Investment approach
Hotel valuation: income approach and price per room
Price per room helps compare transactions but does not determine value; cash flow, CAPEX and the operator contract matter.
Price per room provides a quick comparison of transactions but does not explain value. Hotels with identical room counts can differ in product, CAPEX, operator contracts and cash flow. The primary conclusion should rest on the asset's ability to generate sustainable income, with transactions used as a cross-check.
Start the income approach with normalised performance
The forecast needs a confirmed room count, realistic ADR and occupancy, channel costs, staffing and owner expenses. Then add the renewal reserve and required CAPEX. A capitalisation or discount rate cannot rescue a weak operating forecast.
Adjust the price per room
Compare transactions by location, category, condition, size, operating model and date. Establish whether the price included the business, brand, property or renovation commitments. Otherwise “price per key” combines different things being sold.
Separate present and future value
If the buyer plans a redevelopment, value the hotel as it stands and after a confirmed scheme. The difference is not ready-made profit: deduct CAPEX, downtime, financing, permit risk and execution costs.
A valuation example
A seller cites a nearby hotel that sold at a higher price per room. That property was recently refurbished, operates under a brand and has a different management agreement. The analyst normalises the target's cash flow and uses the comparable only after adjusting for these differences. If transaction data is incomplete, widen the valuation range. Check operating assumptions against hotel KPIs and capital expenditure against DNPI's full budget guide. The conclusion is a range with sensitivity, not one precise number.
Valuation sensitivity
Show how the range changes with ADR, occupancy, operating margin, mandatory CAPEX and the rate. Parameters are not always independent: raising room rates can reduce occupancy, while cutting renovations can weaken the hotel's position. Explain the risk-free base, market risk, liquidity, property size, condition and operator contract used when choosing the rate; record the date and source of any market benchmark.
Check what was actually sold in each comparison. A company price can include working capital and liabilities; a building price may include a lease; a project price may include permits and unfinished CAPEX. Give opaque transactions less weight instead of inventing a precise adjustment. Tie the ends of the range to clear operating and capital scenarios so the valuation can be updated as facts arrive.
Replacement cost is another cross-check where appropriate, but it is not the market value of an operating hotel. Separate land, permits, development time and entrepreneurial risk from physical construction. Replacement cost far above income value may signal a weak operation or an uneconomic new scheme, not automatic market undervaluation.
