To accurately conduct any real estate valuations and specifically hotel valuations (either single- or multi-asset hotel valuations), it is common to make use of different methodologies. HTI Consulting has frequently made use of the income capitalisation approach when conducting hotel valuations in Africa. The income capitalisation approach for hotel valuations usually comprises of three different inputs which assist the valuer in achieving a more accurate hotel valuation.
The three inputs currently used to conduct hotel valuations via the income capitalisation approach are the asset’s future cash flow, the discount rate, and the terminal capitalisation rate. A number of challenges can arise when utilising these inputs to conduct a hotel valuation, particularly in the African market.
When calculating future hotel cash flows on a ten-year basis, African markets are often undersupplied and few have hospitality market research that can assist valuers in determining the market performance. For this reason, consultants undertaking a hotel valuation are required to spend time in the hospitality market under consideration while conducting primary market research. It is critical that such research is thorough in order to ensure that the future projections made are accurate and provide a reliable output.
The second input that can be utilised to conduct hotel valuations is the terminal cap rate. Considering the relatively limited liquidity in Africa, comparative sales are few, and comparisons in terms of values and terminal cap rates are difficult to come by. Cap rates and value benchmarks from more developed hospitality markets, such as South Africa, are generally used, whilst European benchmarks have also been occasionally utilised to inform hotel valuations on the African continent.
Similarly, discount rates, the third input utilised to conduct hotel valuations, which equal the sum of the real returns anticipated plus any risk premiums associated with the specific investment, are also difficult to ascertain, with limited and volatile government issued bonds in Africa (with 10-year coupon rates that can be considered as risk-free rate). In overcoming this challenge, it is common to use risk-free rates and to add premiums to these.
As such, hotel valuations in Africa can be considered as challenging, however, hospitality consulting firms, such as HTI Consulting, have a strong database of benchmarks and values that can be drawn upon to guide values in immature and mature African markets. HTI Consulting has conducted more than 430 assignments, including various hotel valuations throughout Africa, making us a key player in the hotel valuations sector.