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Most financing institutions require an independently prepared market and financial feasibility study for the development of a new hotel. Although they will usually conduct some research of their own, it is unusual for them to go in the same depth as a feasibility study and, because they stand to gain by a project going ahead, it is difficult for them to examine its viability with the same degree of independence and objectivity as third party professional consultants.
Hotel Consulting and Development Group are devoted exclusively to the hospitality industry. Our team of consultants offers expertise in market and feasibility studies. Our comprehensive reports allow the potential investors and lenders of a hotel property the opportunity to preview the potential operating results that a proposed accommodation scheme could achieve. The scope of each assignment and the resulting report are tailored to meet the client's individual needs. The typical product is a comprehensive economic study and appraisal that includes a full market analysis for any given region in Europe, Russia and CIS designated by the respective client.
Market Study
Among the first steps that the developer of a new hotel must take is to prepare a market study and financial projections. HCD Group market studies emphasize two key aspects. First, they assess present and future demand for lodging and such other hotel facilities as public areas, function and syndicate rooms, food and beverage outlets, and leisure facilities. Second, they estimate operating income and expenses for five or ten years after the hotel opens.
The market study by definition depicts the supply and demand analysis for rooms of a given competitive type for a designated encatchment area. The competitive room supply consists of area properties that would form the primary competition for the proposed facility. In addition, the supply must be adjusted for future supply or new properties expected to come on the market in the near future and also for current competitive properties that will be less competitive in the future as they close or change market orientation. The demand for rooms reflected the expected number of room nights sold per annum by the primary and secondary competitive set of hotel properties.
Within the framework of each commissioned study, HCD Group apply particular care in assessing the project site. The site analysis includes a detailed description-size, boundaries, topography, visibility, accessibility, and suitability to hotel use.
Feasibility Study
The relevance of HCD Group market and feasibility study relies not only on the independence and objectivity of its consultants, but also on the accuracy and timeliness of the data used in the analysis. There is a plethora of information concerning the hotel market in Moscow, but very few reports actually use current or reliable data. Other factors, which can play for or against a hotel project in the Russian market include ownership issues, local or national government interests, and financing. In order to support a proposed and existing hotel complex, HCD Group undertake market studies in various regions of Russian Federation and CIS countries by consistently applying the following method of approach:
- Pre-fieldwork
- Fieldwork
- Market data analysis and conclusions
- Financial projections
- Report writing, review and revision
- Presentation to the client
- Pertinent amendment and final draft submission to the client
HCD Group conducts a hotel feasibility study using a detailed work program that provides a step-by-step approach. This program is designed to keep the engagement flowing smoothly and within the time and cost budget. In its financial calculations for any given property, HCD group apply the principles of the "Uniform System of Accounts for Lodging Industry" published by the Educational Institute of the American Hotel & Lodging Association. The high international acceptance of this accountancy system in the hospitality industry allows a direct comparison with other hotels and restaurants using this system and therefore enables a much higher cost transparency of the examined hotel businesses.
HCD Group feasibility studies typically consist of the following key elements:
- background to the country, region and location for the proposed hotel including economic and demographic information;
- an examination of the existing, and likely future tourism trends in the area;
- analysis of the trading performance of potentially competitive hotels;
- a market analysis, including existing and future supply of and demand for hotel accommodation in the area;
- comments on the proposed hotel’s position in the market and projection of average room rate and occupancy;
- a statement of estimated profit and loss which includes all other revenues and expenses to gross operating profit level;
- cash flow projections for the project based on preliminary estimates of costs and method of financing.
A feasibility study is a detailed risk analysis of a project. It evaluates a project on the basis of operational income and expenses and shows its ability to meet debt service and minimum equity yield requirements. However, in some locations, appreciation of the property value of the hotel is an important consideration and this is not usually addressed although it can be in the context of a feasibility study.
Moreover, the Russian banking system, though improving, still has much ground to cover to become a decisive player in hotel real estate financing. Traditionally, banks will extend loans, but for up to five years at annual compounded interest rates exceeding 15%. Such conditions usually go against the project's interest. However, our thorough market and feasibility studies offer a professional source of financial transparency and integrity with regard to the viability of the commissioned project to both lenders and investors, averse of the speculative and risky nature of hotel real estate in Russia and CIS. In order to attain the level of qualitative and financial reliability of our market and feasibility studies in accordance with guidelines set forth by financial and lending institutions, the primary focus of our market research methodology rests on the following areas:
- Infrastructure and communications servicing the site and immediate surroundings
- Site Inspection;
- Compilation and analysis of the statistical and analytical data describing the economic, demographic, political and social conditions of the market where the proposed project is located;
- Definition of Market segment aimed at defining a concept development strategy for the proposed project (commercial, meeting and conference, leisure segment);
- Identification of primary and secondary competition, room count;
- Quantification of accommodated room night demand for a given market;
- Determination of other relevant demand sources affecting the project (latent demand);
- Market Positioning of the proposed project in the market and classification of services;
- Recommended facilities mix of the proposed project for demand optimization;
- Guest utilization coefficients of the proposed facilities of the hotel project;
- Evaluation of demand generators supporting the project's feasibility;
- Seasonal trends affecting the hotel trading patterns;
- Definition of the competitive set;
- Estimation of achievable average occupancy and revenue levels for the proposed project;
- Operations performance forecast adapted to local market conditions and fiscal incidence on net profit.
The tasks highlighted above are then regrouped under a full market and feasibility study, which adopts the following structure:
1. Executive Summary
1.1. Survey of Site and Surrounding Area
1.2. Market Potential
1.3. Competitive Review
1.4. Concept Development
1.5. Summary of Findings and Recommendations
2. Market Area Analysis
2.1. Employment Market and Industry
2.2. Economic and Demographic Trends
2.3. Envisaged Commercial and Real Estate Projects
2.4. Economic Prospects
3. Infrastructure and Major Projects
3.1. General Overview
3.2. Major Infrastructure Projects
3.3. Air, Rail and Road Accessibility
4. Site Assessment
4.1. Location
4.2. Accessibility and Visibility
4.3. Proximity to Demand Generators
4.4. Communications
4.5. SWOT Analysis
5. Definition of Project Concept
5.1 Site Analysis
5.2 Concept Definition of a Proposed Hotel
5.3 Facilities Review
5.4 Space Allocation Programme
6. Supply and Demand Analysis
6.1. Existing Hotel Supply
6.2. Property Profiles
6.3. Future Hotel Supply
6.4. Demand Analysis
6.5. Market Segment Definition
6.5.1 Commercial
6.5.2 Meeting and Conference Segment
6.5.3 Leisure
6.5.4 Other Relevant Segments to the Project (Air Crews, Weddings, etc.)
6.6. Seasonality Fluctuations
6.7. Current and Future Hotel Demand
6.8. Compettive Analysis
6.9. Market Positioning
6.10. Envisaged Hotel Demand
7. Financial Projections for the Proposed Hotel
7.1. Introduction
7.2. Projected Average Daily Rate and Occupancy
7.3. Rooms Revenue
7.4. Food and Beverage Revenue
7.5. Minor Operating Revenues
7.6. Rental and Other Income
7.7. Cost of Sales
7.8. Payroll and Related Expenses
7.9. Other Expenses
7.10. Statements of Estimated Profit and Loss
7.11 Sensitivity Analysis
8. Investment Cost and Hotel Object Valuation Analysis
8.1 Project Cost Estimation
8.2 Return on Project Investment
8.3 Cash Flow Analysis
8.4 Financial Ratios
8.5 Investment Appraisal
9. Exhibits
10. Appendix
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