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18-01-2022 | By : Simon Audoire

Real estate valuation of hotels in the context of a pandemic

The decline in attendance and income for hotel industry players has been historic. Since the start of the pandemic, a drop of just over 65% in the level of activity has been noticed for 2020. Although income greatly determines their real estate value, market values ​​have not necessarily fallen by such proportions. similar.

In the context of financing, the real estate appraisal is an essential step in the process in the protection of the public, particularly in this context, for the buyer as well as his lender. The intervention of a certified appraiser, guarantor of the protection of the public, is therefore essential. The choice of suitable comparable and the detailed study of the income statements are essential steps that this professional implements.

Context elements

A few figures suffice to sum up the disaster facing the hotel sector today. The Quebec Ministry of Tourism is raising the occupancy rate of accommodation establishments with 4 units or more. Provincially, it fell from 60.7% in March 2019-February 2020 to 27.9% over the following 12 months. Over the same period, income per disposable unit fell from $91.10 to $33.50.

In this context, the market value of hotels has not necessarily followed the same trend. Indeed, a stagnation in sales volumes has been observed. The firm CBRE indeed reveals in a study published in the 3rd quarter of 2020 that the gap in the expectations of buyers and sellers remained large. In other words, the pass-through of lower incomes to house prices, hoped for by buyers, did not actually happen in this waiting period. Among the collateral effects of the pandemic, Quebecers could be led to choose the province permanently as a preferred vacation destination. The trend towards a relocation of tourism should be monitored in the short/medium term.

However, in this situation of declining revenues, rates of return have remained stable or even increased (hotels with main services), according to a national study by CBRE. Therefore, stagnation or even decline in values ​​is a reality. This seems heterogeneous depending on the category of hotels considered and their location (city centre, proximity to airports, tourist regions).

Source: Canadian Cap rates & Investment Insights – CBRE Research report – 3rd quarter 2021

Evaluation methods

Chartered appraisers use the three recognized methods of cost, comparison and income. Unlike many single-use properties, the cost method is not the key method for hotels. Indeed, it does not take into account traffic.

The income method is of major importance in the valuation of hotels. It consists of an estimate of the net income generated by the company that owns and operates the building. This step requires the collection of income statements over several years, recording the establishment's income and expenditure. This data should be compared to the market and to available statistics. To do this, the prices charged, the occupancy rates or the net income must be compared with the statistics published by the Ministry of Tourism and with the data available on the market.

The comparison method remains a good reference. The difficulty lies in the availability of data, given that the number of post-covid sales is limited. The situation (visibility, access) and above all the location (proximity to points of tourist interest, agglomerations, roads) are major criteria for choosing comparables. The evaluator must also take into account the typology of the establishments: from those offering no service (motels) to the boutique hotel through the traditional 'hotel-restaurant'.

Given the short-term aspect of the health crisis and the latest information on the recovery available, the certified appraiser will justify its weighting of the pre- and post-covid years.

Public TGA (Global Discount Rate) data is only available at the national level. However, the information collected locally by the appraiser in his previous files will help him to adjust his opinion on the rate of return to retain.

Caprea's chartered appraisers listen to the market and regularly appraise this type of property. For any evaluation request, contact us!

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