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Hotel Consulting and Development Group



Hotel appraisal methods has become a topic of controversy among businesses and government circles following the eruption of a major scandals originating from the privatisation of the Grand Hotel Europe in Saint Petersburg. The Federal Audit Chamber, Sergei Stephashin sent shockwaves through the Saint Petersburg City Administration by announcing that the sale of government shares in the city’s prestigious Grand Hotel Europe has contained violations. The government’s stake, which amounted to 40.37 per cent of the shares, was sold for 32.9 Million Rubles or ($ 1.03 million). According to some analysts, the shares were sold for as little as one fifteenth of their actual value. As a preventive measure to avoid a similar situation in the future, the Audit Chamber has frozen the sale of a government stake in another Saint Petersburg hotel asset, Hotel Moskva, until the shareholding has been officially evaluated.

Despite the noble intent of promoting the creation of a modern hotel infrastructure in Russia, the above scandal exemplifies the difficulties in applying reliable appraisal techniques to hotel valuations. Much of the initiative in privatizing government hotel assets is compromised by numerous inconsistencies linked with a lack of hotel appraisal techniques, rampant corruption and absence of reliable data.

In order to correctly appraise hotel real estate, one must understand the fundamentals of operational profitability of the hotel business. One of the most widespread mistakes of the traditional appraisers is to only consider the hotel building as a common object of real estate. Thus the main focus is given to the physical condition of the building, the degree of deterioration, surface area, the quality of construction, but will ignore the income that is derived from the hotel operations. Because hotels are income-generating assets, the real estate market value should be derived from the hotel’s operational cash flows.

As a measure to better understand the financial mechanisms inherent to hotel valuations, the Russian Society of Appraisers decided to organize a seminar around this issue. Real estate appraisers from various parts of Russia attended the venue. Hotel Consulting & Development Group Consultant, Stéphane Meyrat, opened the seminar with a presentation of the Moscow hotel market, placing particular emphasis on the basic problems and tendencies associated with its evolution. The majority of the students, who intend to estimate hotel real estate assets, discovered the market constraints inherent to the hotel industry in Moscow.

The second part of the seminar was organized by Eric Belfrage, Integra Realty Resources, Columbus, Ohio, USA. Mr. Belfrage, a certified hotel appraiser with MAI accreditation, was invited by the Society of Russian Appraisers to explain hotel valuation techniques to the seminar delegates. He noted that it is difficult to carry out an accurate estimation of a hotel asset in Russia without the support of specialized consultancies in the Russian hotel market, capable of compiling and analyzing the performance data that will be used in the appraisal. “I was fortunate that HCD Group experts agreed to assist me in the organization of the seminar,” Belfrage said.

In comparison with the United States, where accurate regional hotel performance data is relatively easy to obtain from specialised statistic bureaus, such as Smith Travel Research, reliable hotel performance data in Russia is hard to come by. Despite substantial improvement in the sharing of competitive hotel data among the four and five star segment in Moscow, financial transparency of the hotel operations for the remaining supply is still very much of a problem.

The seminar concluded with reconciliations between hotel valuations theory as applied by hotel appraisers in the United States and the obstacles associated with the Russian hotel market. Currently, Russian real estate appraisers possess the skills to valuate commercial, retail and residential real estate. Hotels still represent a challenge, since they require a thorough understanding of market dynamics and operations. Though without an appraisal license, HCD possesses enough expertise and market data to perform 80% of the requirements associated with the valuations process, including the elaboration of the market study and compiling and preparation of P&L statements of existing and proposed hotels.

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