Conducting a Hotel Feasibility Study and Analysing Deals
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 the overall economic gains generated outweigh the hotel’s project costs. This guide details how to conduct a hotel feasibility study analysis and prepare the documentation required.
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 specific locations and competition, then forecasts demand and project returns from revenues and expenses. Voila… that’s the basics of the hotel feasibility study!
It’s typically completed by Hotel Consultants, to offer an independent yet expert opinion. If you ‘DIY’ it, you’re massively increasing your risk of misguided investment plans and rejections from lenders. 99% of hoteliers, investors and owners demand economic return. Other owners may be ego driven and will still progress projects regardless of hotel feasibility study findings. Read hotel investment reasons.
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. It’s the start for your hotel feasibility study.
b) Review the existing hotels, accommodation facilities, quality segments, rooms and total supply at the location. Analysis should quantify and then allocate room-night demand across present and proposed supply of lodging (by comparing competitiveness) and understanding the destination actual guest mix.
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, inclusions, 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. When doing a hotel feasibility study, benchmark all competitors.
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 to summarise the financials.
a) Using occupancy and average room rate from above, calculate room sales revenues and cycles
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, to know their influence
c) Consider other ancillary revenue, like meeting bookings, day sales and conference event sales
4. Hotel Expense Projections
The hotel feasibility study must then consider expenses against your revenue model.
a) Work out the hotel’s forecast 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, based on known regional benchmarks
c) Other ownership costs (i.e. building and other insurance, rates, furniture, equipment and 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, or inflated labour costs of 20% etc). All these projections can be compared with the hotel 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 the lenders and investors? Numerous analysis options exist. These options translate net operating income models into more simple decision making metrics. It’s the key outcome within the hotel feasibility study.
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, debt coverage ratios, other covenants and investment performance hurdle rates (as do hotel operators and corporate finance teams). Everyone wants a highly positive project NPV.
7. What happens once complete?
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, total rooms, hotel design standards, pricing rates). Tweaking and re-tweaking projects to reach hotel feasibility is normal.
A Hotel Market Demand Study…
Sometimes hotel investors and developers aren’t ready for a hotel feasibility study. Maybe they’re just exploring a destination market or product niche within a market, and they’ve not yet formed a project.
That’s when a hotel market demand study is best. It’s quicker, simpler and answers key questions like, what’s this accommodation market like and would accommodation product XYZ potentially work here.
Can Hoteliyo help your project?
Sure. Whether you need a hotel feasibility study or hotel market study, get a quote and we’ll guide you through the options. Depending on your phase, progress and goals, your specific needs might differ. In completing the hotel feasibility study or market demand study, we can be on-location or work virtually.