COVID-19 has made valuing hotels impossible according to Cavendish Maxwell report

Published: 4 August 2020 - 8:45 a.m.
By: Josh Corder
In a normal situation, the market value of a hotel is calculated using the profits method, looking at a five-year forecast for the property.

This takes into account ADR, occupancy levels, demand, cost, revenue benchmarks and other KPIs to come to an estimate of a hotels’ capital value.

During the pandemic, however, comparable figures such as ADR, occupancy and revenue have become unavailable, unreliable or outdated.

According to valuation consultancy firm Cavendish Maxwell, parties looking to buy or sell a hotel must therefore use new valuation methods in consideration of the current coronavirus situation.

In the report ‘COVID-19 Impact on Hotel Valuation’, the firm explained that “If there is a lack of willing sellers, there is an argument to say there is no market during these unprecedented times and any transactional activity is most likely forced. Therefore, determining an estimate of value needs to bridge the gap between buyer and seller expectations.“

Even as hotels across the region, most notably in Abu Dhabi and Dubai, start to see an uptick in bookings, Cavendish Maxwell urges using the most recent evidence for a market value may not be the best choice. Short-term trends such as higher yields and discount rates do not necessarily reflect long-term expectations or trends.

During the pandemic, values need to consider a hotels’ brand and positioning when forecasting demand. When preparing a valuation, it’s important to consider where a specific hotel brand is most popular, and how those source market countries are performing. If a particular hotel brand historically is popular with Egyptian tourists but there’s a travel ban in place or spending in Egypt is low, this could skew demand.

The firm added: “The advantage to producing a five-year forecast is that we can explicitly forecast forward. We can identify reasonable growth assumptions to define an opinion on market value whilst considering the current market situation.

Hospitality assets are not transacted on short-term performance, but investors must have a firm understanding of future forecasts and require reasonable returns to justify the risk of a stunted exit strategy.”

Once hotel performance starts to stabilise and assets return to the market, Cavendish Maxwell expects buyers with higher levels of liquidity to be able to scoop up assets at lower prices than would be the case without the COVID-19 pandemic.

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