How To Value a Hotel

Posted by Colliers on 13th July 2021 -

David Hossack, head of the UK Hotels Valuation team at Colliers, explains why the role of a hotels valuer requires not only expertise as a chartered surveyor, but also the skills of a detective, an accountant and even a social worker.

Firstly, can you describe your role as a hotels valuer?

I am a chartered surveyor and have been valuing hotels for nigh on 30 years. I value hotels and nothing but hotels. I am a specialist valuer who is wholly dedicated to the sector in a world where there are few who can truly say the same. 

I work in a highly experienced department that lives and breathes hotels. In this 50-strong team, everyone is wholly dedicated to the hotels sector in providing valuations, advisory, asset management or agency advice throughout our network of UK offices.

In what way is valuing hotels different to valuing other commercial property assets?

As operational assets, hotels are different to many other core classes of property. We do not simply measure up a building and multiply that area by another number to derive value. Hotels valuation requires much more input. 

A hotels valuer must possess many traits, and being a chartered surveyor alone is not enough. A hotels valuer must be able to combine their property skills with those possessed by a detective, an accountant, an analyst and sometimes a social worker. They must be able to talk and listen to management, the owner, and their client, if not the same.

What sort of things does a hotels valuer need to keep in mind when they conduct a valuation?

A hotels valuer must have an in-depth knowledge and understanding of the sector, of the asset they are valuing and its location. They have to be able to judge how good, or bad, the current management team is, and from that they must be able to establish hypothetically how well another, reasonably efficient, operator would perform at that same asset on the valuation date. 

In addition, the hotels valuer must be able to consider the robustness of the business model, and how it might be impacted in the future should the management team or customer trends change, or if disaster strikes. If a hotel relies on one or two major sources of business the valuer must satisfy themselves that if this source of income is reduced, or cut off entirely, can the business adapt and attract custom from elsewhere, and how quickly the business can return to ‘normal’. This is the same if a key member of the team leaves, and with them a significant element of personal goodwill that should always be discounted from a valuation. 

The hotels valuer must go into an inspection with their eyes wide open. They must look around, establish what state of repair the hotel is in, and then look further afield at potential threats to the business, including existing and proposed competition. 

A valuer who possesses all of the above attributes is one who can be trusted to move on to the next step: the valuation itself.

Can you tell us about the process of valuing a hotel?

There are several ways to value a hotel including by a direct capitalisation of stabilised EBITDA, discounted cash flow, investment (capitalisation of market rent) or comparables (price per bedroom) approach. Whichever method, or combination of methods, the valuer adopts, too often they lose sight of the question they are being asked, and that question is mostly ‘what is the market value of the hotel?’

Applied correctly, with skill and understanding, all of the above valuation approaches will provide the answer to the question. If they are performed incorrectly, without true knowledge, the result is likely to be little more than a slavish mathematical calculation that is not representative of market value. In this case the valuation does not satisfy the client’s brief. Put simply, it is wrong, and this leads to problems.  

So what should a hotels valuer do to ensure a correct valuation?

To apply any valuation methodology accurately the valuer must be able to stand back and consider the results of their valuations, and then be able to make adjustments to provide a market valuation. Call it a sixth sense, I prefer to call it common sense. By this I mean the valuer must have enough about them to discuss their valuation with skilled colleagues from other teams within their hotels department; colleagues who are talking to owners, managers, buyers and sellers on a daily basis throughout the year. Especially now, in a world where comparables are limited, this shared knowledge of market sentiment is invaluable, and critical if the valuer is to provide accurate advice.

What would be your message to anyone thinking of getting a hotel valued? 

Hotels valuation has never been straightforward, perhaps that is why there are only relatively few who truly specialise in this field. During the last year it has become even more of a challenge, for obvious reasons.

If you do need a hotel valuation please satisfy yourself that your valuer possesses all of the above attributes. If they don’t, perhaps look elsewhere for advice.