furniture and equipment together with the ability to obtain or renew all licences, consents etc to continue trading.
3) So how to value trade? I have never met a hotel operator who didn’t think he could do better than the other guy. But we have to ignore this, and our starting point is that we imagine hypothetical buyers and sellers and forecast the “Fair Maintainable Trade” that the “reasonably efficient operator” might “reasonably anticipate”. We look at likely room rate, occupancy, revenue per available room (RevPAR) and the effect of revenue streams from the bar, restaurant, spa, conference and banqueting etc. From this, we deduct a similar view of operating costs and overheads to arrive at Fair Maintainable Operating Profit (FMOP). This is effectively the same as the Net Operating Profit or Earnings Before Interest Depreciation and Amortisation.
4) Depending then upon which segment of the market the hotel fits into, we are likely to adopt a discounted cash flow or initial yield technique, effectively capitalising the FMOP to arrive at “Market Value”.
5) We will also look at market sales evidence and compare on a price per bedroom basis. The greater the non- bedroom proportion of business – particularly weddings, events, conferencing, food and beverage sales – the less reliable a direct comparison will be..
So what about “goodwill”? The short answer is that “Market Value” reflects the trading potential that runs with the property, known as “inherent goodwill”. The personal goodwill of the operator is specifically excluded.
Once we have done this analysis we look at interests in the property and ownership. In the hotel world these are often present in combinations, two examples:
– A Holiday Inn Express may be owned freehold by an individual, occupied by a hotel operator on a management contract with a franchise deal from Intercontinental Hotels to use the Express brand.
– A Premier Inn will probably be operated by Whitbread under a conventional lease, with a financial institution or fund as freeholder.
When considering a management contract or franchise we look at trade. Revenue may be greater due to the brand and central marketing, but costs may be greater too.
Leases to budget operators have become very popular and marketable in recent years due to the simplicity of the income stream, increasing incidence of CPI-based rent reviews and covenant strength of the major operators, particularly Whitbread. The valuation approach in this case is a conventional one, taking a view on passing rent compared to the market and applying suitable capitalisation rates.