Strategic Hotel Property Advisory & Feasability

A comprehensive hotel feasibility typically includes a detailed site analysis to determine site suitability; economic, tourism & hotel market profile to derive demand assumptions; competitive & pipeline profile to derive supply assumptions; supply & demand analysis to derive projected market performance; design review & proposed development components; financial projections & investment appraisal. 

This depends on the stage of the process and the project funding mechanism. If in a due diligence stage with regards to a site acquisition, we recommend a concise pre-acquisition or pre-feasibility assessment. This provides a high-level view of project viability at an early stage and seeks to inform a range of parameters including site bid range, minimum ADR to break even, RevPAR to break even, EBITDA to break even, site development budget and project investment appraisal. A comprehensive feasibility study is generally sought when the project proponent wants detailed market information to comprehensively account for project assumptions. It is often sought by third parties to the project such as investors, lenders and operators. 

A pre-acquisition or pre-feasibility assessment is more beneficial when there is a time-constrained due diligence period that demands a relatively quick turnaround or when the due diligence budget is constrained. While high-level, these assessments adopt sound assessment processes from highly experienced hotel development professionals. 

Over the course of three decades, we have seen approximately 10-15% of feasibility projects come to fruition, reflecting the tight nature of hotel development. This is influenced by a range of variables including development cost, land cost, investor hurdle rates, planning lapse & restrictions, overall project viability, ill-conceived projects, alternative & higher value land use. Often, market conditions change from when an initial positive assessment may have been undertaken to re-assessment within a 12-month period.

The most common misconception is that hotels mine money. This misconception is often borne out of an association with luxury. The reality is that hotels are often trophy assets that are a poorer cousin from an investment returns perspective to their commercial or residential counterparts (development cycle and a range of other factors contingent). A good example here is the inverse relationship between EBITDA performance and market position. Individuals without hotel development experience often expect superior EBITDA performance with a luxury asset over an economy positioned asset. The reality is that luxury assets typically achieve 15-20% EBITDA, whereas economy positioned assets can achieve 45-55% EBITDA. 

Tourism bodies often produce visitor demand growth projections at a national or regional level. The government produces GDP growth projections. These are a sound starting point for a view of future macro-level demand that must be tempered with more micro tourism and economic factors including market size, location prominence, threat of future market entrants, market absorption, local demand factors in proximity, local supply factors in proximity, product market-fit to name a few. 

In our experience, this primarily relates to the standalone nature of investment appraisal of a particular project that typically does not consider the portfolio context, the branding context value or the strategic intent of a given asset. 

A common performance characteristic includes project value realisation upon asset sale. It is uncommon for payback of hotel development projects to occur organically within a ten-year horizon and often up to 20 years. This does not generally occur unless the asset is sold and the improved value of the asset or hold period is sufficient to realise capital growth. The small proportion of hotel projects that realise a reasonable return with a hold strategy typically include projects where the land has been held for a long period of time or demand market conditions for assets is exceptional resulting in sharp capitalisation rates.