Hotels and Resorts

Hotels and Resorts: an investor’s guide presents a comprehensive analysis of how

hotels, golf courses, spas, serviced apartments, gyms, health clubs and resorts

are developed, how they operate and how they are valued. Drawing on over

eighteen years’ experience in the leisure property industry, David Harper provides

invaluable advice on how to buy, develop and sell such properties. Working

through the required due diligence process for purchases (including how to

identify a ‘good buy’), through the ‘route map’ for a successful development and

ending with how to ensure you maximise your returns when selling the asset, this

book covers the whole lifecycle of leisure property ownership.

Examples of valuations, development issues and sales processes taken from the

USA, UK, France, Nigeria, Kenya, Australia, Hong Kong, Singapore and Brazil

provide in-depth analysis on the similarities and differences in approach to hotels

and resorts in various parts of the world.

This book provides invaluable guidance to international investors, developers,

asset managers and students in related subject areas.

David Harper is the managing director of Leisure Property Services, a fellow

of the Royal Institute of Chartered Surveyors and the author of Valuation of

Hotels for Investors. He is a founding member of Hotel Partners Africa (HPA), a

consultancy offering a comprehensive range of services to hotel owners, operators

and investors from initial feasibility to sale and exit.

Hotels and Resorts

Hotels and Resorts

An investor’s guide

David Harper

First published 2017

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN

and by Routledge

711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business

© 2017 David Harper, with the exception of:

Chapter 4 © David Harper and Mark Martinovic

Chapter 5 © Mark Martinovic

Chapter 17 © David Harper and Roger Allen

The right of David Harper to be identified as author of this work has been

asserted by him in accordance with sections 77 and 78 of the Copyright,

Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or

utilised in any form or by any electronic, mechanical, or other means, now

known or hereafter invented, including photocopying and recording, or in

any information storage or retrieval system, without permission in writing

from the publishers.

Trademark notice: Product or corporate names may be trademarks or

registered trademarks, and are used only for identification and explanation

without intent to infringe.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging-in-Publication Data

Names: Harper, David (Property services manager), author.

Title: Hotels and resorts : an investor’s guide / David Harper.

Description: Abingdon, Oxon ; New York, NY : Routledge, 2017. |

Includes bibliographical references and index.

Identifiers: LCCN 2016005445| ISBN 9781138690158 (hardback : alk.

paper) | ISBN 9781138853744 (pbk. : alk. paper) | ISBN 9781315722610

(ebook : alk. paper)

Subjects: LCSH: Hotels--Valuation--Handbooks, manuals, etc. |

Resorts--Valuation--Handbooks, manuals, etc.

Classification: LCC TX911.3.V34 H37 2017 | DDC 910.46--dc23

LC record available at http://lccn.loc.gov/2016005445

ISBN: 978-1-138-69015-8 (hbk)

ISBN: 978-1-138-85374-4 (pbk)

ISBN: 978-1-315-72261-0 (ebk)

Typeset in Goudy

by HWA Text and Data Management, London

This book is dedicated to Arabella, Nicola and Matthew

Contents

List of figures ix

List of tables xi

Preface xiii

Part I

The investment lifecycle 1

1 Introduction to hotels, resorts and leisure property buyers 3

2 Ownership guide 25

3 Buying guide 46

4 Development guide 63

David Harper and Mark Martinovic

5 Construction guide 85

Mark Martinovic

6 Disposal guide 106

Part II

The valuation process 125

7 Methods of valuation 127

8 Due diligence 152

9 Financial due diligence: understanding the business 172

10 Valuation due diligence 186

viii Contents

Part III

Specialised valuation categories: specific examples 205

11 Rental valuations 207

12 Site values and how they are determined 226

13 Serviced apartment values and how they are determined 244

14 Resorts with fractional ownership units and how their value

is determined 260

15 Gym values and how they are determined 281

16 Golf course values and how they are determined 306

17 Spa values and how they are determined 325

Roger Allen and David Harper

Glossary 347

Index 365

Figures

1.1 Desirability of tenure 6

1.2 The Palm in Dubai 8

1.3 Property in Ghana (property provides tangibility) 9

1.4 An ‘experience’ hotel 18

1.5 A ‘boutique’ hotel 19

2.1 Owner’s income and risk profile 26

2.2 Vacant possession hotel 28

2.3 Managed hotel 29

3.1 Trophy hotels are deemed secure investments 49

3.2 Safari lodges tend to be seen as riskier investments 50

4.1 Development process 63

4.2 Site in Honduras 67

4.3 Site in Angola 68

4.4 The design team 81

5.1 The value triangle 85

5.2a The original Moscow Four Seasons hotel in 1975 92

5.2b Moscow Four Seasons hotel in 2015 92

6.1 Methods of disposal 109

6.2 Process of a hotel sale from an agent’s perspective 111

6.3 Peninsula Hong Kong 117

6.4 Raffles Singapore 118

7.1 The profits method 131

7.2 The residual method 132

8.1 Typical hotel organisation chart 161

8.2 Condition due diligence 169

8.3 Environment due diligence 169

9.1 Typical bedroom 175

9.2 Hotel bar 176

9.3 Analysis of revenue mix 182

10.1 Hotel bedroom – key driver behind revenue generation 194

10.2 Design of reception and bar allows for staff cost savings 194

11.1 Weight of evidence for comparable evidence 210

11.2 Hotel leases on ground rent 221

x List of figures

11.3 Site leased on turnover rent 221

12.1 Residual valuation process 227

12.2 Gross land value calculation 227

12.3 Hotel site in Spain 233

12.4 Development site in Sri Lanka 234

12.5 Development costs 236

13.1 Serviced apartment in Morocco 246

13.2 Kitchen in a serviced apartment 247

13.3 Typical ownership structure for hotel branded residences as part

of a mixed-use scheme 249

14.1 The shared ownership industry 261

14.2 Fraction development in Kenya 266

14.3 SOPU development in Cape Verde 267

14.4 Structure outline of typical SOPU scheme 268

15.1 Hotel gym 285

15.2 Wet-leisure facilities 285

16.1 What golfers say makes them happy and what actually makes

them happy 316

16.2 Golf hotel 317

16.3 Golf course 317

17.1 Types of spa 329

17.2 Spa relaxation area in the Chedi, Oman 330

17.3 Spa facilities in Fujairah Rotana Resort and Spa 331

Tables

5.1 Roles and responsibilities under EPC/T contracts 90

7.1 Comparable transactions 128

7.2 New lettings 129

7.3 Hotel transactions 129

7.4 Stabilised year 130

7.5 Hotel Arabella forecast in present values 134

7.6 Hotel Arabella income capitalisation 136

7.7 Hotel Nicola forecast in present values 138

7.8 Hotel Nicola income capitalisation 139

7.9a Hotel Matthew projection in future values 2016–2020 142

7.9b Hotel Matthew projection in future values 2021–2025 144

7.10 Discounted cashflow 146

8.1 Example of a contaminated land risk assessment 167

8.2 Regulatory data 168

8.3 Major remedial items 170

9.1 Historic profit and loss accounts 174

9.2 Historic profit and loss accounts – not in USALI 177

9.3 Adjusted profit and loss accounts 179

9.4 Hotel key performance indicators – operating statistics 180

9.5 Hotel revenue by department 181

9.6 Segmentation of rooms, demand rooms booked and occupancy 181

9.7 Departmental profits 182

9.8 Undistributed operating costs 184

9.9 Undistributed operating costs – room analysis 184

9.10 Fixed costs 185

11.1 Comparable evidence 209

11.2 Comparison of hotels 213

11.3 Summary of adjusted valuations 214

11.4 Hotel Muralitharan 216

11.5 Hotel Stokes – first approach 219

11.6 Hotel Stokes – second approach 220

11.7 Hotel Gavaskar 225

12.1 Hotel Butler trading projections 239

xii List of tables

12.2 Hotel Butler income capitalisation 240

12.3 Hotel Butler development costs 241

12.4 Hotel Butler building costs 242

13.1 Differences between serviced apartment categories 250

13.2 Swann Suites trading projectionsâ•‹ 252

13.3 Swann Suites income capitalisation 253

13.4 Aparthotel Pollock trading projections 258

13.5 Aparthotel Pollock income capitalisation 259

14.1 Anderson and Broad trading projections 270

14.2 Anderson and Broad Resort income capitalisation method 272

14.3 Haynes and Greenidge Hotel, Resort and Spa trading

projections 278

14.4 Haynes and Greenidge Hotel, Resort and Spa income stream 280

14.5 Haynes and Greenidge Hotel, Resort and Spa discounted

cashflow 280

15.1 Multipurpose studios 293

15.2 Martial arts studios 294

15.3 Dance studios 295

15.4 Border’s Gym trading projections 297

15.5 Border’s Gym income capitalisation method 298

15.6 Hadlee’s Health Club trading projections 304

15.7 Hadlee’s Gym income capitalisation method 305

16.1 Royal Lillee Links projections in future values 312

16.2 Royal Lillee Links income capitalisation method 313

16.3 Wasim Willows projections in future values 322

16.4 Wasim Willows adjusted projections in future values 323

16.5 Wasim Willows income capitalisation method 324

17.1 Root Spa, forecast in present values 332

17.2 Root Spa income capitalisation method 334

17.3 Captain Cook Spa: forecast in present values 340

17.4 Captain Cook Spa income capitalisation method 342

17.5 Flintoff’s Spa: forecast in present values 344

17.6 Flintoff’s Spa income capitalisation method 346

Preface

Welcome to Hotels and Resorts: an investor’s guide. The purpose of this book is to

act as a guide to all those keen to get involved in the hospitality market, whether

as developers, owners, investors, operators or advisors.

The book is divided into three main sections. The first part outlines the

investment lifecycle for a hotel, resort or leisure property. It provides an

introduction to hotels and resorts, providing commentary on who invests in such

properties, as well as why they invest. It provides an ‘ownership guide’, outlining

the various types of ownership of such properties, including the various legal

agreements common in the industry, as well as outlining ‘asset management’ in

terms of the hospitality industry. It provides a ‘buyers’ guide’, which discusses what

makes a good buy, and risk versus reward in terms of pricing and yield selection.

The ‘development guide’ outlines the ‘development road map’, discusses the need

for a feasibility study, outlines the key criteria involved in operator selection and

discusses the main components involved in designing a hotel or resort. The

‘construction guide’ outlines how to identify, understand and manage the risk

inherent in the construction process. Finally, Part I concludes with the ‘selling

guide’, which explains the disposal process, discusses enhancing value and advises

on how to maximise the price achieved during the sale.

Part II discusses the valuation process for hotels and resorts specifically, though

the key points are equally valid for all types of leisure properties. It outlines the

key methods of valuation, providing simple examples. The importance of due

diligence is discussed, outlining the various types of due diligence including

legal, statutory, condition and environmental. The chapter on financial due

diligence explains the importance of understanding the detail of the business.

It provides a number of worked examples on how to analyse the operation, so

accurate projections for future performance can be made. Valuation due diligence

is discussed, highlighting the inspection process, assessing the local hotel market,

the interview with the general manager and finally how to analyse all the data.

The final section provides examples of specific types of valuations. The details

from Part II on due diligence apply to all of these individual chapters, but each

chapter discusses specific issues arising from that type of property. Property types

outlined include spas, gyms and golf courses, all of which can be stand-alone

leisure properties or can form part of a hotel or resort. In addition, other chapters

xiv Preface

cover serviced apartments, fractional ownership, site valuation and rental

valuations.

Throughout the book, text boxes are included from some of the most respected

people in the market, giving advice, warnings or just recounting tales of actual

events, characters or issues that have been encountered within the industry.

This book can be read in the same way as a novel, and indeed for those new

to the industry wishing to get an easy introduction into the market, this is the

recommended approach to the book. However, many readers will have a specific

interest, or be looking for something in particular, and in this case referring just

to one chapter or part of the book is just as sensible.

The hotel world is full of jargon and ‘technical speak’, and it has not been

possible to eliminate all jargon from the text of this book. The first time a

technical word is used it has been explained which is useful for those reading the

book cover to cover. Each term is also included in the glossary, so those dipping

in and out can also find explanations of unfamiliar words and terms.

In the interests of confidentiality, while all the examples are based on real

cases, the names of the hotels and resorts have been fictionalised and resemblance

to the name of any actual hotel or resort is purely coincidental.

I do hope you enjoy the book.