Hotel Appraisal Part 1: Property Description and Valuation Method
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Book: Commercial Property Valuation: Methods and Case Studies
Authors: Giacomo Morri, Paolo Benedetto
ISBN: 9781119512127 (hardback), 9781119512134 (ePDF), 9781119512158 (ePub)
Chapter 11 is the biggest case study in the book. It is basically a full hotel appraisal report. This first post covers the property itself and which valuation method fits.
The case was written by Ezio Poinelli and Pavlos Papadimitriou from HVS, a global hotel consulting firm. That matters. This is not a classroom toy example. It reads like something you would hand to a lender.
What are we valuing?
A four-star hotel in a major UK city outside London. It sits in the city centre, near the business district, with easy access by multiple transport modes. The location is strong. Guests can reach the main demand drivers in the area without much hassle.
The hotel has 250 rooms and runs under an international chain brand. It opened about 10 years before the valuation date and has been well maintained. The building design is straightforward. That helps operations. Guest flow works. Staff flow works. The exterior looks modern. Interior finishes are high quality. For a four-star city centre hotel in the UK, the setup looks right.
The room mix
Not all 250 rooms are the same. The breakdown:
| Room Type | Units | Approx. Area (m²) |
|---|---|---|
| Single | 85 | 25 |
| Double | 90 | 28 |
| Executive | 60 | 35 |
| Suite | 15 | 40 |
| Total | 250 | 29 avg |
The weighted average room size is 29 m². That is a solid mix for a business-focused city hotel. Lots of singles and doubles for corporate travellers. Enough executive rooms and suites to capture higher-paying guests.
Food, meetings, and everything else
This is not just a place to sleep. The hotel has real operating complexity.
Food and beverage: A ground-floor café restaurant (125 seats, 200 m²), a speciality restaurant on the top floor (80 seats, 120 m²), and a bar/lounge (50 seats, 70 m²). Total F&B seating: 255 across 390 m².
Meeting space: 955 m² total. That includes a 400-person ballroom, pre-function room, board room, and two meeting rooms. MICE (meetings, incentives, conferences, exhibitions) is a real revenue driver here.
Other facilities: Indoor pool, fitness centre with sauna and spa, business centre, gift shop, guest laundry, and 75 underground parking spaces.
Table 11.1 in the book lays all of this out. When you value a hotel, you need this level of detail. A buyer is not just buying 250 beds. They are buying a full hospitality operation.
Why location and physical quality matter
The book makes a point that sounds obvious but gets skipped in lazy valuations: site and physical facilities directly affect occupancy and average rate.
A great location pulls demand. Good design and finishes let you charge more and fill more rooms. Poor layout or dated facilities do the opposite. You cannot forecast cash flows without understanding what the building actually offers guests.
Trade-related property = different rules
Hotels are trade-related properties. That label from Chapter 2 matters. You cannot just cap last year’s NOI and call it a day. You need to understand the economic result for the operator first. Then you work back to what an investor would pay.
Three things make hotels harder than, say, a simple office building:
Physical rigidity. Hard to convert a hotel into something else. Different parts of the building age at different speeds (structure, machinery, finishes, furniture).
Specialised management. Running a hotel takes real know-how. That is why hotel management companies exist and why management contracts are so important.
Performance swings. Hotel income bounces around. Occupancy changes. Rates change. Your cash flow projections need to reflect that volatility.
Choosing the valuation method
The book walks through all four approaches and explains why most of them fall short for this hotel.
Discounted Cash Flow (DCF): The winner. Hotels are income-producing assets bought by professional investors who think in terms of projected cash flows. International hotel transaction data backs this up. DCF is the method serious hotel investors actually use.
Direct Capitalisation: Limited use. Only makes sense when income is stable and you do not expect big changes in CapEx, competition, or market conditions. Most hotels do not fit that profile.
Direct Comparison (sales approach): Weak for hotels. Every sale is different. Location, facilities, property rights, management contracts, FF&E (furniture, fixtures, and equipment). The adjustments get speculative fast. You also cannot be sure sale prices equal market value. Buyer and seller motivations are often hidden. Still useful as a sanity check. It can set a range to test your DCF result.
Depreciated Cost: Basically inapplicable. Hotel investors do not buy based on replacement cost. They buy based on projected EBITDA after FF&E reserves and expected return. Estimating effective age, accrued depreciation, and remaining economic life is too subjective. Hotels rarely trade on cost.
The conclusion is clear: DCF gets the primary role. Everything else supports or tests it.
My take
If you have only valued offices or retail, Chapter 11 is a wake-up call. Hotels are operating businesses wearing a building costume. The property description section alone tells you how much homework a proper hotel appraisal requires.
The method choice section is equally useful. It is tempting to grab a cap rate from a broker and multiply. The book explains why that shortcut fails for hotels and what to do instead.
The next post dives into the market analysis. That is where occupancy, average rate, demand segments, and competitive positioning get built. It is the longest section of the chapter for good reason. Without solid market work, your DCF is just fancy guessing.
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