The perfect investment in hotel real estate
Comprehensive assessment with the 3P profile
As with shares, there are assessment and valuation standards for hotel real estate. These can be compared with the investment goals and contribute to pricing. The 3-P profile divides every hotel property into the categories of power, performance and potential. In this way, individual characteristics and thus opportunities become visible that might otherwise have fallen by the wayside.
The strength (power) of a hotel property corresponds to its intrinsic value. It is mostly due to unique selling points, such as its unique location, its architecture, its history, its image or special legal advantages. A hotel with such "power properties" has a high chance of increasing value and can always be sold at a good price. However, the regularly generated return is comparatively low in relation to the price. That is why one invests here more in security, i.e. in the preservation of assets, than in earnings.
Performance means the cash flow of hotels. They are therefore judged on the basis of their return on lease or sales. In contrast to intrinsic value, the money regularly flows back to the owner through ongoing operations - and not just after the sale. This plays an important role with a high proportion of borrowed capital. The performance also depends not only on the property, but at least as much on the operator and his business concept.
If a hotel has not yet exhausted its possibilities, this also influences its value. In order to realize the existing potential, however, further investments are necessary. From this point of view, a plot of land with the appropriate dedication already has the highest potential for a hotel business, even if it has not yet been developed. Although the price estimate for the potential of a hotel property remains relatively low, it still has to find its place in the calculation in order to include future business development.
But what about location, location, location? Real estate agents like to stylize it as the most important criterion, but the assessment of the location of a hotel property usually remains quite vague. Here it is above all the value of land, which is based on a naturally limited availability. Land as a scarce commodity that cannot be increased at will - has always been a classic argument for real estate as an investment. What else counts in terms of location is what the guest likes and is useful: the proximity to transport routes as well as to business destinations or tourist attractions, the view, the peace and quiet. But the general price level in the area (micro-location) also has a significant influence on the value. The location therefore has an effect on all three assessment categories and, accordingly, on pricing.
The profile comes before the price
No hotel property can be equally good in all three criteria. And each profile has its justification for certain investor goals. The long-term investor who thinks in terms of decades, if not generations, is more likely to invest in power hotels and leave the management to a professional operator. Long-term security clearly takes precedence over short-term returns. The idea of concrete gold comes to mind in the power category.
Operators who also acquire ownership of hotel properties are more likely to be found in performance hotels. Here the entry price is low with good, ongoing cash flow. In addition, loans can help increase leverage for return on equity. The current income serves the debt service. At best, the property finances itself.
Entrepreneurial thinking and acting is required for hotels with high potential values. First of all, you have to be able to recognize and evaluate the potential. In addition to previously unused expansion, modernization or expansion options, these include, for example, conversions or innovative business models for guest target groups that have not previously been considered. Of course, the potential is not only needed in the rooms, but also in the legal area: building permits, fire protection regulations, concessions - all these hurdles have to be overcome in order to realize previously unused potential. After such an appreciation, it is not uncommon for the property to be sold in order to realize the increase in value. Or you can continue to run the hotel yourself or through operators.
Exemplary and very specific in Kaprun / Austria.
Anyone who calculates the value and thus the price of a hotel property solely on the basis of current profits or rental income is miscalculating what is actually happening on the market. With the 3-P profile from HOTELIVEST, buyers and sellers have a much more realistic model at their disposal. As an example, we want to analyze a hotel that HOTELIVEST currently (Q1 2023) offers. The property is located in Kaprun and offers apartments in addition to normal hotel offers. The house is excellently introduced, sales are ongoing, and there are many regular guests. The well-rehearsed team could be taken over completely. Due to its location in Kaprun with the glacier, the hotel can boast a snow-sure ski area for 6-8 months a year (even in warmer climates thanks to the glacier). In summer and autumn, other attractions and activities in the Zell am See/Kaprun region attract tourists from all over the world. Structurally and legally, the hotel property offers further possibilities: one could expand the capacity up to 60 % plus. A unique possibility which is not granted any longer!
If you were to look at this hotel solely as a performance investment and with the current operating figures, then the ratio of the purchase price to the (lease) return would probably be unattractive. However, if you interpret the economic potential of the expansion, the future snow-sure location and the existing roots in the market correctly, then you recognize the reserves that this house offers with proper management. The advantage: You can initially view the property as a "power investment". So use it exclusively to secure liquid funds against inflationary risks. And while business continues as before, you watch the market, plan with peace of mind and implement when the conditions are right.