The Growing Significance of Revenue Management in Hotel Valuation
By Paul van Meerendonk Director of Advisory Services, IDeaS Revenue Solutions | January 2020
Let's buy a hotel. Not something you hear every day and unfortunately also not something many revenue managers and strategists are exposed to. However, buying and selling hotel real estate is big business. According to research by Jones Lang LaSalle, over the last 10 years the hotel real estate market saw transactions globally worth over $500 billion. The average size of deals was $47 million in 2018. As I said, this is big business.
I spent several years working in hotel real estate to try and better understand what drives owners and investors to the hotel property market. Why are they buying hotels? Is it the return on investment (ROI)? Is it diversification? Is it the thrill of owning one of the gems of the hotel industry?
Certainly buying The Ritz for $1 Billion is not a decision to be taken lightly (yes, it's for sale! ), but I imagine driving up to this icon of all icons and taking a selfie out front with the caption "Yeah, I own this" does have some Instagram value. After all, $1 billion is a steal if you consider that the Waldorf Astoria in New York sold for almost twice as much five years ago.
I do enjoy Instagram, but in the end, my revenue management background betrays me-I am a numbers guy. The overarching motivation to invest in the hotel market must surely be financial. This brings us back to ROI. According to Wikipedia, ROI is "a ratio between net profit (over a period) and cost of investment (resulting from an investment of some resources at a point in time)." Seems quite simple. I buy a hotel and expect to make enough money out of it that the investment is worthwhile versus investing elsewhere.
This basic principle holds up when we look more specifically at how investors make decisions on the valuation of a hotel and how much they are willing to "invest" when they look to buy a property. I found a good overview of this covered by an article from HVS, which states that although you need to take into consideration a number of different factors, the basic valuation of a hotel asset is done through income capitalization. If you read the article, it explains in detail the calculations and formulas involved in income capitalization.
You may or may not be inclined to study the mechanics of this in detail, but there are two important factors that stand out for me as being critical to the valuation of a property: