How to do hotel asset evaluation

A hotel is a commercial property. For a long time, the practice and research on commercial property valuation have been mainly concentrated in the fields of retail real estate, industrial plants and commercial office buildings. Research on hotel valuation methods is rare. Therefore, neither valuation agencies nor investors have much choice when evaluating the value of hotels, and they often borrow valuation methods for other commercial property development.

The value of a hotel is composed of four parts: land, buildings, internal facilities and goodwill. As far as land and buildings are concerned, hotels can be valued according to the same principles as other commercial properties. However, there are some unique characteristics of the hotel industry, such as the single use of hotels, the need for special management experience, and the value of the hotel relative to its value. The ability to generate net income in the future is directly related, making hotel valuations different from other commercial properties to a large extent.

1. Traditional hotel value evaluation methods

Under normal circumstances, the traditional hotel value evaluation methods are mainly the following two:

(1) Heavy The replacement cost method

The replacement cost method assumes that the buyer is willing to pay no more than the cost of building a hotel with the same level of facilities. It does not consider

the price the market is willing to pay nor the price that the market is willing to pay. The value of future net revenue generated by the hotel is not considered. When appraising, first estimate the hotel construction cost based on the current price, and then subtract the depreciation amount based on the hotel's useful life. The resulting balance is the hotel value.

The replacement cost method takes into account barriers to entry in specific markets when valuing, such as the government imposing strict restrictions on hotel construction in specific areas, or the inability to obtain suitable land for the proposed hotel, etc. ,Therefore, this method is very effective when conducting ,feasibility assessment of proposed development projects. Newly opened hotels cannot apply other valuation methods due to the lack of historical operating data. This method may be the most appropriate valuation method.

Unlike other commercial properties, hotel depreciation consists of three parts:

First, the physical depreciation of the hotel - the physical wear and tear of the property. The second is the functional obsolescence of the hotel - the loss of value due to the lack of attractiveness in the interior layout, style and design of the hotel compared with a newly built hotel with equivalent functions. The third is the outdated appearance of the hotel - a loss of value due to external causes. In other words, hotel depreciation must not only consider physical wear and tear, but also functional obsolescence and appearance obsolescence. Because hotels are particularly prone to functional and cosmetic obsolescence, these factors are often difficult to measure and adjust. Therefore, when valuing hotels that have been open for a long time, highly subjective and discontinuous depreciation estimates are required, which greatly reduces the reliability and validity of the valuation results. Another major drawback of this approach is that it does not reflect an investment philosophy based on future income streams.

(2) Transaction amount comparison method

The transaction amount comparison method assumes that the hotel buyer is only willing to pay a price that is no more than the recent transaction amount of similar hotels. This method only cares about the transaction price of similar hotels that have recently been traded on the market, without taking into account the replacement cost of the hotel and the value of the net income generated in the future. The valuation result is a true reflection of the current market conditions and is easily accepted by both parties to the transaction. To use this approach effectively in practice, valuation agencies need access to timely, verifiable and comparable transaction data.

For properties such as retail real estate, it is relatively easy for a valuation agency to obtain sufficient transaction data. Different from these

markets, hotel valuation has the following difficulties in data collection: First, there are not many buyers, sellers and transactions in the hotel market, and there are even fewer transactions that can be used as a basis for valuation. Secondly, a large number of hotel transaction contracts are not disclosed, making it difficult for valuation agencies to obtain sufficient reliable transaction information. Furthermore, there are often large differences in the scale, quality, market positioning and facilities of different hotels, making direct comparison difficult. Finally, hotel transaction data in different periods cannot be directly applied, and the hotel transaction price as the benchmark needs to be adjusted across periods. Generally speaking, benchmark hotel transaction amounts can only be used for comparison after extensive adjustments. However, both parties to the transaction often have different opinions on the adjustment range, and a large amount of negotiation is required to reach an agreement.