HVS International

Wellington Hotel, Main Square, Newtown, UK

Economic Study and Valuation Report Wellington Hotel, Main Square, Newtown, UK

Prepared by: HVS International 14 Hallam Street London W1W 6JG Tel: +44 (20) 7878 7700 Fax: +44 (20) 7436 3386 Submitted to: Mr Nicholas Bishop Director Venture Capital Trust Norfolk Court 21 Warwick Road London, EC2A 1ED 31 January 2001 HVS No: 2000050001/110101/ This sample report was created for illustration purposes only. None of the information represents actual data and any correlation or similarity with an existing hotel or location is purely coincidental. We hope you enjoy reading this sample report.

31 January 2001 Mr Nicholas Bishop Director Venture Capital Trust Norfolk Court 21 Warwick Road London, EC2A 1ED Dear Mr Bishop Re: Wellington Hotel Main Square, Newtown, UK In accordance with your request, we herewith submit our Economic Study and Valuation Report pertaining to the above property. We have inspected the site and facilities and analysed the hotel market conditions in the Newtown area. Our report has been prepared in accordance with the Royal Institution of Chartered Surveyors’ (RICS) Appraisal and Valuation Manual, March 1997. Based on the available data, together with our analysis and experience in the hotel industry, it is our opinion that the open market value of the freehold interest in the property described in this report, as at 1 January 2001, is: £24,000,000 TWENTY FOUR MILLION POUNDS STERLING We hereby certify that we have no undisclosed interest in the property, and our employment and compensation are not contingent upon our findings and valuation. This opinion of value and the entire report are subject to the comments made throughout and to all assumptions and limiting conditions set forth herein. Yours sincerely HVS INTERNATIONAL Justin Lanzkron Consultant & Valuation Analyst Charles Human, ARICS Director CH:JL:fp HVS No: 2000050001

HVS International

Table of Contents

Table of Contents

1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Nature of the Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Market Area Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Description of the Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Market for Transient Accommodation . . . . . . . . . . . . . . . . . . . 16 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Projection of Hotel Demand, Occupancy and Average Rate . . . . . . 27 Projection of Income and Expense . . . . . . . . . . . . . . . . . . . . . 39 Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Investment Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Addendum 1. Statement of Assumptions and Limiting Conditions 2. Photographs of the Wellington Hotel

579 3.685 2.000 9.627 37.8 % 25.989 9.1 % 25.857 2.3 % . Newtown. UK 1 September 2000 Freehold 1 January 2001 Approximately 10. TG1 9JB.1 % 27.9 % 2001 71 % 76 4. Executive Summary Property: Address: Date of Inspection: Interest Valued: Date of Value: Property Description Site Area: Age: Property Type: Guestrooms: Number of Storeys: Food and Beverage Facilities: Meeting Facilities: Car Parking: Table 1-1 Wellington Hotel Main Square.951 9.550 39.5 % 24.336 3.454 37.025 m² total space 150 spaces Summary of Historical & Forecast Income and Expense Performance Forecast 2002 2003 71 % 78 5.475 3.580 2.285 35.200 m² Opened January 1994 Four-star 250 guestrooms Eleven storeys Two restaurants and one bar Five meeting rooms.402 2.7 % 73 % 80 5.356 10.310 2.565 10. 1.0 % 2000 74 % 74 5.670 2.429 3.8 % 2004 74 % 82 5.085 9.7 % 1999 Occupancy Average Rate (£) Rooms Revenue (£000s) Total Revenue (£000s) House Profit (£000s) Net Income (£000s) House Profit as a % of Total Revenue Net Income as a % of Total Revenue 75 % 73 4.055 3.222 35.4 % 23.489 36.431 3.HVS International Executive Summary 1 1.4 % 23.

000 £96.300.0% 1.000 £19.HVS International Executive Summary 2 Summary of Valuation Parameters Number of Years to Stabilise: Stabilised Year: Stabilised Inflation Rate: Loan-to-Value Ratio: Mortgage Interest Rate: Holding Period: Amortisation Period: Equity Yield Rate: Terminal Capitalisation Rate: Brokerage and Legal Fees: Unleveraged Internal Rate of Return: Estimates of Value Income Capitalisation Approach: Cost Approach: Sales Comparison Approach: Open Market Value as at 1 January 2001: Open Market Value Per Room (approx.000 £22.5% 10 years 15 years 17.000.5% 65% 7.3% £24.0% 9.000-£44.): Four 2004 2.600.000 £24.000.000 .5% 12.000.

Open market value is defined as: ‘An opinion of the best price at which the sale of an interest in the property would have been completed unconditionally for cash consideration on the date of valuation. that no account is taken of any additional bid by a prospective purchaser with a special interest. 4. London SW1P 3AD. prior to the date of valuation. UK (‘the Hotel’). assuming: 1. 2. an 80-seat speciality restaurant. that. a willing seller. on any earlier assumed date of exchange of contracts. there had been a reasonable period (having regard to the nature of the property and the state of the market) for the proper marketing of the interest. including the furniture.’1 Purpose of the Economic Study and Valuation Report Property Rights Valued The property rights valued are the freehold interest in the land and premises. RICS Appraisal and Valuation Manual. 3. March 1997. that both parties to the transaction had acted knowledgeably.2. 1. fixtures and equipment (FF&E). 1 . Newtown. that the state of the market. In addition to the guestrooms. and 5. the Hotel contains a 125-seat café restaurant.025 m2 of meeting and banquet space. The purpose of the Economic Study and Valuation Report is to estimate the open market value of the freehold interest in the Hotel with vacant possession of the Hotel. a 50-seat bar. level of values and other circumstances were.HVS International Nature of the Assignment 3 2. business Hotel. PS 4. prudently and without compulsion. Nature of the Assignment Subject of the Economic Study and Valuation Report The subject of the Economic Study and Valuation Report is the freehold interest in the Wellington Hotel located at Main Square. city centre. the same as on the date of valuation. The Hotel has 250 guestrooms and opened in 1994. a fitness centre and other facilities typically found in a four-star. The Royal Institution of Chartered Surveyors. for the agreement of the price and terms and for the completion of the sale.

entitled The Valuation of Hotels and Motels. The Hotel was inspected by Justin Lanzkron on 4 January 2001.3 The Computerized Income Approach to Hotel/Motel Market Studies and Valuations. American Institute of Real Estate Appraisers.5 Pertinent Dates Use of the Economic Study and Valuation Report Scope of the Economic Study and Valuation Report Method of Study Stephen Rushmore (1978) The Valuation of Hotels and Motels. and our analysis was performed shortly thereafter. Motels and Restaurants: Valuations and Market Studies. floor plans and so forth was supplied by Venture Capital Trust. we have inspected the competitive hotels and analysed the hotel sales summarised in this report. Marketing and Exposure Period We estimate the marketing period for the Hotel to be six to twelve months.HVS International Nature of the Assignment 4 The Hotel has been valued assuming that. Chicago.4 and Hotels and Motels: A Guide to Market Analysis. Chicago.2 Hotels. American Institute of Real Estate Appraisers. Investment Analysis. site plans. We have investigated comparable sales in the market area and have spoken with buyers. prior to our value. and Valuations. The exposure period. we have assumed that a competent international or national operator will manage the Hotel. 3 Stephen Rushmore (1983) Hotels. it would be available free and clear of any specific management or operating leases. as at the date of value. 5 Stephen Rushmore (1992) Hotels and Motels: A Guide to Market Analysis. and our value conclusion has been based on this investigation and analysis. and Valuations. referring to the amount of time necessary for the Hotel to have been exposed retrospectively. Motels and Restaurants: Valuations and Market Studies. 4 Stephen Rushmore (1990) The Computerized Income Approach to Hotel/Motel Market Studies and Valuations. This Economic Study and Valuation Report has been prepared for Venture Capital Trust. Unless otherwise noted. and the value estimate represents year 2001 pounds sterling. All information was collected and analysed by the staff of HVS International. Investment Analysis. All projections are expressed in inflated pounds sterling. Chicago. sellers. The methodology used to develop this Economic Study and Valuation Report has been based on the market research and valuation techniques set forth in the textbooks written by HVS International for the American Institute of Real Estate Appraisers and the Appraisal Institute. is estimated to be less than or equal to 12 months. For the purpose of this valuation. The effective date of value is 1 January 2001. 2 . Chicago. Appraisal Institute. The information presented in this report should not be disseminated to the public or third parties without the express written consent of HVS International. brokers. property developers and public officials. Information such as historical operating statements. American Institute of Real Estate Appraisers.

The factors investigated include purpose of visit. Dividing the market for transient accommodation into individual segments has defined specific market characteristics for the types of traveller expected to utilise the area's hotels. and thus the income capitalisation approach most closely reflects the rationale of typical buyers. The Hotel's existing premises have been inspected for their quality of construction. on both an area and a neighbourhood level. daily demand fluctuations and price sensitivity. A projection of income and expense has been made in accordance with the Uniform System of Accounts for Hotels. This projection sets forth the anticipated economic benefits of the Hotel for ten years and provides the basis for the income capitalisation approach. has been reviewed to identify specific hotel-related economic and demographic trends that may have an impact on the future demand for hotels. along with market penetration and the degree of competitiveness. An analysis of existing and proposed competition has provided an indication of the current accommodated demand. cost and sales comparison. 7. 4. 6. Because hotels are income-producing properties that are normally bought and sold on the basis of capitalisation of their anticipated stabilised earning power. The surrounding economic environment. design. average length of stay. Documentation for an occupancy and average rate projection has been derived from an analysis of market-wide demand and supply combined with a penetration analysis to derive the Hotel’s projected occupancy. layout efficiency and items of physical deterioration and functional obsolescence. The report considers three approaches to value: income capitalisation. facilities and amenities required. the greatest weight has been given to the value indicated by the income capitalisation approach. 8. 2. We find that most hotel investors employ a similar procedure in formulating their purchase decisions. 5. as well as access. 3. visibility and other relevant location factors. The subject site has been evaluated from the viewpoint of its physical utility for the operation of a hotel. . seasonality.HVS International Nature of the Assignment 5 The valuation was calculated as follows: 1.

0 0.3 -1.6 -1.2 2.5 1.4 2. The following table contains a summary of these economic indicators.65 2000 3.8 0. Table 3-1 Key Economic Indicators .5 -0. The purpose of the market area analysis is to review available economic and demographic data to determine whether the defined market area will undergo economic growth.3 6. stability or decline. the rate of change must be quantified.61 Forecast 2002 2003 2. In addition to predicting the direction of the economy.4 1.61 0.4 2.67 2.2 2.7 6.3 0.66 2004 2.1 6.0 0.1 5.1 0.1 2.6 -0.1 1.UK Actual 1997 3.68 1999 2.4 -4.4 -0.3 0. Economic and demographic trends that reflect the amount of visitation provide a basis from which the demand for hotel accommodation can be projected.60 0. This section of the report presents a discussion of the primary domestic economic factors that are likely to have the greatest influence on the UK's hotel demand. National Economic Overview The overall economic condition of an area is reflected by the propensity of individuals to travel there.59 0.1 0.1 2.58 0.66 0.64 2001 2.4 6. Market Area Analysis The macro-economic climate in which a hotel operates is an important consideration in forecasting hotel demand and income potential.0 2. The Hotel’s market area is defined by Newtown city centre and its suburbs.0 6.5 -0.8 -2.8 0. Key indicators of future hotel demand are those trends that reflect the relative health of the economy and the spending power of individuals.HVS International Market Area Analysis 6 3.64 - .0 -1.5 1.4 0.3 2.2 6. These trends are then correlated based on their propensity to reflect variations in hotel demand with the objective of forecasting the amount of growth or decline in transient visitation by individual market segment.69 2.62 0.2 6.5 0.1 2.2 0.5 5.5 1.64 0.68 1996 Real GDP growth (%) Consumer price inflation (av %) Budget balance (% of GDP) Current account balance (% of GDP) Short term interest rate (av %) Exchange rate £:$ (av) Exchange rate £:Euro (av) Source: Economist Intelligence Unit September 2000 1998 2.5 0.0 0.

A sizeable percentage of arriving passengers may need hotel accommodation depending upon the type and location of a particular airport. The EIU has forecast retail price inflation for the UK at 2. and prospects for. summarises the volume of passenger traffic for the past nine years. although we have specifically taken into account the state of. Market for Transient Accommodation. . which gives easy access to all parts of the country.5% thereafter. We have taken into consideration both general national economic indicators (such as GDP growth) and specific local activity.9% for 2000. below.HVS International Market Area Analysis 7 The Economist Intelligence Unit (EIU) UK Country Forecast (September 2000) has forecast national GDP growth for the UK at 2. The Wellington Hotel is located in Newtown city centre at Main Square. 2.4% in 2001 and approximately 2. although we have specifically taken into account local hotel market conditions. which run west to east and north to south.4% for 2001 and 2. Table 3-2. Journey times from Newtown to London and Birmingham and are approximately two hours and one hour 25 minutes. Projection of Hotel Demand. including that actual and planned. Newtown is ideally situated next to the intersection of the M4 and the M5 motorways. respectively. 2. Market Area and Local Economy The market area activity is affected by the general level of economic activity in the immediate and surrounding area. Newtown Airport Airport passenger counts are important indicators of transient hotel demand. Our assumptions and projections relating to hotel demand growth and average room rate growth are explained in Section 5.5% for 2002. Occupancy and Average Rate. the immediate local area economy. Trends showing changes in passenger counts also reflects local business activity and the overall economic health of an area. We have used these estimates as the starting point for our evaluation of the potential growth in achievable average room rates by market segment in the market area. Total passenger movements include the sum of arrivals. adjacent to Gateway train station. The M4 links Newtown City centre to the M4.1% in 2000. departures and transient movements. We have used these national estimates as the starting point for our evaluation of the potential growth in demand for hotel accommodation by market segment in the market area. and Section 7. and to determine the likely change in operating costs over time.

108.7 Domestic % Share 30.894 1.557 344. especially for business customers.3 13.5 % 18. Among the major organisations located in Newtown city centre and north of the city centre are Somerfield.113 1.421 % Change 17.250. providing direct flights to all major UK destinations. and in the office and business parks such as Newtown West business park to the north of the city.373. Newtown International Airport is located some seven miles south-west of the city centre and can be reached from the Hotel in 20 to 30 minutes by road.761 1.730 390.539.6 (3.5) 5.2) % (15. electronics and electrical engineering.7 81.3 3.8 23.900 manufacturing companies in the region. There are over 1.916 359.165 1.615. . Sony. with a larger gain recorded in the international passenger segment.564 1.2 % 25.336 390. Key manufacturing industries in the region include aerospace and defence.291 279.5 15.7 17.7 7. printing and publishing.116 1.386 1.HVS International Market Area Analysis 8 Table 3-2 Airport Passenger Movements for Newtown International Airport – 1991-99 Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 Total 1.521.204 1.029 1.0) 6.7 78.734 1.1 17.173 % Change 9. Washington and Boston.2) 3.943 1.752 % Change (9.900 2.760 264. The number of passengers handled at the airport has increased by a little over 9% per year on average since 1991.3 International 798.6 % 11.000 people. Newtown International Airport has experienced tremendous growth over the past eight years.823. providing greater capacity and increasing the number of destinations provided.336.4 19.322 2.183 937.428 378.9 Compound Annual Growth Source: Airports Council International 9. Generally.288. at over 11%.2 17.761. The major commercial demand generators are located in or around Newtown city centre.8 82.897.2 20.2 13.4 % As illustrated in the above table.0 19. industrial activity has been high in the Newtown market in recent years. Hi-tech industry.139.874 1.8 17.4 (8. Axa Sun Life.142.9 82. plus several in Europe and some in North America.1) 5.3 21.9 Domestic 344. A new £42 million terminal building has just opened.4 % 9.7 16.2 (7. including New York.0 80.884. RAC and HSBC (a very short distance from the subject Hotel).551 312.6 80.881.3 18. Newtown International Airport is the fastest growing major regional airport in the UK.3 82. employing over 150.1 International % Share 69.7 6.8 % 75.432.3 15.1 % 1.703 1. paper.

Sunnyside Theme Park and Rockland Park. two major tourist attractions situated within easy reach of Newtown. including Orange. There are only a few major attractions in the city centre.300 11. and art together in innovative new ways. An attraction that is expected to generate both commercial and tourismrelated visitation is the major regeneration of the Newtown Harbourside.0 4. Prospects for the region’s future activity are good. June 2000 There is only a moderate level of tourist visitation to Newtown city centre at this time.600 8. the Tudor House Museum. generate some weekend and general holiday period visitation for the area.6 4.900 8.0 38. Finance & Insurance Public Administration.HVS International Market Area Analysis 9 supported by university research facilities. as well as new residential and commercial office space.2000 Employment Newtown Manufacturing Industries Construction/Utilities/Agriculture Distribution/Hotels & Restaurants Transport & Communications Banking. and Toshiba. In addition. continues to grow. Hewlett Packard. The structure of the workforce in Newtown is detailed in Table 3-3.3 32.400 100% Source: Newtown Economic Development Department.0 UK Average 11.0 3. . considered to be one of the largest regional shopping centres in the UK. The scheme includes ‘Explore Zone’.4 % 3.0 3. 15-acre ‘Newtown Park’ project will bring science. Newtown has become known as one of England’s largest financial services centres outside London. Table 3-3 Employment by Sector in Newtown . The £90 million.600 70. The Tower Hill retail area also includes a multiplex cinema and the ‘Venue’ leisure centre. below.5 23. nature.5 18.4 5. including Newtown Museum of Archaeology. Many hitech businesses have invested in the Newtown area in recent years.8 19. and the number of overnight stays from leisure visitors is relatively low.400 42. Located to the north of Newtown near Tower Hill is the ‘Valley’ shopping centre. the Newtown Zoological Gardens and a number of art galleries. a science world theme park. a virtual reality theme park with an IMAX cinema and botanical garden.0 22.0 100% % Sector 218. Education & Health Other Services Total 24.700 11. and ‘Wildscreen Zone’.900 51.

000 150. Tate East Newtown Somerdale South Newtown South Newtown Business Park Wills Factory Grove Park Description Office Park Office Campus Offices and light assembly Business Park Size m 2 130.010. The development will provide a mixed-use environment of 23 acres combining office accommodation with a full range of retail and leisure facilities. September 2000 We highlight overleaf the aspects of Newtown which we consider to have a specific bearing upon historic. for example the Harbourside and North Shore developments and the growth of new businesses which will increase future commercial hotel demand.000 260.000 visitors in its first year. The project opened at the beginning of July 2000.000 Source: Newtown Economic Development Department. Table 3-4 Proposed Office and Business Park Developments in Newtown as at January 2001 Location North Newtown Parkway North Newtown Business Park The Quadrant Westerliegh. HSBC are relocating their headquarters to Main Square and Tesco will occupy their new regional headquaters in Newtown in 2001.000 Offices and industrial use Manufacturing and light industrial/warehousing Regeneration Potential Regeneration Area 80.000 Offices and industrial use 150. The Wellington Hotel is located near this development.HVS International Market Area Analysis 10 ‘Newtown Park’ is expected to attract 450. . Other office and business park developments planned in the Newtown region are summarised in Table 3-4 below.000 190.000 1. is the city centre regeneration project at Main Square adjacent to Gateway train station. Other companies moving to Main Square include BT Plc and Barclays Bank. Another major development project that is currently under construction in Newtown. • The continuing redevelopment of Newtown city centre.000 50. current and potential future hotel demand: • The regeneration project at Main Square.

Development of the park is anticipated to start in 2002. • The new ‘Newtown Park’ development at the Harbourside. although Newtown Park and the proposed Eco Park could have some impact on leisure visitation. these include the ongoing development of good quality offices and business parks. . is likely to enhance leisure demand further in the area. for example the Newtown West Business Park located in North Newtown.HVS International Market Area Analysis 11 • The recently opened. regional and local economic data indicates that Newtown benefits from strong levels of commercial room night demand generated from local businesses. located in north Newtown some fifteen minutes’ drive from the Wellington Hotel. Specific local economic activity appears to be increasing beyond general national levels due to a combination of factors. including Main Square as well as the Newtown Harbourside redevelopment. Conclusion Our review of various national. • The ongoing expansion of existing business and industrial parks located in or near Newtown. supported by modest numbers of leisure visitors. £42 million terminal building at Newtown International Airport will further enhance commercial and leisure visitation in the Newtown area. is likely to create further commercial hotel demand. • The potential development of an Eco-Park/Zoo in Canons Marsh.

To the north of the Hotel is the HSBC Building. Following this site and location analysis the property’s physical facilities are described. as described in Section 3. and further to the M8 and the M35. The roundabout immediately west of the site links it through Piccadilly Street to the beginning of the M34. We consider the Hotel to occupy a prime location in Newtown city centre. Heading to the south gives access to the A5. The site is roughly rectangular in shape and the topography of the site is generally flat. which is currently almost complete. Description of the Hotel LOCATION A hotel’s location within a specific neighbourhood can have a direct impact upon its performance relative to a competitive market. The visibility of the Hotel is likely to be very good from all approaches to the site. The Hotel is located on the east side of the development and is currently bordered by the Floating Harbour on the east and Gateway railway station on the south. the size of the site of the Wellington Hotel is approximately 10. including Castle Way. Castle Gate and Regent Street.200 m². Size and Topography of the Site According to Venture Capital Trust. The following paragraphs describe the location of the Hotel in relation to its immediate surroundings and its market area.HVS International Description of the Hotel 12 4. some 15 to 20 minutes’ drive from the site. The Wellington Hotel is adjacent to the Main Square office development. Gateway railway station is situated adjacent to the site. Ease of access to primary generators of demand is vital for the successful operation of a hotel. Newtown International Airport is located some seven miles to the south-west via the A40. The Hotel is located near the Main Square development adjacent to Gateway train station. both these buildings are currently almost built. In the centre of the Main Square development are the headquarters of Tesco and located on the west side of the Main Square development are the new offices of Barclays Bank. the A40 to Newtown Airport and south to the M35 and the A37. Access The Hotel benefits from excellent access to and from Castle Way and Castle Gate. One of the primary factors when choosing a hotel over competitive facilities is its location relative to local demand Visibility Proximity to Demand Generators . approximately two minutes walk south of the Hotel.

Gateway railway station. The Wellington Hotel enjoys an excellent location. A number of photographs of the Hotel are provided in Addendum 2. The Hotel enjoys a good location in relation to the following demand generators: • • • • • • Conclusion Newtown city centre. The design and functionality of the structure can also affect operating efficiency and overall profitability. The Hotel also benefits from its proximity to all the major demand generators in Newtown. ‘Newtown Park’. The quality of a property's physical facilities has a direct influence on its marketability and attainable occupancy and average rate. It is centrally located within Newtown city centre and easily reached by several modes of transport. The following paragraphs describe the Hotel and mixed-use rental space’s physical premises and facilities in an effort to determine how they contribute to its total value. The Main Square development. M34 motorway. Based on our inspection and information provided by the management of the Wellington Hotel. HOTEL FACILITIES Summary of the Facilities . whether these are commercial businesses or tourist attractions. Companies located in Newtown city centre.HVS International Description of the Hotel 13 generators. Table 4-1 summarises the facilities available at the Wellington Hotel.

kitchen.Bon Marche Speciality Restaurant . meeting rooms. meeting rooms.HVS International Description of the Hotel 14 Table 4-1 Address: Facilities Summary Main Square Newtown Freehold 1997 . lobby. We have been provided with information on historic capital expenditure at the Hotel.025 Food and Beverage Facilities Café Restaurant . it appears that the Hotel is in very good working order and no immediate material capital expenditure requirement has been identified. IT and exterior 1998 .Oh! Cajun Bar/Lounge Total Car Parking: Leisure facilities: Approximate Area/m² 200 120 70 390 Approximate Number of Seats 125 80 50 255 Approximately 150 parking spaces Fitness centre with sauna. solarium and whirlpool spa. From our inspection of the Hotel.100 Bedrooms. bar/restaurant. lobby. exterior 1999 . and exterior Approximate Area/m² 25 28 35 40 Number 85 90 60 15 250 Maximum Capacity/Persons Theatre Style 400 n/a 20 120 120 660 Opening Date: January 1994 Tenure: Refurbishment History: Guestrooms Single Double Executive Suite Total Meeting Rooms Ballroom Pre-Function Room Board Room Meeting Room 1 Meeting Room 2 Total Approximate Area/m² 500 185 40 150 150 1.80 Bedrooms.70 Bedrooms. Condition of the Building and Facilities The Hotel opened at the beginning of 1994 and since that time has been well maintained. .

city centre hotel in the UK. permitting efficiency of operation and convenient guest and staff flow.HVS International Description of the Hotel 15 Conclusion – Hotel Facilities In general. The guestrooms are excellent in terms of size and decoration and the Hotel’s ancillary facilities are appropriate for the operation of a four-star commercial. The building is straightforward in design and configuration. . the Hotel’s premises appear to be very well-suited for hotel use. outside London. The exterior design of the building is both modern and inviting and the interior finishes are of a high quality.

Further details of these hotels are given in Section 6.783 24. with business demand accounting for approximately 75% and leisure demand accounting for approximately 25% of total area-wide demand. reflects the area as primarily a business . Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Based on our fieldwork.018 55 % 14 19 6 6 100 % Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total This aggregate market mix. area analysis and knowledge of the local hotel market. seasonality of demand. the future potential for each market segment can be projected. facility requirements.HVS International Market for Transient Accommodation 16 5. price sensitivity and so forth. By quantifying the overall room night demand by market segment and defining the individual characteristics of each segment. the distribution of accommodated hotel room night demand for those hotels that we consider to be competitive with the Hotel is as shown in Table 5-1.990 25. Market for Transient Accommodation The analysis of demand by the use of individual market segments is important because each market segment often exhibits unique characteristics relating to factors such as growth potential.552 77. Accommodated Room Night Demand Demand for transient accommodation in the defined market area is generated primarily by the following five market segments.Competitive Market 2000 Accommodated Percentage of Demand Total 229. Competition.455 57. in 2000. Table 5-1 Accommodated Room Night Demand . we estimate that. average length of stay.239 415. double occupancy.

Future demand potential in the Meeting & Conference segment is closely related to the growth trend expected for the Commercial segment. Most commercial groups require accommodation during the weekday period of Monday to Thursday. For the purpose of analysing hotel demand. Commercial Segment Commercial demand is strongest on Monday to Thursday nights. we have considered conference demand to be only those hotel guests attending meetings and conferences in the hotel at which they are staying. historically. We have selected growth rates of 2. take holidays to other destinations. hotel occupancies in the area have been stronger during weekdays and commercial periods and weaker during weekends and holiday periods. especially business and conference visitors. In light of the potential for further developments in and around Newtown and the Hotel’s immediate neighbourhood. This demand in the Newtown area is relatively constant throughout the year. They typically require meeting venues which are conveniently located and which offer suitable space and facilities. The average length of stay for typical conference groups ranges from two to four nights. business travel should increase accordingly. the economic considerations that have an impact on .5%. With the continued development of Newtown city centre and business parks in and around Newtown. summer represents the slowest period and winter demand can be variable. we consider that demand for this segment is likely to grow at a rate slightly above national GDP for the next few years.HVS International Market for Transient Accommodation 17 destination. As the local economy shows improved stability and growth. but associations and social groups will sometimes utilise the weekends. with some drop-off noticeable in the period from November to February and August when travellers. declining significantly on Fridays and Saturdays and increasing somewhat on Sundays. such as the Newtown West Business Park. Those attending ‘city ’ events in non-residential venues are considered to be part of commercial demand. From 2003 onward we have assumed a stabilised growth rate of 2. we anticipate a continued growth in the commercial sector which is likely to show increased activity in the next two to three years. Meeting & Conference Segment The Meeting & Conference segment in the market area mostly comprises demand from local companies. Because most meetings have either a direct or an indirect business purpose. Future demand in this segment is tied primarily to the business and economic health of Newtown and of the UK in general.5% in 2001 and 3% in 2002 and 2003. Peak conference demand typically occurs in the spring and autumn. As a result.

However. five segments were defined as being representative of the Hotel's market. Tour operator rates are generally contracted annually at rather low levels.5%. Because of the low rate of this segment. Starting with an analysis of the local area. but are also responsible for some weekday demand during the summer and other holiday periods. Various types of economic and demographic data were then evaluated to determine their propensity to reflect future changes in hotel demand. For the purpose of this analysis. From 2003 onwards we have assumed a stabilised growth rate of 2. we have chosen to apply the same growth rates for the Group Leisure demand as for the Individual leisure demand.5% from 2001 onwards. For the purpose of our analysis. For the purpose of our analysis. These sectors comprise the majority of weekend demand in the market area. should start to attract additional leisure demand to Newtown and this should contribute to an increase in demand for hotel accommodation at weekends. Generally. identify customer characteristics and estimate future growth trends. there are a limited number of tourist attractions in the immediate area of Newtown. Group Leisure demand in the Newtown area is derived from several sources including coach tours travelling to the continent or elsewhere in Britain and shoppers. Group Leisure Segment The Group Leisure segment generally comprises visitors who have purchased package holidays that include the cost of travel. which generally achieve significant discounts compared to commercial segments. Individual Leisure Segment Individual Leisure demand comprises both those people travelling in groups and those travelling individually for tourism and leisure purposes. We applied a growth rate of 2. Airline Segment This segment mostly comprises airline crew contracts. hotel accommodation and some provision for meals. it is important to note that the recently opened Newtown Park development on the Harbourside. but are used to help fill lower occupancy periods. when demand timing permits. The purpose of segmenting hotel demand is to define each major type of demand. As stated previously. we have chosen to apply the same growth rates for Conference & Meeting demand as for Commercial demand. these attractions generate a high level of day visitation but the demand for overnight hotel accommodation is limited.HVS International Market for Transient Accommodation 18 business travel also affect Meeting & Conference demand. Based on this Conclusion . this demand will be replaced by higher yielding demand as market occupancy increases. or what is termed an ‘inclusive tour’.5% in 2001 and 4% in 2002. we have chosen to apply a growth rate of 2.

5 2.5 % 2005 2.5 2.5 % Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline Base Demand Growth 2001 2.5 2.5 3.5 2.5 2.0 4.5 2.0 2.5 % 2.2 % 3.5 2.HVS International Market for Transient Accommodation 19 procedure we have made the following forecast of market segment growth rates.5 2.5 2.0 % 3.5 % 2.8 % 2.5 2.5 2.5 2.0 4.5 2.5 % . These growth rates will be utilised in subsequent sections of this study to forecast changes in hotel demand.5 2.0 2.0 % 3.5 % 2.5 2. Table 5-2 Forecast Annual Growth Rates by Market Segment Competitive Market 2001-05 Annual Compounded Growth Rate 2002 2003 2004 3.

amenities. 6-2 and 6-3) summarise the important operating characteristics of the primary and the secondary competitors for 1998 to 2000. occupancy levels. Based on an evaluation of the occupancy. Table 6-1 sets out each competitive hotel’s market segmentation. RevPAR is calculated by multiplying a hotel’s occupancy by . inspections. location. facilities and amenities of each competitor. Twelve additional hotels are judged to be only secondarily competitive. market orientation. • Quantify the number of existing and proposed hotel rooms available in the market. • Review the rate structure.HVS International Competition 20 6. these primary competitors total 781 rooms. they do compete with the Hotel to some extent. reputation and quality of the area's hotels. average room rate and rooms revenue per available room (RevPAR). The aggregate weighted room count of the secondary competitors is 740. Competition The Competitive Market An integral component of a market area’s supply and demand relationship that has a direct impact on the performance is the current and anticipated supply of competitive hotel facilities. occupancy. The following Tables (6-1. chain affiliation. The room count of each secondary competitor has been weighted to reflect the degree to which it competes with the Wellington Hotel. Although the facilities. hotel directories and our in-house library of operating data. To evaluate an area's competitive environment. • Determine whether additional hotel rooms (net of attrition) will enter the market in the foreseeable future. rate structures or market orientations of these hotels prevent their inclusion among the primarily competitive supply. as well as the comments of management representatives. facilities. we have identified two properties that are considered to be primarily competitive with the Wellington Hotel. market orientation. rate structure. This information was compiled from personal interviews. Including the Hotel. the following steps should be taken: • Identify the area's hotel facilities and determine which are directly and indirectly competitive with the Hotel.

A 110-room Premier Lodge Hotel is due to open in January 2001 on Queen Street in Newtown city centre. we have not taken these into consideration in our analysis as there was sufficient doubt still surrounding these projects at the time of our study. We have therefore added 55 competitive rooms into the market from February 2001. • • • There are currently unconfirmed proposals for two other hotel developments in Newtown. We have added 31 competitive rooms into the market from January 2001. The Competition Map also shows the location of the Hotel relative to its defined primary and secondary competitors as well as the location of those proposed hotels we consider to be relevant (see below). the property is performing better than the market as a whole. The location of each primary and secondary competitive hotel is shown in the Competition Map which follows Table 6-3. Table 6-3 sets out the key physical characteristics of each of the main competitive hotels and includes information about each hotel’s published rates and brand affiliation. These include: . if the penetration is less than 100%. the hotel is performing at a level below the market-wide average. We have also considered this hotel to be 25% competitive with Wellington Hotel for the same reason.HVS International Competition 21 its average rate. Table 6-2 details each property's penetration factor. If the penetration factor is greater than 100%. We have added 28 competitive rooms into the market from January 2001. Penetration is the ratio between a specific hotel's operating results and the corresponding data for the market. We have also considered this hotel to be 25% competitive with the Wellington Hotel for the same reason. A 123-room Travelodge is due to open at the beginning of 2001 on John Street in Newtown city centre. We have considered this hotel to be 25% competitive with the Wellington Hotel as it will be positioned significantly below it. conversely. • A 128-room Marriott Hotel is due to open at the beginning of 2002 on Manor Road in Newtown city centre. However. A 220-room Travel Inn is due to open at the beginning of 2001 at Exchange House in Newtown city centre. This calculation serves to gauge how well a hotel is maximising its rooms revenue. We consider this hotel to be 100% competitive with the Wellington Hotel. Proposed Competition In our analysis we have included four developments which we consider will also become competitive with the Wellington Hotel.

an existing Express franchisee. near Newtown Grange Hill train station. near Junction 17 of the M8 at Tower Hill (A4018). . they will be targeted at lower rate paying business and leisure travellers. • It is our opinion that.HVS International Competition 22 • A 100-room Express by Holiday Inn at Grange Hill. and due to their distance from the Wellington Hotel they are unlikely to be significantly competitive with the Hotel. The hotel has been linked with Stannifer Hotels. even if these hotels are developed. A 150-room Quality Hotel.

521 82 % 71 69 82 0 71 72 76 72 0 0 71 76 % 75 % £45 54 59 50 0 57 55 50 44 0 0 35 £51 £59 £37 38 41 41 0 40 40 38 32 0 0 25 £39 £44 85 % 69 70 79 0 66 79 68 70 0 0 71 75 % 76 % £46 55 60 50 0 60 56 53 46 0 0 46 £53 £61 £39 38 42 40 0 40 44 36 32 0 0 33 £40 £46 81 % 70 70 76 80 72 76 77 77 75 87 71 75 % 75 % £51 56 53 53 57 72 58 56 58 35 39 45 £54 £62 £41 39 37 40 46 52 44 43 45 26 34 32 £40 £46 .342 55 % 55 55 50 60 55 40 55 50 55 55 45 52 % 55 % 15 % 8 15 20 5 15 25 15 10 15 0 20 16 % 14 % 15 % 7 % 8 % 30 0 7 20 5 5 10 10 10 20 10 5 20 5 5 25 5 5 20 5 5 25 10 5 15 10 5 15 25 5 20 10 5 18 % 19 % 7% 6% 7% 6% 75 % 75 75 75 50 50 50 25 25 25 25 25 50 % 65 % 140 30 137 151 2 64 71 50 17 27 24 28 740 1.561 2.HVS International Competition 23 Table 6-1 Operating Profiles of the Primary and Secondary Competitors 1998-00 (£) Estimated 2000 Market Segmentation Total Comp Level 100 % 100 100 100 % 2000 Weighted Annual Rm Count 250 242 289 781 Comm ercia l Meet ing Confe & rence Indivi dual Leisu re Group Leisu re Estimated 1998 Estimated 1999 Estimated 2000 Primary Competitors Wellington Hotel Holiday Inn Hilton Sub-Totals/Averages Secondary Competitors Corus Hotel Berkeley Hotel Forte Posthouse Jarvis International City Hotel Swallow Moat House Novotel Express by Holiday Inn The Piccadilly Hotel Thistle Hotel The Grand Hotel Sub-Totals/Averages Totals/Averages No of Rooms 250 242 289 781 Occ 76 % 73 75 75 % Average Rate £72 70 57 £66 RevPAR £55 51 43 £49 Occ 75 % 74 79 76 % Average Rate £73 72 62 £68 RevPAR £55 53 49 £52 Occ 74 % 73 75 74 % Average Rate £74 73 62 £69 Airlin e RevPAR £55 53 47 £51 55 % 60 60 58 % 15 % 10 10 12 % 20 % 20 20 20 % 5% 5 5 5% 5% 5 5 5% 187 40 182 201 40 128 142 200 68 167 94 112 1.

521 Fair Share 17 % 16 20 0 53 0 47 0 100 0 0 0 10 10 10 53 % 47 % 100 % Occ Penetration 101 % 97 100 109 94 92 109 0 94 96 101 96 0 0 94 99 % 101 % 100 % Average Rate Penetration 122 % 119 97 76 92 100 85 0 97 93 85 75 0 0 59 112 % 87 % 100 % RevPAR Penetration 124 % 115 97 83 87 92 93 0 91 89 86 72 0 0 56 111 % 87 % 100 % Estimated 1999 Occ Average Rate RevPAR Penetration Penetration Penetration 99 % 98 104 112 91 92 104 0 87 104 90 92 0 0 94 100 % 99 % 100 % 120 % 118 102 75 90 98 82 0 98 92 87 75 0 0 75 112 % 86 % 100 % 118 % 115 106 84 82 91 85 0 86 96 78 70 0 0 71 113 % 86 % 100 % Estimated 2000 Occ Fair Share Penetration 16 % 16 19 9 2 9 10 0 4 5 3 1 2 2 2 51 % 49 % 100 % 99 % 98 100 108 94 94 102 107 96 102 103 103 100 116 95 99 % 101 % 100 % Average Rate Penetration 120 % 119 101 83 91 86 86 93 117 94 91 94 57 63 73 112 % 87 % 100 % RevPAR Penetration 119 % 116 101 90 85 81 88 99 113 96 94 97 57 74 69 111 % 88 % 100 % Property Wellington Hotel Holiday Inn Hilton Corus Hotel Berkeley Hotel Forte Posthouse Jarvis International City Hotel Swallow Moat House Novotel Express by Holiday Inn The Piccadilly Hotel Thistle Hotel The Grand Hotel Primary Competitors Secondary Competitors Sub-Totals/Averages Fair Share 17 % 16 20 0 53 0 47 0 100 0 0 1 0 0 2 53 % 47 % 100 % .HVS International Competition 24 Table 6-2 Operating Performance Analysis – Primary and Secondary Competitors 1998-00 (£) Estimated 1998 Number of Rooms 250 242 289 187 40 182 201 40 128 142 200 68 167 94 112 781 1561 2.342 Total Competitive Level 100 % 100 100 75 75 75 75 50 50 50 25 25 25 25 25 100 % 47 % 65 % 2000 Weighted Annual Room Count 250 242 289 140 30 137 151 2 64 71 50 17 27 24 28 781 740 1.

4 4.2 0 0.HVS International Competition 25 Table 6-3 Facilities of the Primary and Secondary Competitors (£) Published Rate (£) Number of Year Rooms Opened 250 242 289 187 40 182 201 40 128 142 200 68 167 94 112 1991 1974 1991 1994 1990 1874 1980 2000 1991 1987 1985 1995 2000 2000 1950 Market Positioning Four Star Four Star Four Star Three Star Three Star Three Star Four Star Budget Four Star Four Star Three Star Budget Four Star Four Star Three Star Single Weekend 127 104 140 95 78 110 110 150 134 139 99 119 52 55 95 Double Weekend 70 74 88 69 80 45 43 150 78 68 94 90 45 45 39 Number of Restaurants 2 2 2 1 1 1 1 1 1 1 1 1 1 0 1 Maximum Number Conference Meeting Space Meeting Space Capacity Leisure of Bars Rooms (m²) per room (m²) Theatre Style Facilities 1 1 2 2 1 2 1 1 1 2 1 1 1 1 1 11 22 21 25 0 12 10 3 21 13 25 6 2 0 2 1.6 3.7 200 600 300 320 0 600 350 72 200 200 250 150 45 0 45 No Yes Yes No No No Yes No Yes Yes Yes Yes No No No Property Wellington Hotel Holiday Inn Hilton Corus Hotel Berkeley Hotel Forte Posthouse Jarvis International City Hotel ¹ Swallow Moat House Novotel Express by Holiday Inn The Piccadilly Hotel Thistle Hotel The Grand Hotel Brand/Chain Affiliation Independent Hilton International Bass Hotels and Resorts Corus Hotels Independent Forte Hotels Granada Group Jarvis hotels Independent Whitbread Queens Moat House Accor Bass Hotels and Resorts Independent Thistle Hotels Independent .3 4.6 3.1 0 6.8 1.8 8.7 2.205 760 50 602 915 769 600 40 0 75 1.025 745 824 770 0 1.7 6.8 0.4 3.

COMPETITION MAP Key Ù Wellington Hotel Primary Competitors u Holiday Inn v Hilton Secondary Competitors 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) Corus Hotel Berkeley Hotel Forte Posthouse Jarvis International City Hotel Swallow Moat House Novotel Express by Holiday Inn The Piccadilly Hotel Thistle Hotel The Grand Hotel Proposed Competitors u v w x Marriott Hotel Travel Inn Travelodge Premier Lodge Hotel .

for the competitive market. These demand growth rates (as summarised in Table 5-2 in Section 5. Because this estimate is based on hotel occupancies. Latent demand can be divided into Unaccommodated Demand and Induced Demand. Market for Transient Accommodation we set out our assumptions regarding the prospects for demand growth. which has been estimated in Table 7-1 above. by market segment. A weighted average of the market mix of each competitive property has then been calculated to determine the overall market segmentation of the hotels within the subject Hotel's market. The result of these calculations for the Hotel's competitive market area is shown in the following table.018 55 % 14 19 6 6 100 % Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total The above table illustrates the accommodated room night demand in the Hotel's competitive market. Table 7-1 Accommodated Room Night Demand – Competitive Market 2000 Accommodated Percentage of Demand Total 229. Latent demand accounts for guests who could not be accommodated by the existing competitive supply for a variety of reasons.455 57. .552 77. Occupancy and Average Rate CALCULATION OF HISTORICALLY ACCOMMODATED DEMAND From our fieldwork and in-house library of market data.783 24. it considers only those hotel rooms utilised by guests. Market for Transient Accommodation) are applied in our analysis to the base level of accommodated demand. by market segment. Base Demand Growth In Section 5.239 415. we have estimated the year-end 2000 occupancy rates of the Hotel's competitors and thereby the total number of occupied rooms in the competitive market.990 25. Occupancy and Average Rate 27 7. forms the historical base demand.HVS International Projection of Hotel Demand. The Year 2000 area-wide estimate of room night demand. Projection of Hotel Demand.

HVS International Projection of Hotel Demand.346 28. Because the competitive hotels achieve an overall occupancy of 75%. an estimate of the amount of unaccommodated demand should be made.191 58.752 64. it can generally be assumed that excess weekday demand exists and a certain amount of patronage must be turned away. These visitors must defer their trips.137 27.514 62. If additional hotels are expected to enter the market. commercial hotels enjoy strong occupancies from Monday to Thursday.2% 2003 249.018 - 2001 235.552 77. thus.783 24. Unaccommodated demand is generally estimated as a percentage of accommodated demand.991 79. or when weekly demand patterns fill area hotels to capacity on one or more nights per week.990 25.103 451. we estimate that in 2000.239 415. When hotels operating under these market conditions realise occupancies greater than 70% to 75%. For example.393 2.247 60. unaccommodated demand in the competitive market was likely to amount to approximately 1. Based on our fieldwork and market analysis.877 2.587 2. when business travel is most frequent.455 57.940 26.5% 2002 242.216 28.760 83.148 87. in commercial markets where demand is not equally spaced throughout the week. Occupancy and Average Rate 28 Thus market-wide base demand is forecast to grow as illustrated in Table 7-2 below: Table 7-2 Projection of Market-wide Base Demand 2000-04 Base Year 2000 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total Demand Growth 229. Because this demand did not yield occupied room nights within the competitive set.427 24.484 25.845 425. settle for less desirable accommodation.876 26.755 462.171 26. hotels often exhibit peaks and troughs in their daily occupancies. or stay in hotels located outside the market area.8% 2004 255.5% Unaccommodated Demand Unaccommodated demand refers to individuals who are unable to secure accommodation in the market because all the competitive hotels are full.466 439. it is likely that there will be days when all the primary hotels will be full and unaccommodated demand will exist. and lower occupancies on Friday and Saturday. In general. Unaccommodated demand is often a form of excess demand resulting from the cyclical nature of the hotel business. it is reasonable to assume that this unaccommodated demand will be accommodated and.6% of .583 85.095 3. it is not included in the historical accommodated room night demand estimate.

020 - 2001 3.397 -23. the expansion of a convention centre or the addition of a new hotel bringing a different chain affiliation or unique facilities.5% 2003 4. and leisure segments. In practice the amount of unaccommodated demand which becomes accommodated (i. or approximately 80 rooms turned away on 90 days of the year.637 2.200 room nights per year for the 1. overleaf.283 873 289 268 7. and the introduction of new supply.151 780 258 242 7.421 37. we have termed this Residual Unaccommodated Demand. shows the total amount of induced demand that we have estimated will be available in the competitive market between 2001 and 2004.252 852 282 261 7. Occupancy and Average Rate 29 accommodated demand.115 1. a proportion of this unaccommodated demand could remain unaccommodated during the projection years.e. Situations where induced demand can be created include the opening of a new manufacturing plant.500 room nights per year. .845 1. The opening of new hotels is expected to induce some additional room nights in the competitive market.521 room competitive market.528 885 600 198 186 5. Table 7-3 below shows our projection of unaccommodated demand for the defined competitive market from 2000 forward. In our projections we have included induced demand equal to around 8.5% It should be noted that because of the seasonality of demand described earlier. Overall this equates to approximately 7. Table 7-4. This level of unaccommodated demand has been allowed to increase in our projections year by year in line with the base demand growth rates explained above. meetings and conference.589 1.215 831 275 255 7.HVS International Projection of Hotel Demand.990 1. The demand induced by new hotels is considered to continue. Table 7-3 Projection of Market-wide Unaccommodated Demand 2000-04 Base Year 2000 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total Demand Growth 4. In our analysis. allocated between the commercial.9% 2004 5. Induced Demand Induced demand represents the additional room nights that will be attracted to a market area as a result of the introduction of a new demand generator. that which is no longer residual) is dependent upon market-wide occupancy and seasonality.1% 2002 4.828 2. This equates to 9% of occupancy for the new competitive rooms we have brought into the market between 2001 and 2002.

296 2.803 29.643 89. the base year.584 612 480 9. some of the potential demand will continue to be unaccommodated during certain years as a result of market-wide and individual hotel seasonality.688 65.506 81. Table 7-5 shows the total potential demand for the competitive market as projected for the period 2001 to 2004.371 26.5% As already discussed. Occupancy and Average Rate 30 and is included in demand computations for future years.696 630 824 318 250 4. is equal to the base amount of unaccommodated demand in Table 7-3.8% 2004 266. Table 7-6 overleaf summarises the residual demand computed in the course of our analysis and projections.363 26.212 1.188 85.212 1.072 2004 5.844 468.281 435.184 1.944 25.184 1. Induced demand does not grow in line with the rates of base demand growth explained earlier.776 27. As previously discussed. Table 7-5 Projection of Market-wide Potential Demand 2001-04 2001 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total Demand Growth 241.553 28.717 2002 5. unaccommodated demand and induced demand for the competitive market.072 2003 5.276 63.072 Total Potential Demand Total potential demand is the sum of base demand.047 87.212 1.588 4.503 479.584 612 480 9.584 612 480 9.6% 2003 259.065 26. .652 29.508 2002 252. Table 7-4 Projection of Market-wide Induced Demand 2001-04 2001 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total 2. base demand and unaccommodated demand are assumed to grow in line with the growth rates explained in Section 5.201 455. and supply constraints. A certain amount of residual unaccommodated demand will result.051 66. The residual demand presented for 2000.776 2.415 60.HVS International Projection of Hotel Demand.184 1.

for the competitive market from 2000 to 2004.020 Total Usable Room Night Demand Total usable room night demand is the combined total of accommodated room night demand and usable latent demand (i. The amount of residual demand is also shown.589 1. Occupancy and Average Rate 31 Table 7-6 Estimate of Market-wide Residual Unaccommodated Demand 2000-04 Base Year 2000 2001 0 0 0 0 0 0 2002 0 0 0 0 0 0 2003 0 0 0 0 0 0 2004 0 0 0 0 0 0 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total 4. as is the growth per annum of occupied room nights.e. . market-wide occupancy is estimated for each year.151 780 258 242 7. or occupied room nights.HVS International Projection of Hotel Demand. By applying the total projected occupied room nights to our estimates of total rooms supply for the competitive market. that latent demand that can be absorbed is based on the number of additional hotel rooms expected to enter the market). The table setting forth out forecast of annual hotel demand is presented below. We have used the 2000 accommodated and unaccommodated room night demand as a base and projected levels of demand into the future using the growth rates selected for each market segment. Table 7-7 summarises our projections of total usable demand.

8 % 73 % 455.3 % 26. This stabilised occupancy is intended to reflect the anticipated results of the market excluding from consideration any abnormal relationship between supply and demand and non-recurring conditions that may result in unusually high or low occupancies.4 % 85.589 — 57. as quantified by its penetration factor.5 % 63.018 7.5 % 648.151 — 77.6 % 648.9 % 597.5 % 25.239 242 — 415. Occupancy and Average Rate 32 Table 7-7 Total Usable Room Night Demand – Competitive Market 2000-04 2000 2001 241.9 % 87.220 435.455 4.588 0 4.1 % 81.201 0 3.5 % 29.5 % Commercial Occupied Room Nights Residual Demand Accommodated Demand Growth Meeting & Conference Occupied Room Nights Residual Demand Accommodated Demand Growth Individual Leisure Occupied Room Nights Residual Demand Accommodated Demand Growth Group Leisure Occupied Room Nights Residual Demand Accommodated Demand Growth Airline Occupied Room Nights Residual Demand Accommodated Demand Growth Totals Occupied Room Nights Residual Demand Accommodated Demand Growth Available Room Nights per Year Available Room Night Growth Market-wide Occupancy 229.0 % 74 % 75 % We consider that the stabilised market-wide occupancy for this market in Newtown is approximately 74%.643 0 2.776 0 2.188 0 4.051 0 2.783 258 — 24.506 0 5. .5 % 2004 266.552 1.276 0 4.844 0 2.1 % 28.503 0 2.944 0 4.415 0 5.3 % 2002 252.5 % 89.3 % 70 % 468.363 0 4.5 % 29. we anticipate that the market will reach this level of occupancy in 2004.688 0 2.990 780 — 25.832 9.5 % 66.047 0 2.776 0 2.386 0. Although the market-wide occupancy may rise above this stabilised level.281 0 4.020 — 555.9 % 65.HVS International Projection of Hotel Demand.4 % 26.2 % 60.065 0 2. based on the projected market fluctuations in demand and supply.371 0 5.4 % 27.3 % 26. Penetration Factor Analysis The Hotel's forecast market share and occupancy level have been based on its anticipated competitive position within the market. and.508 0 4.553 0 5. we consider it equally possible for new competition and temporary economic downturns to force occupancy below this selected point of stability.6 % 2003 259.0 % 72 % 479.386 0.803 0 2.652 0 2.296 0 2.8 % 648.258 8.

If the same property achieves a market share in excess of its fair share.0 % 70.0 % 70.0 85.0 85.0 2004 115.1 105.0 90. and for the property as a whole. Penetration factors have been estimated for each market segment for each calendar year and reflect our view of how the subject hotel is likely to perform relative to its fair share. Table 7-8 Market Penetration Input by Segment – Wellington Hotel 2000-04 Base Year 2000 ¹ 98. and consequently upon the calculated penetration factor for each hotel in each market segment.7 84. Occupancy and Average Rate 33 The forecast market share of the Hotel is based upon a penetration factor analysis. for example) or negatively (when an undermaintained or poorly marketed hotel loses market share). If a property with a fair share of 5% is capturing 5% of the market in a given year. The same is true when the performance of existing hotels changes. Penetration factors can be calculated for each market segment of a property. then its occupancy will be greater than the market-wide occupancy. Table 7-8 below shows the specific penetration factors that we have assumed for the Hotel from the date of value until it reaches a stabilised level of performance relative to its competitive market.0 100. particularly in relation to proposed new hotel supply entering the competitive market.0 85.0 85. or the aggregate of its competitive market.HVS International Projection of Hotel Demand.0 90. thus affecting the penetration of the Wellington Hotel. then its occupancy will equal the market-wide occupancy.0 105.5 % 107. either positively (following a refurbishment.0 2003 115. particularly the Marriott Hotel which is due to open at the beginning of 2002. The performance of individual new hotels has a direct effect upon the aggregate performance of the market.0 105. .0 % 70.0 90.0 103. The penetration factor is the ratio between a property's market share and its fair share. there is a circular relationship between the penetration factors of each hotel in the market. Because of the new supply entering the competitive market over the next couple of years.0 90. and its penetration factor will be greater than 100%.0 Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline ¹ Actual historic penetration Because the supply and demand balance for the competitive market is dynamic.8 2001 109. we have therefore increased the Wellington Hotel’s penetration in the commercial and individual leisure segments.0 % 70. and its penetration factor will equal 100% (5%/5% = 100%).0 2002 115.4 79.

by which time we consider that the Hotel will have reached a stabilised level of performance in terms of market penetration and occupancy.7 84.2 99.1 105.3 84.7 104.2 88. this leaves less demand available in the market for the other hotels to capture and the penetration performance of one or more of those other hotels consequently declines (other things remaining equal).5 % 2004 111. as can be seen in Table 7-10 overleaf.6 88.4 79.6 88.6 88.8 % 74. Consequently. . the annual market-wide occupancy and the resultant market mix. or a change in the relative penetration performance of one or more hotels in the competitive market. or total captured demand analysed by market segment. Table 7-9 below shows the output penetration factors applicable to the subject Hotel.9 % 72.2 % Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline Overall Penetration It is these output penetration factors which drive our estimates of demand capture and occupancy for the subject Hotel.0 101.6 102. Thus.9 105.4 % 2002 113. if one hotel’s penetration performance increases. These projections are in calendar years from 2001 until 2004.3 85.5 102. Our projections of penetration. This sets out the result of these market share adjusted (output) penetration factors by segment upon the subject Hotel’s future demand capture and occupancy performance.5 % 107. after the effect of market share adjustment has been taken into account.3 84.8 99. Occupancy and Average Rate 34 A hotel’s penetration factor is calculated as its achieved market share of demand divided by its fair share of demand.0 % 2001 107.8 % 2003 112.0 % 73.9 102. This type of market share adjustment takes place every time there is a change in supply. Table 7-9 Market Penetration Output by Segment – Wellington Hotel 2000-04 Base Year 2000 98.2 105. thereby increasing its achieved market share. the actual penetration factors applicable to the subject Hotel for each market segment in each projection year (the output penetration factors) vary somewhat from the input penetration factors set out in Table 7-8 above.2 85.3 % 73. demand capture and occupancy performance for the subject Hotel take into account these types of adjustment to market share within the defined competitive market.HVS International Projection of Hotel Demand.

5 % 41.1 % 6.363 15.4 % 25.188 10.506 11.5 % 40.8 % 2002 252.1 % 77.944 13.525 91.201 11.250 74 % 99 % 60.555 88.8 % 67.065 12.790 105.138 111.250 73 % 103 % 66. Demand Capture and Occupancy – Wellington Hotel 2000-04 Base Year 2000 229.7 % 3.6 % 39.2 % 25.2 % 12.376 84.2 % 37.2 % 64.6 % 10.9 % 3.2 % 3.940 107.2 % 3.455 16.129 107.7 % 3.2 % 3.581 73.9 % 66.363 104.0 % 2003 259.3 % 13.2 % 29. sets out the resultant market mix.8 % 3.460 88.139 98. Occupancy and Average Rate 35 Table 7-10 Projected Penetration.6 % 29.503 11.505 105. or total captured demand analysed by market segment.6 % 28.844 11.1 % 6.415 16.795 91.632 88.7 % 85.281 12.057 105.761 91.703 74.5 % 13.783 13.7 % 3.7 % 24.553 14.990 17.3 % 2004 266.HVS International Projection of Hotel Demand.438 73.2 % 87.047 10.223 85.1 % 38.1 % 3.376 79.250 71 % 103 % 65.652 14.0 % 81.545 88.5 % 64.399 113.3 % 26.755 91.150 84.051 15.5 % Market Segment Commercial Demand Market Share Capture Penetration Meeting & Conference Demand Market Share Capture Penetration Individual Leisure Demand Market Share Capture Penetration Group Leisure Demand Market Share Capture Penetration Airline Demand Market Share Capture Penetration Total Room Nights Captured Available Room Nights Occupancy Total Penetration 2001 241.359 91.3 % 27.276 15.371 12.718 72.250 71 % 99 % 63.293 112.6 % 26.2 % 3.216 84.9 % 89.776 12.1 % 6.2 % 6.250 74 % 102 % Table 7-11.9 % 57.6 % 67.552 17.239 13.803 14.373 101.6 % 12. below.095 85.3 % 26.688 15.643 10.5 % 12. .

we have anticipated a base underlying inflation rate of 2. Market Area Analysis.and market-specific factors. most forecasts assume that room rates will continue to increase at the anticipated general economic rate of inflation expected for the local market area. In forecasting average rate growth. Occupancy and Average Rate 36 Table 7-11 Projected Market Mix – Wellington Hotel 2000-04 Base Year 2000 Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total 55 % 15 20 5 5 100 % 2001 60 % 10 19 5 5 100 % 2002 61 % 10 19 5 5 100 % 2003 61 % 10 19 5 5 100 % 2004 61 % 10 19 5 5 100 % Conclusion – Overall Occupancy We expect the Hotel to reach a stabilised level of penetration (occupancy performance relative to its competitive market) in 2004. We have applied various market and hotel-specific growth factors to the average rate of the respective demand segments. The average rate forecast for the Hotel has been based upon the consideration of projected market mix changes and rate increase projections related to each demand segment. When hotel room rate inflation is projected into the future. we have relied upon inflation estimates supplied by the Economist Intelligence Unit (EIU).5%. FORECAST OF AVERAGE RATE . After a hotel achieves occupancy stabilisation. As stated in Section 3. It is impacted more by market conditions such as the relationship between supply and demand. Hotel room rate inflation is not necessarily the same as the general economic rate of inflation experienced in the local community. By this time we expect the Hotel to achieve an overall penetration of 102%. The following table illustrates the estimated increases in average rate for each market segment.HVS International Projection of Hotel Demand. the movement in average rate up to the point where the hotel achieves its stabilised occupancy is generally attributed to property. The stabilised occupancy is intended to reflect the anticipated results of the property over its remaining economic life given any and all changes in the life cycle of the Hotel.

5 2. in conjunction with forecasts of demand by segment.5 2.5 2. The same is true in 2003. affect overall average rate for the period 2001-2004.00 45.5 2.5 2.5 2.5 2.00 74.6 % 2.6 % 2.5 2. this is because of the slight change in the Hotel’s market mix towards the higher paying commercial segment.5 % Market Segment Commercial Meeting & Conference Individual Leisure Group Leisure Airline Total 2001 2.5 2.5% in 2002 to each segment’s rate the overall change in 2002 was 2.5 2.00 55.00 55. .5 % 2.5 % 2.00 Projected Growth Rate 2002 2003 2004 2.5 % 2.5 2.5 2.HVS International Projection of Hotel Demand.00 75.5 2.5 2.5 2. Occupancy and Average Rate 37 Table 7-12 Projected Average Rate Growth by Market Segment Wellington Hotel 2001-04 (£) Base Year 2000 85.5 2.7 % Although we have applied growth rates of 2.5 % 2. The following table shows how the projected changes in average rate by segment.8%.

156.77 2.Wellington Hotel (£) Year 2000 2001 2002 2003 2004 Occupancy 74 % 71 71 73 74 Average Rate £ 74 76 78 80 82 RevPAR £ 55 54 55 58 61 Average Rate in 2000 Prices £ 74 74 75 75 75 .23 2.556.387 76.38 2.672 87.438 507.223 181.5 % 38.00 2004 2.581 531.940 3.754 80.5 % 12.518.138 3.755 5.5 % 40.5 % 6.656 75.13 2.392.761 5.697 56.850 74.795 4.5 % 12. the Hotel's occupancy and average rate have been estimated as follows: Table 7-14 Forecast Occupancy and Average Rate .772 93.00 2002 2.78 2.71 2.5 % 6.5 % 3.376 185.5 % 3.139 3.775 55.78 2.864 57.367 57.794 85.5 % 12.79 2.688.264 60.38 2.694 55.HVS International Projection of Hotel Demand.057 792.13 2.00 — 3.5 % 6.545 171.548 80.095 178.28 2.00 Commercial Average Rate Growth Captured Room Nights Rooms Revenue Average Rate Meeting & Conference Average Rate Growth Captured Room Nights Rooms Revenue Average Rate Individual Leisure Average Rate Growth Captured Room Nights Rooms Revenue Average Rate Group Leisure Average Rate Growth Captured Room Nights Rooms Revenue Average Rate Airline Average Rate Growth Captured Room Nights Rooms Revenue Average Rate Total Average Rate Growth Captured Room Nights Rooms Revenue Average Rate — 37.542 56.30 2.5 % 3.5 % 3.80 2.270 78.718 556.359 5.271 91.373 697.363 714.472 89.436 82.5 % 3.790 757.505 742.050.00 — 13.00 — 3.82 2.293 3.67 2.5 % 13. Occupancy and Average Rate 38 Table 7-13 Average Rate Forecast by Market Segment .859.593 59.460 163.5 % 41.790 48.525 4.399 3.5 % 39.7 % 64.5 % 67.Wellington Hotel (£) Base Year 2000 2001 2.632 180.376 151.555 163.150 186.931 45.996.394 49.6 % 66.996 46.88 2.23 2.5 % 3.00 — 67.216 195.54 2.513 59.308.129 759.00 2003 2.691 60.00 CONCLUSION – OCCUPANCY AND AVERAGE RATE Based on the preceding analysis.591 47.00 — 10.146 82.703 515.5 % 3.71 2.5 % 6.46 2.6 % 64.5 % 3.924.259 76.895 78.

The forecast of income and expense is expressed in inflated pounds sterling for each projection year. given any or all applicable stages of build-up. For the purposes of determining the Hotel's open market value.5%. Where applicable. We have selected an annual inflation rate of 2. Our review of the subject’s financial operating history did not reveal any abnormalities that could impact the future operating performance of this property. we have developed a ten-year forecast of income and expense commencing on 1 January 2001. Thus. its historical income and expense experience can serve as a basis for projections. Projection of Income and Expense Based on our preceding projection of occupancy and average rate. The following income and expense statements were provided by management and are unaudited. The revenues reflect a leadership position in the market and the operating expense ratios generally indicate strong control and competent management.HVS International Projection of Income and Expense 39 8. The stabilised year is intended to reflect the anticipated operating results of the Hotel over its remaining economic life. . income and expense estimates from the stabilised year forward exclude from consideration any abnormal relationship between supply and demand. Review of Operating History Because the Hotel is an existing hotel with an established operating performance. it is assumed that the Hotel is sold as at the date of value. as well as any nonrecurring conditions that may result in unusual revenues or expenses. the projection of income and expense therefore reflects the achievements of a typical anticipated new owner. and our knowledge of both the Hotel’s and comparable hotels’ financial operating profiles. plateau and decline in the life cycle of the Hotel. we have reorganised the statements in accordance with the Uniform System of Accounts for Hotels. These historic statements of income and expense show an efficiently operated lodging facility.

92 140.69 1.000 3.32 18.405 924 6.3 37.1 68.550 52.365 9.200 2.1 0.724 4.53 38.5 17.025 20.60 2.46 36.41 4.29 11.9 % 41.5 3.3 3.93 5.6 3.96 4.51 5.000 15.639 3.03 77.59 5.900 4.858 447 800 17.8 % 41.6 69.1 8.3 63.061 1.13 3.956 15.284 758 259 351 231 1.593 436 760 16.21 12.875 3.95 0.9 50.358 1.20 1.035 1.989 3.9 55.0 24.475 1.2 100.137 3.295 199 28 330 284 841 2.78 60.42 4.20 11.5 17.13 12.21 48.69 2.132 3.525 Days Open: 365 Occupancy: 74.589 21.28 53.60 77.8 4.9 % 1999 250 68.34 37.108 1.318 1.26 Forecast of Income and Expense Based on the market for hotel accommodation in the Newtown area.HVS International Projection of Income and Expense 40 Table 8-1 Historical Operating Performance .397 14.0 24.318 1.0 44.84 4.0 34.2 1.454 52.599 3.438 Amount per 365 Occupied 75.00 of Revenue 74.84 0.33 3.880 172 390 9.395 194 28 339 283 844 2.181 796 114 1. In forecasting revenues and expenses for a hotel.1 1.80 17.800 10.0 2.0 3.90 56.0 39.0 % Amount per Available Room 20.685 290 3.648 109 190 4.580 284 3.557 14.1 0.24 49.0% Percentage Average Rate: 74.78 5. The forecast starts on 1 January 2001 and represents our opinion of how a competent management company would operate the Hotel. The fixed component is adjusted only for inflation.88 4.7 3. This model is based on the premise that hotel revenues and expenses have one component that is fixed and another that varies directly with occupancy or facility usage.6 63. Rooms Revenue .137 13.135 3. as well as the Hotel's anticipated future market position.0 8.160 13.816 Amount per Available Room 19.00 of Revenue REVENUE Rooms Food & Beverage Telephone Other Income Total DEPARTMENTAL EXPENSES Rooms Food & Beverage Telephone Other Expenses Total DEPARTMENTAL INCOME OPERATING EXPENSES Administrative & General Marketing Property Operations & Maintenance Energy Total HOUSE PROFIT Management Fee INCOME BEFORE FIXED CHARGES FIXED EXPENSES Property Taxes Insurance Incentive Fee Reserve for Replacement Total NET INCOME 5.76 2.920 10.600 700 1.3 3. we use a fixed and variable component model.96 63.440 948 6. we have developed a forecast of income and expense.7 2.70 137.05 57.08 3.714 112 200 4.8 4.738 1.80 2.8 3.1 100. A projection can be made by taking a known level of revenue or expense and calculating the fixed and variable components.9 25.0 27.377 10.600 37.032 1.219 777 265 360 237 1.01 4.37 53.147 5.900 175 400 9.201 Amount per Occupied Room 72.2 2.0 2.560 37.51 24.8 3.Wellington Hotel (£ 000s) 2000 Number of Rooms: 250 Occupied Rooms: 67.0 9. while the variable component is also adjusted for the percentage change between the projected occupancy and facility usage that produced the known level of revenue or expense.66 2.0 8.8 2.0% Percentage Room 73.59 2.8 2.256 5.7 44.4 48.22 40.38 23.34 4.578 776 111 1.1 36.51 3.230 2.520 688 1.0 56.431 1.

Food revenue also includes meeting room rental. Occupancy and Average Rate. Other income. resulting in departmental profits as high as 50– 55%. dry cleaning and interest income. Our forecast of food revenue is based on the Hotel’s historic performance. Based on the Hotel’s historical performance we have projected telephone revenue at £2. however. Beverage revenue is generated from the sale of alcoholic beverages in restaurants and banquet rooms and the sale of alcoholic and nonalcoholic beverages in a hotel's bars and lounges. Beverage Revenue Telephone Revenue Rooms Expense . in some cases dramatically. tea and soft drinks. More recently. However.HVS International Projection of Income and Expense 41 Rooms revenue is determined by two variables. In recent years. Food Revenue The Uniform System of Accounts for Hotels defines food revenue as ‘revenue derived from the sale of food. as discussed in Section 7. milk. Telephone revenue varies directly with changes in occupancy. Other Income The content of other income varies considerably between hotels.50 POR in 2000 prices.00 POR on the Hotel’s historical performance. wages and employee benefits account for a substantial portion of this category. laundry. in the case of the Hotel. service charges and miscellaneous banquet revenue. Food revenue has been projected at approximately £48 per occupied room (POR) in 2000 prices. much of a hotel's payroll is fixed. porterage personnel and house cleaners to work when occupancy requires. Food sales do not include staff meals. beverage and meeting outlets. the hotel industry has experienced diverging trends with respect to telephone revenue. the number of long-distance calls billed POR has declined as a result of the extensive use of long-distance carrier services and mobile telephones. We have based our forecast of £5. making a comparison of this department with other hotels invalid. This fixed component consists of public telephone revenue generated by non-resident patrons using the Hotel's food. Rooms expense consists of items relating to the sale and upkeep of guestrooms and public space. cover charges. The Hotel is expected to continue to draw additional local patronage to that of in-house residents. Salaries. occupancy and average rate. Although payroll is somewhat variable with occupancy because managers can schedule room-cleaning staff. although a small portion of this category is fixed. consumption has started to increase as guests use the telephone service to access the Internet and e-mail facilities. Beverage revenue has therefore been projected at approximately 30% of food revenue. Our forecast of beverage revenue is based on the Hotel’s historical beverage to food revenue ratio. Projection of Hotel Demand. including coffee. and is in line with comparable hotels. Prices per call have increased. is primarily composed of shop rentals.

Telephone Expense Administrative and General Expense . theft and business interruption insurance. including premiums for public liability. Fire and extended coverage insurance on the building and contents is a separate insurance expense category included under ‘Fixed Expenses’. Based on the historical performance of the Hotel. wages. which include salaries. equipment rental and other expenses. and is dependent on the nature of the revenue. Also included in this expense category is general insurance. beverage and banquet facilities. Expense items related to the management and operation of the property are also allocated to this category.HVS International Projection of Income and Expense 42 Other rooms department expenses include the cost of cleaning materials. The exceptions are cash surpluses and shortages. We have forecast other income expense based on the historical departmental ratio. are mostly fixed. we have projected other income expenses at 50% of other income revenue. Other Income Expense Other income expense consists of costs associated with the generation of other income. commissions on credit card charges and provisions for bad debts. several new items have been added to the administrative and general expense category. Telephone expense consists of all costs associated with the operation of the telephone department. commissions payable to travel agents and reservations costs. use of telephone services by hotel employees is generally charged to this account. Our forecast of food and beverage expenses is based on the Hotel’s historical ratio between food and beverage expenses and food and beverage revenues. In recent years. Food and Beverage Expense Food and beverage expense consists of items necessary for the operation of a hotel's food. Administrative and general expense includes the salaries of all administrative personnel and those not directly associated with a particular department. The bulk of the telephone expense consists of the cost of local and long-distance calls billed by the telephone companies that provide this service. The remaining costs. The historic rooms expense for the Hotel appears to be in line with other hotels of this type. Most administrative and general expenses are fixed.00 POR at 2000 prices in line with the historic performance of the Hotel. Food and beverage expenses have therefore been projected at approximately 70% of food and beverage revenue. such as human resources administration costs and security expenses. This is in line the operating history and with industry norms. Unless a particular hotel department incurs high expenses. We have forecast rooms expenses at approximately £18. we have projected telephone expense at 60% of telephone revenue. Based on the historical performance of the Hotel.

but most facilities face higher property operations and maintenance costs each year. A well-organised preventive maintenance system often helps to delay deterioration. Except for repairs necessary to keep the facility open and prevent damage (to plumbing. .HVS International Projection of Income and Expense 43 Based on the historical performance of the Hotel. Most hotel operators establish an annual marketing budget that sets forth all planned expenditures. Marketing can be used to create an image. A hotel that has operated with a lower-than-normal maintenance budget is likely to have accumulated a considerable amount of deferred maintenance. and with reference to the performance of comparable hotels. it contains only those components that can be expensed. Property operations and maintenance is considered to be an operating expense. most maintenance items can be deferred for varying lengths of time. rather than capitalised. and with reference to the performance of comparable hotels we have projected marketing expenses at approximately £1. they have not eliminated or saved the expenditure. total marketing expenses can be forecast accurately. we have projected administration and general expenses at approximately £3. as a hotel grows older. with the exception of fees and commissions. Based on the historical performance of the Hotel. A new or thoroughly renovated property is protected for several years by modern equipment and manufacturers' warranties.000 per available room (PAR) in 2000 prices. they have only deferred payment until a later date. maintenance expenses escalate. However. are totally controllable by management. The marketing category is unique in that all expense items. as such. If management elects to postpone a required repair. Property Operations and Maintenance Expense Property operations and maintenance expense is another expense category that is largely controllable by management. Marketing Expense Marketing expense consists of all costs associated with advertising. which is discussed later in this section. develop customer awareness and stimulate patronage of a property's various facilities. Valuers account for capital replacements of items such as FF&E in the reserve for replacement account. heating and electrical systems and so forth). regardless of what the occupancy trend may be. these activities are intended to attract new customers and retain existing ones. Maintenance is an accumulating expense. sales and promotion.000 PAR in 2000 prices. The age of a hotel greatly influences the required level of maintenance. If the budget is followed.

It does not include liability coverage. a valuation should reflect these expenses by deducting an appropriate reserve for replacement. Other than bedrooms and meeting space. Included in this category are all non-real-estate items that are typically capitalised rather than expensed. Insurance expense is compared on a PAR basis and appears to be in line with similar properties. boiler explosion. we have projected energy expenses at approximately £1. Incentive Fee Expense Insurance Expense . we have projected property operations and maintenance expenses at approximately £1. and with reference to the performance of comparable hotels. In line with the operating history and management contract we have projected the incentive fee at 10% income before fixed charges. plate glass breakage. The FF&E of a hotel are often exposed to heavy use and must be replaced at regular intervals.000 PAR in 2000 prices. and so forth. Periodic replacement of FF&E is essential to maintain the quality. Based on the historical performance of the Hotel. Management Fee Expense Management fee expense consists of the basic fee paid to the hotel management company that is anticipated to operate the Hotel. In line with the operating history and management contract we have projected the management fee at 3% of total revenue. which is a component of administrative and general expense. sprinkler leakage. Because capitalised expenditures are not included in the operating statement but nevertheless affect an owner's cash flow. regardless of occupancy.500 PAR in 2000 prices. and with reference to the performance of comparable hotels. The marginal energy cost of an additional occupied room is minimal. most areas of a hotel must be continually lit and heated or air-conditioned. image and income potential of a hotel. while others offer both management services and a brand name affiliation. and their quality often influences the standard or grading of a property. The insurance expense category consists of the cost of insuring the Hotel and its contents against damage or destruction by fire. Some companies provide management services alone. Based on the historical performance of the Hotel.HVS International Projection of Income and Expense 44 Based on the historical performance of the Hotel. Energy Expense A large portion of a hotel's energy consumption is relatively fixed and varies little with changes in occupancy. weather. Reserve for Replacement Expense FF&E are essential to the operation of a hotel. we have projected insurance expenses at approximately £125 PAR in 2000 prices.

we consider that a reserve of 3% of total revenue is sufficient to provide for the periodic replacement of the Hotel's FF&E and provide funds for additional equipment necessary to maintain the Hotel's competitive position. . Based on an analysis of comparable hotels. Ten-Year Projection The following projection of income and expense is intended to reflect our judgement of how a typical buyer would project the Hotel's operating results.HVS International Projection of Income and Expense 45 Our industry experience indicates that a reserve for replacement of 3% to 4% of total revenue generally is sufficient to provide for the timely replacement of FF&E.

857 313 3.6 23.8 25.0 50.752 41.00 24.0 8.00 2005 250 67.4 50.2 4.1 3.8 7.8 7.992 41.1 0.3 % £6.613 73% £80.0 32.253 782 417 391 261 1.0 2.525 74% £84.4 % 4.951 3.583 938 500 469 313 2.266 893 476 446 298 2.0 60.1 3.819 829 442 414 276 1.525 74% £82.0 44.2 3.6 18.8 25.HVS International Projection of Income and Expense 46 Table 8-2 Forecast of Income and Expense .7 % £5.0 1.4 3.970 112 186 4.1 2.364 354 4.8 70.2 61.285 1.610 5.046 1.010 3.5 3.788 71% £76.3 3.8 362 3.908 3.4 3.7 37.670 302 3.851 3.7 70.693 1.7 37.518 3.00 2004 250 67.0 1.1 69.00 24.6 11.525 74% £86.5 8.310 280 3.112 4.0 34.6 18.0 50.3 191 1.704 53.957 100.4 2.346 6.0 8.085 53.1 0.4 35.453 53.2 4.2 61.0 36.3 180 1.1 3.375 3.8 422 3.030 196 29 303 280 808 £2.356 53.565 53.8 392 3.410 3.00 £4.3 % £6.1 2.3 3.0 8.477 5.817 236 34 382 337 988 £2.4 3.045 115 191 4.0 2.0 32.0 60.8 373 3.6 18.8 7.094 100.8 350 3.0 2.326 5.7 23.7 19.222 1.799 100.226 2.1 2.1 0.305 41.7 19.2 4.7 % £5.4 4.3 196 1.2 4.199 120 201 4.1 0.3 211 1.1 0.6 18.1 2.844 6.1 69.544 219 31 354 313 917 £2.061 4.525 74% £88.00 % of Gross 53.3 % 4.361 126 211 5.9 4.2 4.9 4.231 100.724 230 33 372 329 964 £2.6 18.1 3.871 41.0 50.2 4.4 35.00 24.8 432 3.256 2.0 44.0 50.089 6.0 1.157 41.6 18.0 4.221 5.5 171 1.115 201 30 311 287 830 £2.3 3.0 8.165 4.055 100.0 60.2 54.4 50.8 7.3 206 1.110 254 36 411 363 1.0 8.4 2.279 123 206 5.0 1.7 19.24 2010 250 67.0 60.633 224 32 363 321 940 £2.961 3.3 3.8 7.1 3.3 % £5.445 3.8 401 3.0 34.1 2.2 4.627 1.0 33.1 69.636 41.4 3.1 0.0 1.402 287 3.216 6.6 10.4 % 4.121 117 196 4.4 3.7 37.3 3.58 2007 250 67.9 4.3 3.1 69.2 55.578 806 430 403 269 1.8 25.1 0.342 2.1 2.0 60.4 3.954 321 3.0 2.9 4.1 44.0 50.4 % 4.4 % 4.4 45.1 2.993 53.0 44.0 2.3 3.2 54.1 2.3 69.1 0.0 8.00 2003 250 66.0 % 41.0 1.3 201 1.0 8.8 411 3.8 % % of Gross % of Gross % of Gross % of Gross % of Gross % of Gross % of Gross % of Gross % of Gross £5.00 24.579 100.0 8.0 8.6 10.473 363 4.1 69.00 24.038 £2.0 34.369 211 30 337 302 880 £2.0 2.0 60.9 4.1 0.885 109 182 4.2 55.7 37.7 9.899 1.0 34.847 53.00 24.75 2008 250 67.972 1.7 37.429 100.0 8.4 45.053 329 3.3 % .154 337 3.3 % £5.973 41.422 915 488 457 305 2.115 763 407 381 254 1.0 1.760 1.1 2.47 2006 250 67.964 849 453 425 283 2.00 24.412 41.2 55.788 71% £78.4 % 4.8 25.525 74% £93.525 74% £95.275 4.5 55.0 50.336 1.829 1.689 100.0 1.8 7.0 2.7 100.4 3.6 11.6 18.556 3.2 55.0 34.876 167 342 9.1 69.00 24.013 £2.114 871 464 435 290 2.219 4.4 60.5 2.3 % £5.725 5.4 4.302 2.511 100.010 248 35 401 354 1.1 0.8 8.8 24.4 3.064 £3.4 % 4.6 12.1 % 3.257 345 3.6 11.3 3.00 24.9 4.0 24.912 242 34 391 345 1.1 3.525 74% £90.805 3.3 % £6.489 1.747 961 513 481 320 2.97 2009 250 67.5 1.3 4.4 3.0 44.3 216 1.8 7.2 4.Wellington Hotel 2001-10 (£ 000s) 2001 2002 250 64.0 34.3 3.6 10.2 55.0 44.296 53.789 105 177 4.6 10.7 37.481 3.1 69.8 3.4 % 4.142 53.2 55.0 1.0 2.8 8.0 50.2 55.445 130 216 5.3 186 1.9 4.7 37.4 50.1 3.4 3.8 25.0 34.0 44.3 3.0 60.0 44.57 Number of Rooms: Occupied Rooms: Occupancy: Average Rate: REVENUE Rooms Food & Beverage Telephone Other Income Total DEPARTMENTAL EXPENSES Rooms Food & Beverage Telephone Other Expenses Total DEPARTMENTAL INCOME OPERATING EXPENSES Administrative & General Marketing Property Operations & Maintenance Energy Total HOUSE PROFIT Management Fee INCOME BEFORE FIXED CHARGES FIXED EXPENSES Property Taxes Insurance Incentive Fee Reserve for Replacement Total NET INCOME 250 64.8 25.3 3.2 4.8 382 3.523 41.8 25.721 102 172 4.965 6.

The cost approach may provide a reliable estimate of value for newly constructed properties. the prudent valuer would also consider and have regard to the cost approach and the sales comparison approach. in certain circumstances. However. however. The Income Capitalisation Approach takes a property's forecast net income before debt service and allocates these future benefits to the mortgage and equity components. Valuation APPROACHES TO VALUE In evaluating property to assess its open market value. The Cost Approach estimates market value by computing the current cost of replacing a property and subtracting any depreciation resulting from one or more of the following factors: physical deterioration. is then added to the depreciated value of the premises in order to produce a total value estimate. the value of each component is calculated. based on market rates of return and loan-to-value ratios. as buildings and other forms of premises increase in age and begin to deteriorate. Through a discounted cash flow and income capitalisation procedure. because it most closely reflects the investment thinking of knowledgeable buyers. cost and sales comparison approaches. Our international experience with numerous hotel buyers and sellers indicates that the procedures used in estimating market value by the income capitalisation approach are comparable to those employed by the hotel investors who actually constitute the marketplace. We find that . The most relevant of these three is the income capitalisation approach. functional obsolescence and external (or economic) obsolescence. the income capitalisation approach produces the most supportable value estimate and is generally given the greatest weight in the hotel valuation process. the resultant loss in value becomes increasingly difficult to quantify accurately. the professional valuer has three approaches from which to select: the income capitalisation. The total of the mortgage component and the equity component equals the value of the property. The former. This approach is often selected as the preferred valuation method for income-producing properties. whilst the latter typically provides a range of values per room.HVS International Valuation 47 9. both of which have some influence on operators' or investors' judgements. as though it were vacant and available. The value of the land. For this reason. indicates what the ‘cost of entry’ into the market would be.

The future benefits of income-producing properties. and we generally use the sales comparison approach as a guide to bracket the final estimate of value and support any adjustments in our valuation conclusions. often make the results of the sales comparison approach questionable. or what is also known as the present worth of future benefits. and any expected reversionary proceeds from a sale. the sales price of a comparable property should be adjusted to reflect any dissimilarities between the comparable property and the Hotel. These future benefits can be converted into an indication of market value through a capitalisation process and discounted cash flow analysis. INCOME CAPITALISATION APPROACH The income capitalisation approach is based on the principle that the value of a property is indicated by the net return to the property. the sales comparison approach may provide a range of values to bracket and support the final estimate of value. restaurants and hotels – where the adjustments are numerous and more difficult to quantify – the sales comparison approach loses much of its reliability. Because the cost approach does not reflect any of these income-related considerations. derived by a forecast of income and expense. this approach is given minimal weight in the hotel valuation process.HVS International Valuation 48 knowledgeable buyers of hotels generally base their purchase decisions upon economic factors. the numerous unsupportable adjustments that are necessary and the general inability to determine the true financial terms and human motivations of comparable transactions. such as forecast net income and return on investment. However. The amounts and terms of available mortgage financing and the rates of return that are required to attract sufficient equity capital form Mortgage and Equity Components . The sales comparison approach may provide a useful value estimate for simple forms of property. To obtain a supportable estimate of value. apart from providing an estimate of the cost to enter the marketplace. Various factors. Hotel investors typically do not rely upon the sales comparison approach in reaching their final purchase decisions. are net income before debt service and depreciation. office buildings. in the case of more complex investments such as shopping centres. The conversion of a property's forecast net income into an estimate of value is based on the premise that investors typically purchase real estate with equity cash (20% to 50%) and mortgage financing (50% to 80%). such as hotels. The Sales Comparison Approach estimates the value of a property by comparing it to similar properties recently sold on the open market. such as the lack of timely comparable hotel sales data. Nevertheless. such as vacant land and single-family homes. where the properties are homogeneous and the adjustments are few in number and relatively simple to compute.

and taken into account the risk inherent in achieving the projected income stream. we have assumed a 65% loan-to-value ratio. From our inspection of the Hotel. it . it is our opinion that a 7. and the opportunities for competition to enter the market. 10-year term mortgage is appropriate for the Hotel. This yield includes an allowance for the payment of the incentive fee to the operator. banks and other investment institutions.5%. In order to estimate the value of the Hotel’s Equity Component. We have used a terminal capitalisation rate of 9. brokerage and legal fees. To reflect the appropriate rates and investment yields required by international banks. a percentage is deducted for the seller's transaction costs. The net proceeds to the equity interest are calculated by deducting the outstanding mortgage balance from the reversion. Furthermore. Based on this information and the perceived risk of the Hotel's location.5% of value). which are around 6. the freehold nature of the site.0% for a hotel investment such as this. Purchaser’s Costs Sales Tax and Legal Fees Deduction for Required Capital Expenditure The Income Capitalisation Value has been adjusted to allow for deductions for stamp duty (4% of value) and legal fees (0. A typical premium of 100 to 150 basis points is typically added to the yield for the risks associated with a project of this nature.0% and assumed that the transaction costs at the time of this sale would be 1. condition and anticipated market position of the Hotel.5%.HVS International Valuation 49 the basis for allocating the net income between the mortgage and equity components and deriving a value estimate. which we have treated as purchaser’s costs in arriving at the price which would be paid for the Hotel. The estimated reversionary sale price as of this date is calculated by capitalising the projected 11th year's net income by an overall terminal capitalisation rate. It is our opinion that an equity investor is likely to require an equity yield rate of 17. we consider that an international mortgage provider will lend up to 65% of the Hotel's market value as determined by this valuation. Terminal Capitalisation Rate Inherent in this valuation process is the assumption of a sale at the end of an assumed ten-year holding period. we have reviewed the ten-year money rates. We have been provided with information on historic capital expenditure at the Hotel. Data for the Mortgage Component are developed from analysing the prevailing interest rates offered in the marketplace coupled with interviews with hotel investors. From this sale price. the age.5% of the sale price. The Hotel opened at the beginning of 1994 and since that time has been well maintained.

Numerous hotel buyers base their investments on an equity yield rate projection that takes into account income growth and perceived risk. The process of estimating the value of the mortgage and equity components is as follows. We have therefore made no deduction of capital expenditure from our opinion of value. 3. The cash flow to equity and the equity reversion are discounted to the present value at the equity yield rate. 1. After deducting the mortgage balance at the end of the tenth year and the typical brokerage and legal costs. and the income to the mortgagee is discounted at the mortgage interest rate.0 1. Summary of Valuation Parameters The following table summarises the key valuation parameters utilised in deriving the value of the Hotel by the income capitalisation approach.HVS International Valuation 50 appears that the Hotel is in very good working order and no immediate material capital expenditure requirement has been identified. The terms of typical hotel financing are established. including interest rate. The sum of the equity and mortgage values is the total property value. The net income of the 11th year is capitalised into a reversionary value. The net income to equity for each of the projection years is also discounted to the present value. 2.5 65 15 10 7. The sum of these discounted values equates to the value of the equity component. Table 9-1 Summary of Valuation Parameters Stabilised Year: Inflation: Loan to Value: Amortisation: Term: Interest Rate: Terminal Cap Rate: Transaction Costs: Equity Yield: Total Property Yield: 4 2. we have used a discounted cash flow analysis. The value of the equity component is calculated by first deducting the annual debt service from the forecast net income. leaving the net income to equity for each projection year. An equity yield rate of return is established. amortisation period and loan-to-value ratio.5 9. .5 17. the equity residual is discounted back to the date of value at the equity yield rate.3 % % Years Years % % % % % Mortgage-Equity Discounted Cash Flow Analysis To estimate the value of the Hotel. Adding the equity component to the initial mortgage balance yields the overall property value.0 12.

HVS International

Valuation 51

4. Because the mortgage and the debt service amounts are unknown but the loan-to-value ratio was determined in Step 1, the preceding calculation can be solved through an iterative process or by the use of a linear algebraic equation known as the Simultaneous Valuation Formula, which computes the total property value. The value is proven by allocating the total property value between the mortgage and equity components and verifying that the rates of return set forth in Steps 1 and 2 can be met from the forecast net income. Using a simultaneous valuation formula to perform the necessary algebraic calculations results in the following estimate of value in pounds sterling, before the deduction of purchaser’s costs. Total Property Value as Indicated by the Income Capitalisation Approach (Say) = £25,200,000 Proof of Value The value is proven by calculating the yields to the mortgage and equity components over the projection period. If the mortgage achieves its 7.5% yield and the equity yield is 17.0%, then £25,200,000 prior to any deduction for capital expenditure and purchaser’s costs is the correct value by the income capitalisation approach. Using the assumed financial structure set forth previously, market value can be allocated between the debt and equity components as follows. Mortgage Component (65%) Equity Component (35%) Total £16,411,000 8,837,000 £25,248,000

The annual debt service is calculated by multiplying the mortgage component by the mortgage constant. Mortgage Component Mortgage Constant Annual Debt Service £16,411,000 0.113287 £1,859,157

The cash flow to equity is calculated by deducting the debt service from the projected net income before debt service.

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Valuation 52

Table 9-2

Forecast of Net Income to Equity (£)
Net Income Available for Debt Service 2,222,000 2,285,000 2,489,000 2,627,000 2,693,000 2,760,000 2,829,000 2,899,000 2,972,000 3,046,000 -

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Annual Debt Service 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 1,859,000 = = = = = = = = = =

Net Income to Equity 363,000 426,000 630,000 768,000 834,000 901,000 970,000 1,040,000 1,113,000 1,187,000

The equity residual value at the end of the tenth year is calculated as follows. Reversionary Value ( £ 3,122,000/0.090) Less: Brokerage and Legal Fees Mortgage Balance Net Sale Proceeds to Equity £34,689,000 520,000 7,522,000 £26,647,000

The overall property yield (before debt service), the yield to the lender and the yield to the equity position have been computed as follows.
Table 9-3 Overall Property Yields (£)
Projected Yield (Internal Rate of Return) Over 10-Year Holding 12.3 % 7.5 17.0

Position Total Property Mortgage Equity

Value 25,247,000 16,411,000 8,837,000

The following tables demonstrate that the property receives its anticipated yield, proving that the £25,200,000 value (before deductions for purchaser’s costs) is correct based on the assumptions utilised in this report.

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Valuation 53

Table 9-4

Mortgage Component Yield (£)
Total Annual Debt Service Present Worth of £1 Factor @ 7.5% 0.930239 0.865345 0.804977 0.748821 0.696583 0.647988 0.602784 0.560733 0.521616 0.485228 = = = = = = = = = = Discounted Cash Flow 1,729,000 1,609,000 1,496,000 1,392,000 1,295,000 1,205,000 1,121,000 1,042,000 970,000 4,552,000 16,411,000

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 x 1,859,000 * x 9,381,000 * x

Value of Mortgage Component

*10th year debt service of £1,859,000 plus outstanding mortgage balance of £7,522,000

Table 9-5

Equity Component Yield (£)
Net Income to Equity Present Worth of £1 Factor @ 17.0% 0.854695 0.730504 0.624358 0.533636 0.456096 0.389823 0.333180 0.284767 0.243389 0.208023 = = = = = = = = = = Discounted Cash Flow 310,000 311,000 393,000 410,000 380,000 351,000 323,000 296,000 271,000 5,790,000 8,835,000

Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

363,000 x 426,000 x 630,000 x 768,000 x 834,000 x 901,000 x 970,000 x 1,040,000 x 1,113,000 * x 27,834,000 * x

Value of Equity Component

*10th year net income to equity of £1,187,000 plus sales proceeds of £26,647,000

Return Components

In evaluating the risk associated with an investment, it is useful to determine the portions of a property's value that are attributable to annual cash flow and reversionary proceeds upon sale. The larger the percentage of value attributable to reversionary proceeds, the greater the risk, because a property's sale price and resultant appreciation are uncertain. Based on the previous discounted cash flow analysis, 57% of the Hotel's estimated value is attributable to cash flow and 43% is attributable to property appreciation. These percentages, which fall within the typical range of 55% to 65% for cash flow and 35% to 45% for appreciation, are considered reasonable for a hotel of this type.

25 and 1. This value equates to approximately £96.829.693. Following is the discounted cash flow analysis.49940 0.2 in the first year of the forecast to 1.000 2.000 plus sales proceeds of £34.222. provides for a debt coverage ratio that ranges from 1.000 2. which implies that no prudent investor will pay more for a property than the amount for which a site can be acquired and a building of equal desirability and utility constructed without undue delay. as these costs are typically borne by a purchaser and result in a lower net transaction price.000 2.3% results in the same value as derived from the mortgage-equity discounted cash flow capitalisation technique.143 ¹ 25.258.45 in the stabilised year of operation.000.5%).3% 0.000 2.979.871 11.629 1.489.000 2.899.000 per room for the 250-room Hotel.000 2.698.000 Discounted Cash Flow Analysis Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Net Income 2.35292 0.169.760.000 2.89072 0.583 1.509.39622 0.046.425 25. Table 9-6 Discounted Cash Flow Analysis: Total Unleveraged Property Yield (£) Discount Factor @ 12.44483 0.933 1.79338 0.048.148.378.215.4 in the stabilised year of operation. The Hotel's projected debt coverage ratio is above the required levels and provides a sufficient margin of cash flow to cover annual debt service.000.627. Using the total property yield of 12. Appropriate deductions are made for depreciation resulting from physical deterioration and functional and/or economic obsolescence.285. COST APPROACH .000 * Estimated Income Capitalisation Value (SAY) *10th year net income of £3.31435 Discounted Cash Flow 1.200.70668 0.000 37. in order to provide an estimate of market value.HVS International Valuation 54 Debt Coverage Ratio The projected net income before debt service.247. expressed as a percentage of debt service. Thus the value determined by the Income Capitalisation method is £24. The value of the land is then added to the depreciated replacement cost.413 1.000 2.880 1.345 1. The cost approach estimates open market value by first calculating the current cost of replacing the premises.000 ¹ Before the deduction of capital expenditure and purchaser's costs Deductions for Purchase Costs Deductions have been made from the Hotel’s value for stamp duty (4%) and legal fees (0.653.884 1.758.181 1. The cost approach is founded on the principle of substitution.972. as presented in the proof of value.56067 0.62946 0.812. Lenders active in hotel financing generally require debt coverage ratios of between 1.

Africa and the USA. HVS International maintains constant contact with developers. By analysing both historic construction cost figures and current market conditions. but built with modern materials and according to current construction standards and design. the Middle East. facilities. We have estimated the Hotel's replacement cost based on figures derived through our research. . lenders and investors and has been able to compile a substantial list of construction cost budgets and actual costs incurred for numerous types of hotel throughout Europe. class and so forth. we are able to derive an appropriate construction cost estimate.HVS International Valuation 55 Replacement Cost is the cost of construction at current prices of a building of the same utility as the structure being valued. size. and by making adjustments for the specific characteristics attributed to the Hotel such as location.

HVS International Valuation 56 Table 9-7 Replacement Cost Estimates (£) 250 Number of Rooms Total Constructed Area Site Area 10.500. Individuals who require an accurate cost estimate should retain the services of an experienced quantity surveyor.200 m² 5.127 306 113 129 49 179 2. the following list details all the recent hotel transactions in the four.000 Per m² 500 ¹ 1.250 500.500 £21. which appear to have some degree of comparability.000 46.125.257 2.827. Although the data used to compile this estimate are generally reliable.000 m² Total Cost Per Room 10.600 5. Based upon our market research and information provided to us by other hotel brokerage firms. This approach in valuing hotels is primarily used as a check against the values indicated by the income capitalisation and cost approaches. it provides only a rough indication of what the redevelopment cost may be. The following sales.000 % Total 11 % 52 14 5 6 2 8 100 % Site Purchase Cost Building Cost Furniture.000 ¹ Based on a site area of 5.149 2. are discussed briefly overleaf.500 4.0% interest charge on 70% of development cost over 2 years.000 m² ² 10% of Building Cost 3 7. Fixtures & Equipment Professional Fees ² Interest during Construction 3 Pre-Opening Cost Developer's Profit (Say 10%) 4 Estimated Development Cost Say £2.000 3.310 87.000 1.916.750 £22.or five-star segment which exhibit some measure of comparability with the Hotel. the valuer can develop an indication of value based upon the per room sales price paid for similar hotels.000 1.000 12.667 88.500.314.000 11.000. .000 7.000 1. Through an analysis of the comparable sales data. SALES COMPARISON APPROACH The sales comparison approach estimates the value of a property by comparing it to similar properties recently sold on the open market.150. It should be noted that the preceding estimate of value using the cost approach is one of the recognised valuation approaches to arrive at an overall estimate of value.

000 12.300.000 78. facilities. property rights transferred and many other variables make a precise comparison between the comparable sales and the Hotel difficult.000.000 10.700.000 114.000 to £177. applicability and defensibility of each indicated value is analysed. with the greatest weight given to that approach deemed most appropriate for the property being valued. because it is difficult to determine the exact motivations of the buyers and sellers.HVS International Valuation 57 Table 9-8 Comparable Hotel Transactions (£) Number of Rooms 140 148 164 117 215 188 137 81 86 72 8. Price Local (£) 16. there is no accurate way of determining whether the sales prices actually paid represent open market values.750.000 Minimum: Maximum: Price Per Room 116.000 132.000 14.500.000 78.000 12. although the sales comparison approach is generally unsuitable for indicating a specific final estimate of value.000 177.000 17.000.465 5.000 20. or £19.500.250.Sales Comparison Approach The sales comparison approach has some limited use in providing a range of values.000 per room. or what special conditions may have influenced the sale.900. Based on the preceding data and analysis set forth in this report. . RECONCILIATION OF VALUE INDICATIONS Reconciliation is the last step in the valuation process in which the final value is estimated from the various indications developed by the income capitalisation.000 116.000 119.000 140. The relative significance.000.000 10. Our analysis of comparable sales indicates a wide range of £78.000 1.000 21.000. cost and sales comparison approaches.500.000 124.000 88.000 for the 250-room Hotel.000 103.000 93.000 Est.000.000 8.600. Moreover.000 to £44.000 578.000 177. We are of the opinion that.000 Property/Group Slaley Hall Four Seasons Grand Hotel Park International Bonnington Hotel Charles Dickens Hotel Palms Hotel Mickleover Court St George's Hotel Rathbone Stakis Hotels Swallow Hotels City Newcastle Manchester Eastbourne London London London Hornchurch Derby London London UK UK Country UK UK UK UK UK UK UK UK UK UK UK UK Sale Date May 1998 Feburary 1999 April 1999 April 1999 June 1999 July 1999 August 1999 November 1999 January 2000 Feburary 2000 July 1999 July 1999 Conclusion . Subjective adjustments used to lessen these differences are highly speculative.500. it may serve to establish a range that can test the reasonableness of the values indicated by the income capitalisation and cost approaches. the following value indications were developed. Differences in location.

000.000 TWENTY FOUR MILLION POUNDS STERLING This value equates to approximately £96.000 per room for the 250-room Hotel.HVS International Valuation 58 Approach Income Capitalisation Cost Sales Comparison VALUE CONCLUSION Valuation Indication £24.000 £19.000. It is our opinion that the open market value of the freehold interest in the Hotel described in this report.500. we have given primary weight to the income capitalisation approach.000. as at 1 January 2001.000 £22. we consider that the income capitalisation approach produces the most supportable value estimate. For this reason. .250.000 Our international experience with numerous hotel buyers and sellers indicates that the procedures used in estimating market value by the income capitalisation approach are comparable to those employed by the hotel investors who constitute the marketplace. is: £24. Based on the preceding analysis and our specialist experience in valuing hotels. and it is given the greatest weight in our final estimate of the Hotel's open market value.00-£44.

has been concerned with deriving the Open Market Value (OMV) for the Hotel. that investment or investor-specific parameters and return requirements are used to evaluate various (potentially competitive) investment options. in commercial investment analysis and appraisal. . In arriving at the OMV. we have been informed. OMV represents the valuer’s view of what a rational purchaser would pay for a property in an open market situation. at Libor plus 25 basis points. Investment Value The bulk of this report. Sensitivity Analysis In the following paragraphs we consider the potential purchase of the Wellington Hotel in the light of specific return requirements. It is often a factor. Often potential purchasers or investors consider investments in light of internal ‘hurdle rates’ or minimum internal rates of return (IRR). which is relevant to the particular return criteria employed by Venture Capital Trust. a valuer assumes such valuation parameters and return criteria as he deems to be representative of the market for such a property purchase. • A leveraged finance structure involving 80% ‘low cost’ debt to which the investor is assumed to have access. We have considered the potential purchase of the Wellington Hotel under two investment valuation scenarios: • A required unleveraged IRR of 15% per annum before tax. are used by Venture Capital Trust in evaluating various investment options. and an equity return requirement of 20% per annum before tax. but rather a specific investment value. such as. As such the resulting ‘value’ does not represent HVS International’s opinion of OMV. and of the foregoing analysis. however.HVS International Investment Value 59 10.

With respect to the unleveraged investment value scenario: • The price which the investor can ‘afford’ to pay for the Hotel. then the following conclusions may be drawn from the two investment value scenarios considered in this sensitivity analysis. or £116. Conclusions If it is accepted that the OMV is based upon ‘market’ return expectations.200.0 29. Clearly three quite different value conclusions have been derived from three different sets of valuation parameters or return requirements. which are computed under each investment value scenario. • The investor may miss out on this opportunity to buy the Hotel.5 80 15 10 6.0 1. that is £29. therefore. in order to earn an unleveraged 15% annual return on capital employed is below OMV.5 9. Table 10-1 Investment Value Scenarios Unleveraged Finance Structure Stabilised Year: Inflation: Loan to Value: Amortisation: Term: Interest Rate: Terminal Cap Rate: Transaction Costs: 4 2.5 20.0% 15. such as would be required by a rational investor typical of the field of potential buyers for the Hotel. where other purchasers are in competition.000 15.0 1.800 per room.000 116.0% 11.2 million.0% 9.5 % % Years Years % % % Leveraged Finance Structure Stabilised Year: Inflation: Loan to Value: Amortisation: Term: Interest Rate: Terminal Cap Rate: Transaction Costs: Equity Yield: Income Approach Value: Value per Room Total Property Yield: Weighted Average Cost of Capital Deflated Stabilised Yield 4 2.500. below. • The investor is. and the resultant investment values.000 94.25 9.5% These investment values should be compared with the OMV before any deductions for capital expenditure or purchaser’s costs. . unlikely to purchase the Hotel in an ‘open market’ transaction. summarises the key valuation parameters.800 11.4% 9.HVS International Investment Value 60 We have applied each of these capitalisation bases to the flow of net income projected in Table 8-2 to HVS International’s sophisticated computerised hotel valuation model. Table 10-1.2% % % Years Years % % % % Income Approach Value: Value per Room Total Property Yield: Weighted Average Cost of Capital Deflated Stabilised Yield 23.

is above OMV. Any purchaser who expects to be able to achieve a better future performance. It is assumed that the investor and the rational purchaser envisaged in the OMV scenario have identical expectations with regard to the Wellington Hotel’s potential future income and expense performance. With respect to the leveraged investment value scenario: • The price which the investor is willing to pay. given his access to ‘low cost’ debt and his Equity Return requirement of 20%. purchase the hotel at a price which is greater than necessary to ‘win’ the hotel in an open market transaction.HVS International Investment Value 61 • The investor’s return expectations are higher than ‘market’. or a more conservative purchase competitor. therefore. It is said that ‘beauty is in the eye of the beholder’. as set out in Table 82. • The investor may. • The investor’s blended. Clearly these comparisons assume that the value parameters used in our OMV analysis represent ‘market’ return requirements. is clearly likely to pay more for an income earning asset than is a less optimistic. or who is prepared to accept a lower return. . or overall return expectations are lower than ‘market.

laws.Statement of Assumptions and Limiting Conditions 1 Addendum 1 – Statement of Assumptions and Limiting Conditions 1. 3. This report is to be used in whole and not in part. pictures. Sketches. All information (including financial operating statements. or PCBs. .HVS International Addendum 1 . No responsibility is assumed for matters of a legal nature. Unless noted. local and private codes. No survey of the property has been made by the valuers and no responsibility is assumed in connection with such matters. It is assumed that the use of the land and premises is within the boundaries of the property described and that there is no encroachment or trespass unless noted. maps and other exhibits are included to assist the reader in visualising the property. 4. It is assumed that the property is in full compliance with all applicable city. nor have we considered the presence of any form of toxic waste. it is assumed that there are no encroachments or planning and building violations encumbering the Hotel. which is assumed to be marketable and free of any deed restrictions and easements. such as asbestos. urea formaldehyde foam insulation. We have not considered the existence of potentially hazardous materials used in the construction or maintenance of the buildings. There are no hidden or unapparent conditions of the property. The property is valued as though free and clear unless otherwise stated. 2. No liability resulting from misinformation can be assumed by the valuers. No responsibility is assumed for these conditions or any engineering that may be required to discover them. 5. licences and regulations (including an alcohol licence where appropriate). nor do we render any opinion as to title. 6. estimates. The valuers are not qualified to detect these substances and urge the client to retain an expert in this field if desired. subsoil or structures that would render it more or less valuable. consents. 7. 8. and opinions) obtained from parties not employed by HVS International is assumed to be true and correct.

In the interest of simplicity most numbers presented in this report have been rounded to the nearest tenth. 12. Any variance from this assumption may have a significant impact on the forecast operating results and value estimate. 10. If the reader is making a fiduciary or individual investment decision and has any questions concerning the material contained in this report it is recommended that the reader contact the valuers. We are not required to give testimony or attendance in court by reason of this valuation without previous arrangements and only when our standard per diem fees and travel costs are paid prior to the appearance. No portions of this report may be reproduced in any form without the permission of the valuers. Many of the figures presented in this report were generated using sophisticated computer models that make calculations based upon numbers carried out to three or more decimal places. The financial forecasts presented in this valuation assume both responsible ownership and competent management. these figures may be subject to small rounding errors in some cases. certificates. beverages and services will be adjusted to at least offset these advances. or other media without the prior written consent of the valuers. public relations. 11. 15. encumbrances. news. but they have been prepared on the basis of information obtained during the course of this study and are intended to reflect the expectations of typical investors. permits. . 16. it is expected that the prices of rooms. conditions or circumstances affecting the property's market value that take place subsequent to either the date of value contained in this report or the date of our field inspection. All mortgages. liens. The valuers take no responsibility for any events. franchises and so forth can be freely renewed and/or transferred to a purchaser. whichever occurs first. We do not warrant that the estimates will be attained.HVS International Addendum 1 . food. 14. The estimated operating results presented in this report are based on an evaluation of the current overall economy of the area and neither take into account nor make provision for the effect of any sharp rise or decline in local or economic conditions. sales. leases and servitudes have been disregarded unless specified otherwise. Thus. To the extent that wages and other operating expenses may advance during the economic life of the property.Statement of Assumptions and Limiting Conditions 2 and that all licences. The quality of a hotel facility's on-site management has a direct effect on a property's economic viability and market value. 9. nor shall the report be distributed to the public through advertising. 13.

the final estimate of value is subjective and may be influenced by the valuers' experience and other factors not specifically set forth in this report. The relationship between pounds sterling and other major world currencies remains constant as of the date of our fieldwork. Nothing contained herein is to be construed as a representation or warranty of any kind. Valuing real estate is both a science and an art. The freehold title to the Hotel would be readily marketable without any undue restrictions. 19. .HVS International Addendum 1 .Statement of Assumptions and Limiting Conditions 3 17. While the information contained herein is believed to be correct it is subject to change. 18. 20. covenants or conditions except where otherwise noted. Although this valuation employs various mathematical calculations to provide value indications.

HVS International Photographs of the Wellington Hotel. Newtown.Main Square. UK 1 Addendum 2 Photographs of the Wellington Hotel. UK . Newtown.

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