Buying hotel real estate - tips for analysis

The valuation of hotel real estate is shaped by the interplay of many factors such as the economic situation, applied real estate valuation standards, choice of appraisers and current market situation. What makes the price when you want to buy hotel real estate?

Best location, best name - The Hotel Atlantic Kempsinki Hamburg at the Außenalster; Image source Sascha Brenning
Who wants to buy hotel real estate, has to consider many parameters

A hotel is well suited as a facility if the location is right - a banal statement that is correct, but must not tempt one to see the value of a hotel property in the light of the location alone. The operator must already realize the right concept. A hotel as an investment property is a project that must be very well designed.

A study by the Bad Honnef University of Applied Sciences examined the market for business travelers in Germany. A survey of this clientele on the value of criteria such as location, brand and price in the choice of hotel showed that the location of the hotel is rated as very important by 3 out of 4 business travelers and thus dominates the choice of hotel. The price is only very important for slightly more than half of the travelers, and the brand is not even rated as important or very important by 10% of the travelers.

The pricing of hotel purchase depending on the following parameters, in the value of their numerical mentioning
Hotel room price depending on the pricing strategy
Hotel occupancy
and last but not least the determination of the capitalized earnings value
Valuation of the hotel property

The internationalization of the capital markets and the real estate markets as well as the related real estate valuation standards has strongly influenced the valuation practice in Europe and Germany. The process of unification of the European valuation standards has above all pushed the Anglo-Saxon valuation procedures to the fore. This led to a controversial discussion in Germany between the Anglo-Saxon and German valuation procedures.

In the past, the valuation of hotel properties was mainly carried out with the help of the capitalized earnings value calculation of the German Federal Building Code (Bundesbaugesetzbuch). Since the German capitalized earnings value method according to the Ordinance on the Principles for Determining the Market Value of Real Estate (WertV) and the valuation of income-producing properties do not include factors such as the development of rents, etc., this method is now considered antiquated by investors at the international level.

For this reason, the discounted cash flow (DCF) method is increasingly being used to determine the value of hotel properties. Valuations of hotel real estate in Germany are carried out by publicly appointed and sworn (certified) experts (e.g. BDSF, BVFS, appraisers (e.g. HJ Korbmacher, box above left), financing banks or auditors and tax consultants. A standardization of the valuation, driven by national as well as international efforts around committees, has been tried in vain for years.

The actual price is ultimately determined by the interaction of other factors such as
Economic situation
Professionalism of the seller/broker
Buyer potential / investors (equity / debt providers)
Banks, insurance companies, fund and real estate leasing companies
Project developers, appraisers, management consultants

But: In the end, only the income value of a hotel counts, which must be determined for the future!

The hotel property and asset management

In the investment field, real estate / hotel real estate is a financial investment with complicated functions. For a successful performance, market segments must be investigated that offer the right growth potential. Not every location fits every concept. In the asset management of hotel companies, the hotel property has lost value in relation to the individual tools in recent years, since 2014, a change in business policy has been discussed in the asset management of the hotel industry.