Almost every major hotel in the world will have had a feasibility study prepared before its development and grand opening.
Twenty years ago, most hotels contracted external advisory firms for feasibility work, but since then the global brands have taken processes in-house. However, since the brands no longer pay for development, banks and funds still sometimes want an impartial forecast of revenue rather than only relying on a brand’s projections.
The production of a feasibility study – commonly known as “a feasy” – remains an important process, although something of a niche activity. Among the wider team of hotel valuers and advisors at CBRE, for instance, a group of 30 look after feasibility work for hotel developments across Europe.
“The banks and the lenders still need to go to their investment committees. They still need to prove the case by having an impartial view with projections in writing. You can’t get away from that physical document,” Julian Kemp, senior director, hotel advisory services, CBRE, said.
Patrick Angwin, director, Clanalytix, added: “Whether you’re Accor or just starting out in the business, any kind of expansion involves investment and any kind of investment, if you’re doing it seriously, properly and professionally, requires analysis. Ultimately that analysis needs to look at various things but essentially you will still want to go through that process of understanding what the return is going to be on that investment.”
There are often time constraints when deals need to be sealed, so has technology speeded up the feasibility process?
Move to Commoditization
Both Kemp and Angwin acknowledged that feasibility studies have become “much more commoditized” which impacts how they are used, presented and priced. This is largely down to two factors: firstly, an explosion in the availability of data, and secondly, new tools to process and present that data.
“The hotel business has always been one where people thought anyone could run a hotel. You could ask someone on Fiverr to do a feasibility study. Will it be any good? I suspect not, but it’s reached the point where it’s a more commoditized tradable product,” commented Angwin.
In addition to STR and HotStats, there are now several specialist providers of occupancy, ADR and P&L data such as Fairmas in Germany and Benchmarking Alliance Nordic AB for Scandinavian markets.
There is much greater availability of forward-looking data, from platforms like OTA Insights, providing information on booking patterns, destination searches, pricing, and flight loads.
Organisations like STR, AMPM and Total Hotel Projects provide supply data whereas in the past, Angwin remembered: “It used to involve driving around, looking at builder’s boards, going to the planner’s office, speaking to other hotels. It used to be quite an art.”
Kevin Edwards, business development director, Alliants, said: “The hotel sector is one of the most informed of the asset classes. Data is available for most aspects of performance, more so than retail and office space.”
No-cost or Low-cost Solutions
The second big change is in the availability of no-cost or low-cost solutions – such as Tableau and Qlik – to process and present data, plus the increased sophistication and capabilities of long-standing tools like Microsoft Excel.
Kemp said that downtime during Covid enabled his team to put in place an in-house P&L benchmarking tool that had been talked about for years.
The missing ingredient in all this, however, is professional human experience and the ability to interpret the data.
“Data is a big part of it, but it’s not just about that. Very few things are entirely comparable. You still have to use experience,” said Angwin. “To my knowledge, the process of looking at forecasts and the build-up period to stable trading has not been automated yet. There is nowhere you can go that will do that.”
Kemp added: “I like doing what I do because there is this human element and it’s the unknown quantity that you’re always dealing with. You can walk around a building site and think: ‘Why is this hotel being built here?’ You only get that if you’ve been there. You can’t allow a computer to do it. There is still gut feel.”
The path to the full automation of feasibility work is likely to be longer for the hotel industry. While AI makes inroads across industries, the relative complexity of the hotel business is a stumbling block.
“We’ve got an data analytics programme set up by our healthcare team,” said Kemp. “When you need to go into a care home, you tend to come from the local area, and therefore they can look at population movements, housing prices, land availability etc. Given demand and supply and the aging population, they can conclude there could be a need for a care home.”
“Whereas with hotels, there’s still that unknown. People come from far and wide to stay at a hotel, and why? For varying reasons. That’s where data analytics probably fails because how does it read the mind of a consumer who has come down from Scotland because he’s going to a funeral, or she’s turning up for a hen night … it’s really difficult.”
Making forecasts during the pandemic is obviously no walk in the park, but banks and lenders have a much better understanding of the hotel sector nowadays. Investors are more interested in what’s expected to happen in the short-term and the build-up years of any given opening will receive great scrutiny. In spite of constant uncertainty, live and forward-looking data plus improved modelling techniques mean a better feasibility product for developers and investors.
“We have to be able to defend our views and be able to explain them,” said Angwin. “I’ve worked for clients who have said: ‘Ooh that’s a bit low. Can you push it up a bit?’ We can’t. Ultimately it’s our reputation on the line.”
Time constraints necessitate different types of feasibility work. The format of a complete study (widely known as “a full-fat feasy”) has not changed in 30 years. It includes economic and tourism forecasts, location analysis, supply and demand analysis, leading up to full revenue and cost projections for the planned hotel. A slimmed-down product (also known as a QDF – “a quick and dirty feasy”) includes less information.
In the end, the revenue and cost projections are of the greatest interest to all parties and advances in technology have given advisors more time to focus on these numbers. Kemp said: “Speeding up the front-end stuff gives us more time to spend with the client on what is really important which is how we think the market is going to recover.”