Hotel feasibility studies are the result of a professional activity aimed at establishing if a hotel project that is localized in a given place has enough probability to be economically sustainable, according to specific current and perspective market conditions.
Sometimes it may happen that feasibility studies focus just on single or economic-financial market aspects, without considering other elements, such as building construction costs, or assessing the financial structure of the operation, which is determined by bank credit conditions within the real estate, hotel and accommodation industry.
Generally, a hotel feasibility study should contain the following analyses:
- Quantification of market potential for the new hotel product, with estimates of penetration, projections of the occupancy rate in the year of management and average yield per room of the accommodation unit (so-called ADR, Average Daily Rate)
- Preparation of the hotel unit perspective Revenue Account by applying accounting standards, such as USALI (Uniform Standards of Accounts for the Lodging Industry), which allows identifying costs and revenues of single hotel operations
- Representation of study conclusions and clarification of recommendations addressed to the Client, by drafting and issuing a written and signed report.
In some cases, even at the instance of clients, feasibility studies may contain:
- Estimate of the hotel value, as a result of cash flows analyses and suitable hotel valuation methods– commonly based on DCF methods (Discounted Cash Flow) – and comparison of this value with the building construction costs, included possible further cost items for the regularization of hotel operations.
- A financial analysis of the project – aimed at assessing the real financiability –, including the composition of invested capital, the determination of optimal forms of own and third party capital, according to the costs that can be associated with debt capital and expectations of the return on invested capital.
Feasibility studies support the whole process of real estate development, identifying realistic objectives in terms of performance of the new accommodation structure on the market.
Feasibility studies that are carried out with professionalism and competence reduce the risk of a new hotel real estate project, since they first consider the market conditions in which the hotel will be operating.
Furthermore, feasibility studies are recommended by major international hotel chains, which often need that type of analysis to support the adoption of various types of products in the different hotel markets.
