How to Conduct a Hotel Feasibility Study and Analyse Hotel Projects

Write a Powerful Hotel Business Plan by Analysing Key Questions
Popular Hotel Valuation Methods - Appraisals for Hotel Transactions

Hotel-Feasibility-Study

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 Financial Model helps this process.

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 Model

The 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).

 

Need extra help? Leave a comment or get in touch. Ask a question about your hotel.

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Write a Powerful Hotel Business Plan by Analysing Key Questions
Popular Hotel Valuation Methods - Appraisals for Hotel Transactions
Mike Metcalfe About Mike Metcalfe

Mike started Hoteliyo as a resource for hotel professionals. Previously, he founded Snotels, a branded network of 30 alpine hotels across Europe. Mike's worked for Virgin Group, IHG, Intrawest Resorts and Princess Cruises, and has an MBA in Hotel & Tourism Management    Linkedin | Facebook | Twitter | Google+

Comments

  1. Shannan Reid says:

    Hi Mike – Our city has 1 B&B and no hotels. The nearest Resort on the lake is 5 miles away and does not send HOT taxes to us. The next closest hotels are the Super 8 and Best Western 8 miles away. Neither of them impact our community or us send taxes.

    We have a growing base of tourism happening naturally. We have a lot of history to explore and within 10 miles of our sweet little town, we have 6 “Pinterest-style” wedding venues that have popped up in the last 2 years. They are doing amazingly well, but for good accommodations, they are driving guests over 25 miles to sleep. :-(

    I’m working with Economic Development Council to bring a Courtyard Marriott style hotel to our city. I’m understanding that a feasibility study is our next step. I liked your article but could really use some guidance as it’s not my area of expertise. Thanks!

    • Greetings Shannan. I’d start with the simple steps of supply and demand. Measuring room supply won’t be hard there. Speak with the B&B and wedding venue owners to analyse overnight demand trends and displaced demand (bookings staying out of town). Let us know how things progress!

  2. Benbert Mecarsos says:

    Hello, i am Benbert, i am 28 years old, and to be honest i really don’t any idea about running a hotel though i already have a small Inn business of only consisting 8 rooms…and now, i am planning to have a bank loan and i was able to comply all the needed requirements but i have a big problem because the bank were asking me a hotel feasibility study to the hotel that i am going to establish.

    To give you a broad idea of the hotel that i am going to put up, it would be a first ever hotel here in the Philippines who’s swimming pool with a slide that is protruding in the 9th floor thats look like an over looking transparent aquarium, with a jacuzzi at the top of the building. It’s already approved by the city engineers office, coz its only a 9 stories building, that the 1st floor will consist an internet cafe, laundry business, mineral water refilling station and mini grocery. The 2nd floor till 6th floor will consist 55 luxurious rooms and the 7th floor will be Sky luxury tv bar and Sky luxurious disco – also a first in the Philippines, and in the 8th floor it will be the restaurant and luxurious space, which is also gonna be the first one ever here in the Philippines.

    Is it ok with you if i will ask for your services to make a hotel feasibility study of my propose projects because if i will be approved by the bank, i would definitely be the first ever and youngest entrepreneur and business man to have this kind of establishment and if i will be so lucky enough, i could make another projects with a much bigger scale because this small hotel is only 204 sq. meters….

    Your favorable response on this matter would greatly and truly appreciated by me since is a big break for me and hoping to be put in the history…thanks Mike!

    • Greeting Benbert – thanks for sharing your plans. It’s great to read unique ideas. You’ll definitely need to analyse hotel feasibility! Good luck with it.

  3. Crystle McMillian says:

    Interesting post – enjoyed the point of view.

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