Valuation debate continues

The Royal Institution of Chartered Surveyors (RICS) this week jumped into the long-running hotel valuation debate with a written response to a booklet published last November by the British Association of Hotel Accountants (BAHA).

Although work on BAHA's Recommended Practice for the Valuation of Hotels began two years earlier, the public airing of vastly different valuations within a short time at Queens Moat Houses intensified interest in hotel valuation procedure.

According to BAHA, the recommended way to value a hotel is to forecast a series of cash flows over 10 years, representing a hotel's anticipated revenue, expenses, capital outlay and operating performance.

The cash flows are then capitalised by applying a discount rate, which takes into account inflation and a risk-free rate of return.

According to the RICS, this approach, called discounted cash flow (DCF), calculates the potential "worth" of a hotel to an investor but does not provide a price or market value.

Instead, the RICS report recommends the use of the earnings multiple approach, which gives greater weight to a hotel's achieved performance. In a typical valuation, the valuer will look at trading over the past three years, as wellas current performance and projections for a further two years.

The document was drafted by James Devitt, a partner of William Hillary Leisure & Hotels, who told Caterer there was a real difference between worth and price.

BAHA recommends the DCF approach because it smooths out the volatility of the hotel property market, but the RICS report says fluctuations have to be taken into account.

"We say that if you want to know the market value of a hotel you have got to have regard to market volatility. If you move away from that you are not calculating market value, you are calculating worth," said Mr Devitt.

DCF may be appropriate when a valuer is confronted with a hotel or leisure property which is still in construction or where a hotel is about to be extended or renovated.

But even in these cases, according to the RICS, DCF should be only one of a variety of methods and devices used to arrive at the value.

Apart from analysing the past, present and future earnings of a hotel, a valuer working under the RICS model would also take note of comparable hotel transactions.

"We believe there is a place for comparable transactions, whereas BAHA is rather scathing about them," said Mr Devitt.

BAHA has called for a formal register of hotel transactions to be established, and valuers have discussed setting up an informal or formal register. It is well known that valuers already informally exchange information on deals.

Yet at a time of property market weakness, with agreed prices often below balance sheet values, agents and vendors are unwilling to release sale prices.

"Personally, I would prefer the cloak of confidentiality to be lifted," said Mr Devitt. "The more information we have, the better we can advise our clients."