There are three primary approaches to valuing hotels:
The valuation techniques mentioned above are universally acknowledged as the primary methodologies for appraising hotel assets.
While the income capitalisation approach holds particular significance, a wise appraiser should consider all three methods.
The cost approach can sometimes reveal the "entry cost" for a specific market, while the sales comparison approach typically offers a spectrum of per-room values.
But here we will share with you some quick methods to estimate the value in less than 5 minutes and very easily.
These aren't infallible rules but tools designed to estimate a hotel's value quickly. You can take these methods as a first approach to knowing the potential real price.
The Average Daily Rate (ADR) is a well-known Key Performance Indicator (KPI) in the hotel industry. This rule of thumb assigns a value by multiplying the ADR by 1,000 and then by the number of rooms.
Value = ADR x 1,000 x Number of Rooms
For instance, if a hotel charges an average of 145€ per room per night and has 60 rooms, its estimated value would be approximately 8.700.000€.
One limitation of using ADR is that it doesn't consider factors like cost per occupied room or revenue generated outside of room bookings, such as restaurant sales, events, parking, and spa services.
For a more comprehensive valuation, the Income Capitalization Approach is advisable.
This is a somewhat whimsical rule of thumb. It values each room by multiplying the price of a bottle or can of soda available in the hotel's in-room minibars or vending machines by 100,000 and then by the number of rooms.
Value = Bottle/Can Price x 100,000 x Number of Rooms
Using our previous example (60 rooms), with a 1.5€ soda price, the hotel would be valued at roughly 9.000.000€, a bit far from the earlier estimate. However, this method is less reliable.
In this method, you compare the sale of the hotel you're interested into a previous sale with similar conditions, typically on a per-room basis. It simplifies complex hotel sales and allows you to make a sort of "apples-to-apples" comparison.
PPR = Sale Price / Number of Rooms
For instance, if a 60-room hotel you're considering has a similar counterpart that sold for 15.500.000€ with 100 rooms, the PPR for your 60-room hotel would be approximately 9.300.000€.
Remember that this approach assumes all rooms are equal and doesn't account for factors like room revenue, FF&E (Furniture, Fixtures & Equipments), construction quality, purchase incentives, or market-altering events (pandemic, wars, etc).
For a quick assessment, it's advisable to calculate values using all three approaches, yielding estimates of 8.700.000€, 9.000.000€, and 9.300.000€. Further analysis may be necessary if the asking price (for buyers) or the expected selling price (for sellers) does not align closely with these values.
While these rules of thumb offer a rapid evaluation, more precise methods should be considered for in-depth transactions or unique properties.
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