Hotels could be undervalued by up to 20%

Hotels which are valued using traditional methods are potentially being undervalued by as much as 20%, according to hotel consultancy HVS.

The methods, which don’t account for an upturn in the market and an owner’s ability to refinance with improved credit facilities, are outlined in HVS’s report The Art and Science of Hotel Valuation in an Economic Downturn.

“We have adapted our valuation model to be able to factor in current and medium-term operating and lending conditions. This gives a fairer estimate of a true market value, rather than a ‘distress’ value based purely on trading and financing in the current market,” commented report co-author Sophie Perret, associate director, HVS London.

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“Using the revised model would give buyers a more positive and longer term view of an asset and may encourage some owners to sell properties now, rather than wait for the economy to improve,” she added.

The HVS valuation model is based on a 10-year leveraged cash flow and can build-in a refinancing of the hotel when lending conditions become more favourable, the loan-to-value ratio improves and investors are able to release some of the additional equity. This methodology is fully compliant with the principles set out in the RICS Red Book of Appraisal and Valuation Standards.

“This is a more flexible, realistic and transparent way to value quality hotels in uncertain times, taking into account current credit conditions in the short-term and a refinancing in the medium-term based on improved cash flows and the return of investor and lender confidence,” Perret explained.

Using this enhanced new valuation model would potentially increase the value of a hotel.

“This methodology cannot be applied indiscriminately to every hotel,” concluded report co-author Ana Campos-Blanco. “Those hotels whose trading levels are greatly depressed, for example, cannot avoid a ‘distressed value’ being applied to them for the time being.”