You are on page 1of 78

Valuation of Hotels & Resorts

Asia Pacific
Department of Real Estate
National University of Singapore
David Ling, MSISV, AAPI
Managing Director
October 27, 2010 HVS Asia Pacific
-1-
TOPICS

 Part I – Introduction to Valuation

 Part II – HVS Valuation Method

 Part III – Hotels & Resorts in Asia Pacific

-2-
Part I – Introduction to Valuation

-3-
Introduction to Valuation

1) Definition – Valuation & Market Value

2) Who Needs a Valuation?

3) How is Hotel Value Measured?

4) Hotel Valuation Methods

-4-
Introduction to Valuation

Valuation:
Appraising or estimating the worth of something
having an economic or monetary value.
www.businessdictionary.com/definition/valuation.html

-5-
Introduction to Valuation

Market Value:

International Valuation Standards Committee (IVSC)*:

Market Value is the estimated amount for which a property should


exchange on the date of valuation between a willing buyer and a willing
seller in an arms-length transaction after proper marketing wherein
the parties had each acted knowledgeably, prudently, and without
compulsion.

(*) Member of the UN. Founded in 1981, a Joint –venture of the UK based RICS and the American Appraisal Institute

-6-
2) Who Needs a Valuation?

Stock
Exchanges

Investors/ Financial
Developers Institutions

VALUATION

Hotel
Auditors
Owners

-7-
3) How is hotel value measured?

Simplistic…
● Sales comparisons (amount per room)
● Replacement cost
● Present value of expected future cash flows
Even more simplistic…
● Multiple of profits
● Yield
Utterly fascinating…
● Can of Coke method

-8-
Can of Coke Method?

‘I think you’re meant to multiply by a hundred thousand


– not try and drink a hundred thousand…’

-9-
4) Hotel Valuation Methods

 Sales Comparison
 Depreciated Replacement Cost
 Income Capitalisation

- 10 -
 Sales Comparison

Main Assumption

“An informed purchaser will pay no more for a


property than the cost of acquiring an existing
property with equal utility”.

- 11 -
 Sales Comparison (cont.)

Definition

Deriving a hotel’s value by reference to recent


comparable transactions which have taken place

- 12 -
 Sales Comparison (cont.)

Uses Limitations
 

 

 

 

- 13 -
 Sales Comparison (cont.)

Uses Limitations
 Provides a range of  No hotel is truly
values comparable

 Gives an indication of  Reliable sales data not


buyers’ motivations always available

 Guide on what others  Economic environment


pay for comparable may differ
properties

- 14 -
 Depreciated Replacement Cost

Main Assumption

“An informed purchaser will pay no more for a property


than the cost of producing a substitute property with
equal utility”.

- 15 -
 Depreciated Replacement Cost (cont.)

Definition

Deriving a hotel’s value by calculating the cost of


replacing it and deducting an allowance for
cumulative depreciation

- 16 -
 Depreciated Replacement Cost (cont.)

Uses Limitations
 

 

 

 

- 17 -
 Depreciated Replacement Cost (cont.)

Uses Limitations
 Construction cost  Not always possible,
estimate at today's prices especially old/heritage
less depreciation hotels
allowance
 Doesn't reflect investor
 Useful as a guide for new rationale
properties
 Depreciation can be
physical and/or functional
 Not reliable

- 18 -
 Income Capitalisation Approaches

 Direct Capitalisation
 Stabilised Year Capitalisation
 DCF Approach

- 19 -
 Income Capitalisation Approaches (cont.)

Main Assumption

Conversion of the anticipated benefits of


property ownership (annual income) into an
estimate of present value.

- 20 -
 Income Approaches – Direct Capitalisation

Definition

Deriving a hotel’s value by applying a capitalisation


rate to the net income

- 21 -
 Income Approaches – Direct Capitalisation (cont.)

Uses Limitations
 

 

 

 

- 22 -
 Income Approaches – Direct Capitalisation (cont.)

Uses Limitations
 Quick approach  Only based on one year’s net
income
 Commonly used and
widely understood  Doesn’t reflect rise (or fall) in
net income
 Not always reliable

- 23 -
 Income Approaches – Stabilised Capitalisation (cont.)

Definition

Deriving a hotel’s value by applying a capitalisation rate


to an estimate of the hotel’s stabilised net income

- 24 -
 Income Approaches – Stabilised Capitalisation (cont.)

Uses Limitations
 
 
 
 

- 25 -
 Income Approaches – Stabilised Capitalisation (cont.)

Uses Limitations
 Takes some account of  Needs skill and hotel
the impact of the operational knowledge
future  Still only based on one year’s
 Useful where assets are net income
currently under-  Doesn’t reflect changes in
performing net income

- 26 -
 Income Approaches – Discounted Cash flow

Definition

Deriving a hotel’s value by applying an appropriate


discount rate to a projection of the hotel’s estimated
future cash flow

- 27 -
 Income Approaches – Discounted Cash flow (cont.)

Uses Limitations
 

 

 

 

- 28 -
 Income Approaches – Discounted Cash flow (cont.)

Uses Limitations
 Thorough approach  Based on forecasts of five or
ten year’s net income – not
 Reflects rises and falls “quick & dirty”
in net income (time
value of money)  Valuers need more detailed
exposure to and
 Increasingly used and understanding of the local
widely understood hotel market

- 29 -
Part II – The HVS Valuation Method

- 30 -
HVS Valuation Method

Hotels and Motels:


Valuations and Market Studies

By
Stephen Rushmore, MAI
Erich Baum

Publisher: Appraisal Institute

- 31 -
HVS Valuation Method (cont.)

1) Market Study

2) The Underlying Real Estate

3) Analyse the Demand and Supply dynamics

4) Analyse the Hotel Operating Performance

5) Application of the Valuation Parameters

6) Cross Check with other methods, as appropriate

Can be applied to existing hotels and proposed developments

- 32 -
1. Market Study

- 33 -
1. Market Study

 Macro-economic
 Hotel and tourism markets
 Investment market
 Country risk
 Others

- 34 -
A) Economic Indicators

- 35 -
B) Visitor Arrival Trends (1995 – 2009)

CAGR of 8%

- 36 -
C) Country of Origin, 2009

- 37 -
D) Average Length of Stay, 2000 - 2009

- 38 -
E) Identify Major Demand Generators and Assess Impact

• The two Integrated Resorts


• The Singapore Airshow
• MICE Market
• Formula 1 Night Race
• Proposed Changi Motorsports
• Youth Olympic Games 2010 (History)
• International Cruise Terminal
• 101-Hectare Gardens by the Bay
• River Safari at Mandai (proposed)
• Revitalised Orchard Shopping Belt
• Medical Tourism
• Education Hub

- 39 -
F) Occupancy Trends

- 40 -
2. The Underlying Real Estate

- 41 -
2) The Underlying Real Estate

 Location
 Product
 Market Positioning
 Ownership interest
 Operating revenue and profitability
 Hotel management
 Upsides?
 Others

- 42 -
Location, neighbourhood, accessibility, etc

- 43 -
Guestrooms

- 44 -
Food & Beverage Outlets

- 45 -
Conference & Banquet Facilities

- 46 -
Recreational Facilities

- 47 -
Back of the House

- 48 -
3. Analyse the Demand & Supply Dynamics
[ RNA ]

- 49 -
A) Identify the Competitive Market

- 50 -
B) Historical ADR & Occupancy Analysis

- 51 -
C) Additions to Supply

- 52 -
D) Base Demand Growth

- 53 -
E) Unaccommodated Demand

- 54 -
F) Induced demand

- 55 -
G) Total Potential Demand – Marketwide Occupancy

- 56 -
H) Penetration Factor

- 57 -
I) Occupancy Rate of Subject Hotel

- 58 -
J) Average Room Rate of Subject Hotel

- 59 -
4) Analyse the Hotel Operating Performance

- 60 -
Operating Performance Analysis (Trends, %, POR, PAR)

- 61 -
C) Room Departmental Revenue and Expenses

 Room Revenue
• Occupancy rate
• Average room rate
• Room count
• 365 days

 Room Expenses
• Salaries and wages
• Operating Supplies
• Cable & Satellite television
• Commission
• Complimentary guest services
• Laundry & Dry Cleaning
• Guest transportation
• Reservation Expenses
• Training & Uniforms
• Uniforms

 Room Profit
- 62 -
C) Food & Beverage Departmental Revenue and Expenses

 F&B Revenue
• Food
• Beverage
• Banquet Income
• Other Income (Meeting room rentals, cover and minimum charges)

 F&B Expenses
• Cost of food sold
• Cost of beverage sold
• Salaries and wages
• Cost of employee meals
• Kitchen Fuel
• Operating supplies
• Laundry and dry cleaning
• Licenses

 F&B Profit
- 63 -
D) Detailed Operating Cash flow Projection

- 64 -
D) Operating Cash flow Projection [ 10 years Format]

- 65 -
5. Application of Hotel Valuation Parameters

- 66 -
A) Valuation Parameters

- 67 -
B) Simultaneous Valuation Formula (SVF)

- 68 -
C) DCF Analysis
Net Operating Discount Factor Discounted
Year Income @ 9.5% Cash Flow

2010 14,695,000 0.91332 13,421,184


2011 16,072,000 0.83415 13,406,408
2012 17,789,000 0.76184 13,552,372
2013 18,670,000 0.69580 12,990,604
2014 20,963,000 0.63549 13,321,702
2015 21,488,000 0.58040 12,471,639
2016 22,025,000 0.53009 11,675,210
2017 22,575,000 0.48414 10,929,437
2018 23,140,000 0.44217 10,231,862
2019 361,635,000 * 0.40384 146,043,629
Estimated Market Value 258,044,048
(SAY) 258,000,000
Reversion Analysis
11th Year's Net Operating Income 24,311,000
Capitalisation Rate 7.0%
Total Sales Proceeds 344,812,924
Less: Transaction Costs @ 2.0% 6,896,258

Net Sales Proceeds 337,916,666

*10th year net operating income of S$23,718,000 plus sales proceeds of S$337,917,000 - 69 -
6. Cross-check with other valuation
approaches, as appropriate

- 70 -
Sales Comparison Approach

- 71 -
Sales Comparison Approach (cont.)

- 72 -
Sales Comparison Approach (cont.)

Value Range Derived from Comparable Hotels

≈ $516,000 to $540,000 per key

Considering the differentiating factors and varying date of


transactions, etc, the value of the subject Hotel is adopted at
$525,000 per key reflecting $262,000,000.

- 73 -
Direct Capitalisation Approach

- 74 -
Final Value Conclusion

DCF $258,000,000
Sales Comparison $262,000,000
Direct Cap $245,000,000

Market Value Adopted $258,000,000

- 75 -
Hotel Valuation Index (HVI) – Asia 2009
(US$)

- 76 -
Asia HVI 2009 – Winners and Losers

- 77 -
David Ling
dling@hvs.com
+65 6293 4415
www.hvs.com

- 78 -