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Hotel valuation: a value-creating asset class

Hotel assets are characterised by their diversity. Each hotel estimate is a special case based on a careful analysis of the asset’s customer segment, services offered and location. Another characteristic that has a significant impact on valuation scenarios for hotels is that they must be regularly renovated to respond to changing consumer expectations.

The hotel investment market is particularly dynamic thanks to solid fundamentals, limited supply expansion and positive growth prospects for the international tourism industry, which recorded 3.9% growth (2016) for the seventh consecutive year (source: UNWTO) with 1,235 million international tourists worldwide in 2016.

Investors see this asset type as an interesting diversification product with a high potential for added value.

  • 17,949

    HOTELS IN FRANCE AS OF JANUARY 1,2019 INCLUDING 13,157 CLASSIFIED HOTELS

  • 6 %

    THE TOTAL VOLUME OF INVESTMENT IN COMMERCIAL REAL ESTATE IN EUROPE IN 2018

  • 16 billion euros 

    HOTEL INVESTMENT EN EUROPE IN 2018

2018 - BNP Paribas Real Estate Valuation France

Our expert’s point of view

Vincent Coisne / Gabriel Poree

Breaking down the hotel asset class

What are the characteristics of hotel real estate assets?

Hotel assets are first and foremost characterised by their diversity. The hotel asset class includes: independent and chain-affiliated hotels, business or leisure tourism oriented hotels, hotel residences, hotel shops, resorts, etc.  This diversity can also be found in regard to their locations: large capitals, seaside, mountains....

A major feature common to all hotel assets is that they must be regularly renovated in order to remain modern and up-to-date. Customers' expectations are constantly changing - especially in terms of services - trends are changing, and so are environmental requirements: all factors that can lead to an adaptation of the hotel, ranging from decoration to a complete overhaul of the spaces. BNP Paribas Real Estate - Valuation experts can play an advisory role by proposing several valuation scenarios.

 

What are the market trends?

Hotels must innovate to attract travellers with changing requirements such as digitalisation, development of tailor-made offers, flexibility and sustainable development.

The breakthrough of the collaborative economy in the hotel market has contributed to the emergence of new consumption patterns. The hotel sector, traditionally organised in supply-side economics, is challenged by the demands of a demand-based economy. To answer this question, owners draw on trends to imagine new hosting experiences.

The creation of new brands and concepts is accelerating. Hotel design, which has historically been focused on accommodation spaces, is now focusing more on larger shared and common spaces to provide a friendlier experience, enriched with services (restaurants, concierge services, exhibitions, etc.).

 

What are investors' expectations?

For several years now, there has been both a densification and diversification of players interested in the hotel industry. Private investors see this asset class as an interesting diversification opportunity. Hotel assets offer a number of advantages over other types of tertiary real estate assets: a holding structure (generally involving a single tenant or operator), cash flow sustainability, minimum vacancy, favourable taxation, creation of capital gains through conversion or renovation and above all an attractive risk/return ratio.

What are the main valuation criteria for a hotel?

In the hotel sector, as in other sectors, location remains an essential valuation criterion. Other criteria are also decisive, such as benefits, ownership structure, operational performance and market conditions.

Location

Urban destination, seaside resort, tourist destination, winter sports resort

Characteristics of the hotel

Number of rooms, amenities and services, quality of facilities, compliance with standards (Public access building, disabled access, environment...), accessibility

Holding structure

Lease, management mandate, franchise agreement, management lease, brand and operator quality

Operational performance

Key performance indicators (occupancy rate, average price, RevPAR), cost structure, management fees, franchise fees, profitability, effort rate

Market environment

Tourism demand, congress and event infrastructures, urban development, hotel offer, competition

Our hotel valuers use traditional methods of capitalising income and discounting cash flows to estimate the value of a hotel asset. They also refer to the most recent market information in order to establish the fairest possible asset value.

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