Following the significant and continuing impact of the global financial and economic crisis on the hotel industry, HVS's valuation assumptions and methodology have evolved to more accurately reflect the actions of typical buyers and sellers in the market place who have modified their valuation procedures based on the current financing environment.

European hotel values have come under significant pressure in the past two and a half years owing to the credit and operating constraints of the current market.

In this context, we have adapted our valuation assumptions and methodology to ensure that we consider current and medium‐term operating and lending conditions to provide a fair estimate of Market Value rather than a value which overemphasises the effects of financial and/or operational distress.

In this article we demonstrate how distressed values are at least 15‐20% lower than Market Values. Hence, the importance of making sure that the value doesn't penalise the medium and longer‐term performance of the asset by assuming currently depressed investment parameters and operating conditions throughout the entire holding period.

Having observed some of the strategies put in place by currently active buyers, we propose a more flexible, realistic and transparent route to Market Values in uncertain times.

The proposed methodology considers current credit market conditions in the short term and a refinancing event in the medium term, based on improved business cash flows and the subsequent return of investors' and lenders' confidence.

The main purpose of this methodology is to represent more closely both debt and equity investors' sentiment and behaviour in the current market making sure that the true earning potential of the asset is reflected in our conclusion of Market Value, whilst at all times complying with the strict requirements of the Royal Institution of Chartered Surveyers' (RICS) Red Book.

Read the entire article in PDF format via the link below in a new window:

www.hvs.com/article/4896/art-science-of-hotel-valuation-in-an-economic-downturn