So you’re thinking about a new hotel development or hotel repositioning project? You’ll want to understand the financial viability of the proposed project. That’s why you need a hotel feasibility study – to determine if overall economic gains generated outweigh the hotel’s project costs. This guide details how to conduct a hotel feasibility study analysis.
But What’s a Hotel Feasibility Study?
A hotel feasibility study is a report produced for hoteliers, owners, investors and lenders. It researches and analyses variables that impact profitability of new hotel developments or turnaround projects. The investigation looks at supply and demand of locations and competition, then forecasts demand and project returns from revenues and expenses.
It’s typically completed by Hotel Consultants, to offer an independent yet expert opinion.
99% of hoteliers, investors and owners demand economic return. Other owners may be ego driven and would still progress projects regardless of hotel feasibility study findings.
Your hotel feasibility study links with your hotel business plan. Here are the main steps:
1. Supply/Demand Dynamics
a) Undertake research into the specific market. You can find detailed reports and trend analysis from HotStats, STR, National, Regional and Local Tourism Offices, plus inbound tour operator reports. Search for target market news that will impact supply and demand.
b) Review the existing hotels, accommodation facilities, quality segments, rooms and total supply at the location. Analysis should quantify and then allocate the room-night demand across present and proposed supply of lodging (by comparing competitiveness).
Your hotel feasibility study now has a projection of local hotel demand.
2. Occupancy & Average Rates
Using demand projections, forecast annual occupancy and average room rate. Consider how the hotel will be positioned in the local market. Assess its competitive set, quality segment, facilities, target guests, location, distribution and brand strength. You can use a comparison of the strengths and weaknesses verse competitor hotels, then assess occupancy and rate differences based on existing data and the local demand projection.
3. Hotel Revenue Projections
For the hotel feasibility study, we must now estimate the rooms, F&B and total revenues. Forecasts for 5 years are needed. A formatted Hotel Real Estate Financial Model helps.
a) Using occupancy and average room rate from above, calculate room sales revenue
b) For other revenue centres (like food and beverage or concierge sales), forecast the percentage of guests who will likely use such services or the average revenue per guest
c) Consider other ancillary revenue, like meeting bookings and conference event sales
4. Hotel Expense Projections
The hotel feasibility study must then consider expenses against your revenue model.
a) Work our the operating costs. This will include labour and be listed by department
b) Analyse the fixed overheads. This forecast is based on the scale and type of property (inc. general admin, electricity, power maintenance, franchise or management fees, plus sales and marketing). It’s often calculated on room totals and percentages of revenue
c) Other ownership costs (i.e. insurance, rates, furniture, fittings + equipment reserves)
5. Net Operating Income ModelThe hotel feasibility study now has a net operating income financial model. A sensitivity analysis may then be applied (e.g. the project impact of 5% less revenue only in Yr 1 & 2). All these projections can be compared with the development or repositioning costs.
6. Hotel Feasibility Study ROI
You must now assess if the return on investment is attractive enough to warrant the cost and energy. If you require debt and / or equity financing, does the hotel feasibility study show sufficient return for lenders and investors? Numerous analysis options exist. These translate the net operating income models into more simple decision making metrics.
a) NPV Net Present Value
b) IRR Internal Rate of Return
c) DCF Discounted Cash Flows
These evaluation methods are common. The weighted cost of capital discounted cash flow procedure is popular. It creates a forecast of economic value for comparison to the total project cost. Banks and lenders use IRR rules and hurdle rates (as do hotel operators and corporate finance teams). Everyone wants a highly positive project NPV.
And what happens next?
The hotel investor or developer will review the hotel feasibility study results. They’ll likely consult with partners and lenders. A decision to proceed, cancel or redefine the hotel project will occur. If returns aren’t sufficient, variables might be changed to improve ROI (i.e. development costs, no. of rooms, hotel design standards, pricing rates).
Good luck with your ventures!
– Michael Metcalfe @ Hoteliyo