Case Study: Hotels - A Feasibility Study

Hotel feasibility study

What is a hotel feasibility study?
A hotel feasibility study is a report based on the investigation of all the factors that could affect the profitability of a proposed new hotel. The study estimates probable demand and makes economic projections based on all sources of income and costs.

Who needs one?
Our typical client is a potential investor who wants an independent expert report on the financial viability of a proposed hotel project.

How we undertake the study

1. Present and future demand
• We research the local business community and inbound tour operators about the current performance and future trends of the hotel industry in the particular locality to determine the potential demand for additional new hotel accommodation.
• Using Ministry of Tourism and other official statistics, we project future demand based on the proportions (by country-of-origin) of international visitors as well as domestic visitors who tend to use hotel accommodation in the locality of the proposed hotel.

2. Income projections
• We determine where the proposed hotel is positioned in the market, and evaluate potential demand for this standard of hotel and the level of room rates it might achieve. Factors taken into account include the hotel's locality, branding and competitors.
• Using these projections of the room demand and price, we are now able to calculate the total room revenue.
• We calculate the projected revenue from food and beverage sales based on the hotel's room rate and projected occupancy as well as other factors such as the proportion of guests who are likely to eat in the hotel rather than go to a restaurant elsewhere or the spend per person.
• We project additional revenue generated from conferences and meetings, both from room hire and from the associated food and beverage sales.

3. Cost projections
These comprise:
• Operating costs, including staff costs for all the different departments in the hotel and the costs associated with these.
• Overhead costs, calculated according to the size and type of hotel, for example, administration overheads, sales and marketing, energy costs, repairs and maintenance and, if applicable, management fees paid to an external management company.
• Ownership costs such as rates, insurance and FFE Reserve (for replacement of furniture, fittings and equipment).

4. Net cash flow
The net cash flow from operations is projected forward for a five year period and compared with the overall cost of developing the hotel.

5. Return on investment
Taking into account all of our previous calculations and projections we can now identify whether the return on investment is likely to be sufficiently attractive to a potential investor, given the risks involved by applying appropriate terminal yield and discount rates.

Reporting and following up
We prepare a comprehensive report (typically 30-40 pages)for our client, who is able to decide, in consultation with potential lenders and/or other equity investors, whether to proceed with the project.

If the projected return is too low, we might investigate and recommend some ways of improving it, perhaps by:
• re-scoping the hotel's specifications;
• reducing development costs by changing the design or standard
• increasing room rates where possible
• undertaking follow-up negotiations on the client's behalf.

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The 8th Annual
New Zealand
Hotel Industry Conference was held at the
Pullman Auckland
on the 5th June 2014.

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