RICS information paper

RICS Professional Guidance, Asia

Capital and rental valuation of

hotels in Asia
1st edition

rics.org/guidance
 rics.org

Capital and rental valuation

of hotels in Asia
RICS information paper, Asia

1st edition, July 2014

Published by the Royal Institution of Chartered Surveyors (RICS)

Parliament Square
London
SW1P 3AD
UK
www.rics.org

No responsibility for loss or damage caused to any person acting or

refraining from action as a result of the material included in this
publication can be accepted by the authors or RICS.

Produced by the Asia Valuation Professional Group.

ISBN 978 1 78321 049 7

Royal Institution of Chartered Surveyors (RICS) July 2014. Copyright in

all or part of this publication rests with RICS. No part of this work may be
reproduced or used in any form or by any means including graphic,
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Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

Capital and rental valuation of hotels in Asia

Contents

RICS Valuation Professional standards (the Red 1

Book)

Acknowledgments 2

RICS professional guidance 3

1 Introduction 5

2 Valuations of hotels as fully equipped and operational 6

entities
2.1 General 6
2.2 Trading potential and personal goodwill 7
2.3 Comparable approach 8
2.4 Capitalisation of maintainable profit 8
2.5 Discounted cash flow method 9
2.6 Management contracts 9
2.7 Rental valuations 9
2.8 Apportionments 10

3 Licences, consents, certificates and permits 11

4 Valuations for secured lending purposes 12

5 Other property 13

6 Confidentiality 14

ii RICS information paper, Asia

 rics.org

RICS Valuation Professional Standards (the

Red Book)

RICS (Royal Institution of Chartered Surveyors) is the leading organisation of its kind in the world for professionals in
property, land, construction and related environmental issues. Part of RICS role is to help to set, maintain and
regulate standards as well as providing impartial advice to governments and policymakers.

To ensure that RICS members are able to provide the quality of advice and level of integrity required by the market,
RICS qualifications are only awarded to individuals who meet the most rigorous requirements for both education and
experience and who are prepared to maintain high standards in the public interest.

Members who qualify as valuers are entitled to use the designation chartered valuation surveyor and, in addition to
compliance with the general rules of conduct applicable to all members, must also comply with the RICS Valuation
Professional Standards, generally referred to as the Red Book.

RICS has in place a regulatory framework. Where a valuer undertakes work that has to comply with the Red Book
that valuer is also required to register with RICS. Registration enables RICS to monitor compliance with the valuation
standards and take appropriate action where breaches of those standards have been identified. Further details are
available at www.rics.org/vrs

RICS information paper, Asia 1

Capital and rental valuation of hotels in Asia

Acknowledgments

This information paper has been prepared by the Valuation Professional Group and is based on material originally
published as Valuation Information Paper 6.

RICS would like to thank the following contributors:

David Faulkner Colliers International

Ed Fitch JLL

Simon Landy Colliers International

David Ling CDL Hospitality Trusts

Robert McIntosh CBRE

RICS would also like to thank other members of the Asia Valuation Professional Group for their assistance in updating
this paper.

2 RICS information paper, Asia

 rics.org

RICS professional guidance

International standards
RICS is at the forefront of developing international standards, working in coalitions with organisations around the
globe, acting in the public interest to raise standards and increase transparency within markets. International Property
Measurement Standards (IPMS ipmsc.org), International Construction Measurement Standards (ICMS), International
Ethics Standards (IES) and others will be published and will be mandatory for RICS members. This information paper
links directly to and underpins these standards and RICS members are advised to make themselves aware of the
international standards (see www.rics.org) and the overarching principles with which this information paper complies.
Members of RICS are uniquely placed in the market by being trained, qualified and regulated by working to
international standards and complying with this information paper.

RICS information papers

This is an information paper. Information papers are intended to provide information and explanation to RICS
members on specific topics of relevance to the profession.

The function of this paper is not to recommend or advise on professional procedure to be followed by members. It is,
however, relevant to professional competence to the extent that members should be up to date and have knowledge
of information papers within a reasonable time of their coming into effect.

Members should note that when an allegation of professional negligence is made against a surveyor, a court or
tribunal may take account of any relevant information papers published by RICS in deciding whether or not the
member has acted with reasonable competence.

This information paper is believed to reflect case law and legislation applicable at its date of publication. It is the
members responsibility to establish if any changes in case law or legislation after the publication date have an impact
on the guidance or information in this document.

RICS information paper, Asia 3

Capital and rental valuation of hotels in Asia

Document status defined

RICS produces a range of professional guidance and standards products. These have been defined in the table
below. This document is an information paper.

Type of document Definition Status

Standard
International standard
Practice statement
RICS practice statement
Guidance
RICS code of practice
RICS guidance note (GN)
RICS information paper (IP)
An international high level principle based standard Mandatory
developed in collaboration with other relevant bodies
Document that provides members with mandatory Mandatory
requirements under Rule 4 of the Rules of Conduct for
members
Document approved by RICS, and endorsed by another Mandatory or recommended
professional body/stakeholder that provides users with good practice (will be
recommendations for accepted good practice as confirmed in the document
followed by conscientious practitioners itself)
Document that provides users with recommendations Recommended good practice
for accepted good practice as followed by competent
and conscientious practitioners
Practice based information that provides users with the Information and/or
latest information and/or research explanatory commentary

4 RICS information paper, Asia

 rics.org

1 Introduction

1.1 Hotels are among those types of property
generally referred to as trade related property. They
are normally bought and sold having regard to their
trading potential.
1.2 This information paper relates only to the valuation
of an individual property (or properties) that is valued
having regard to its trading potential. Valuations of
businesses will be covered by separate guidance. This
information paper includes properties valued on the
basis that vacant possession is available as well as
those to be valued as investments (i.e. without vacant
possession).
1.3 VPGA 4, Valuation of individual trade related
properties, RICS Valuation Professional Standards
2014 (the Red Book) defines trade-related property as
any type of real property designed for a specific
type of business where the property value reflects the
trading potential for that business. VPGA 4 considers
the criteria to be adopted by valuers when assessing
market value or market rent for an individual trade
related property. It relates to a wide range of such
properties, including hotels, public houses, bars,
restaurants, nightclubs, theatres or cinemas, and
various other types of leisure property. The valuer
should also have regard to the International Valuation
Standards 2013, IVS 310 Valuations of Real Property
Interests for Secured Lending, G13, Trade Related
Property.
from the operational entity is normally the primary
concern of purchasers and, hence, valuers.
1.7 Valuers who prepare valuations of trade related
property need to have knowledge of the operational
aspects of the property type, and of the industry as a
whole, which is fundamental to the understanding of
market transactions and the analysis required.
1.8 The following matters are considered:
general approach to be adopted for the valuation
of hotels
trading potential
licences, consents, certificates and permits
the various occupational structures
valuation of hotels for secured lending purposes.
1.9 For properties that are occupied, or are capable of
being occupied, as hotels, but are not trading, such as
new hotels or those closed for some reason, the same
principles and approach may be applied, with
appropriate adjustment and weighting attached to the
various factors affecting value. In such circumstances,
valuers may also need to determine whether it is
appropriate to consider alternative uses of such
properties on a highest and best use basis.

1.4 This information paper focuses on a specific type

of trade related property, namely hotels. Although it is
not intended to be fully comprehensive, it considers the
general approach to be adopted for the capital and
rental valuation of hotels, commenting on the different
valuation methodologies and the practical approach to
the assembly and interpretation of relevant information
for this purpose. The principles involved also apply to
similar properties such as serviced apartments.

1.5 This information paper is written specifically in

relation to the practice in Asia, although much of the
content may well be applicable in other regions or
globally.

1.6 A trade related property is usually valued by

treating the physical property, fixtures, fittings and
equipment (often referred to as trade inventory), and
the market perception of the trading potential for the
existing use as a single entity. The potential profitability

RICS information paper, Asia 5

Capital and rental valuation of hotels in Asia
2 Valuations of hotels as fully equipped and
operational entities
2.1 General
2.1.1 Properties that are fully equipped and trading as
operational entities are normally valued on their
estimated future trading potential as at the valuation
date.
2.1.2 Hotels are usually occupied and operated on one
of the following bases:
with vacant possession, i.e. owner-operated or
franchised
subject to a management agreement
subject to a lease.
In all cases the valuer needs to be able to estimate the
future cash flows to the owner of the interest being
valued and the risks associated with such cash flows.
Hence it is necessary to be able to estimate the future
trading of the property.
2.1.3 The valuation will include:
the interest in the land and buildings
trade fixtures, fittings, furniture and equipment
the operational arrangements
the markets perception of the trading potential,
together with an assumed ability to obtain or
renew existing licences, consents and certificates.
Wet and dry consumable stock, also known as stock in
trade, and, where appropriate, badged items that do
not pass on a disposal are excluded from the valuation.
2.1.4 When valuing hotels as fully equipped and
operational entities, the valuer will be reflecting the
same methodology (or a combination of
methodologies) as adopted by prospective purchasers.
Such approaches will vary depending on the particular
type of hotel and market conditions at the particular
point in time. It is important that for each instance the
valuer recognises the various market methodologies,
which include the:
(a) income approach;
(i) capitalisation of a stabilised years
assessment of fair maintainable operating
profit (FMOP)
(ii) discounted cash flow (DCF) method
(b) direct comparable or market approach.
6 RICS information paper, Asia
In estimating the operating profit (and the income for
the DCF method) it is recommended that the accounts
be prepared in accordance with The Uniform System
Of Accounts for the Lodging Industry. The fair
maintainable operating profit (FMOP) is calculated,
reflecting the prospective purchasers EBITDA after an
annual allowance for furniture, fittings and equipment
and a reserve for repairs.
It is common in many locations for there to be a
lack of comparable sales. It is therefore usual for a
number of alternative methodologies to be adopted
to enable a range of approaches to the calculation
of the value to be considered.
It is usual for the purchaser of hotels to have regard
to the future trading potential of the property. Many
of the markets in Asia are developing and changing
and hence the calculation of a single FMOP may be
difficult and not always reflect the longer term
potential of the property.
2.1.5 Methods (a) and (b) require the consideration and
analysis of trading performance. Method (a)(i) requires
an explicit assessment of trading projections over the
next 1 to 3 years (or until trading has stabilised). For
method (a)(ii), the assessment of trading projections
should be over a longer period of time say 5 to 10
years. Method (b) contains implicit assumptions about
future trading.
2.1.6 Such assessment and analysis of historic
performance is generally from the viewpoint of a
prospective purchaser or operator. In this context, it is
important to note that current and past performance is
no guarantee as to future potential. Where vacant
possession is available the task of the valuer is
therefore to assess future trade by a reasonably
efficient operator (REO), rather than necessarily by the
existing operator. Where the property is subject to an
existing management agreement or lease it may be
necessary to have regard to the assessment of the
future trade of the operator that is managing the
business and the extent to which this can be changed
if the existing operator is not considered to be an REO.
2.1.7 Where other assumptions are made, or various
occupancy structures are in place (for example, where

a hotel is subject to a management agreement), these
should be clearly stated in the report.
2.1.8 Current performance may either overstate or
understate the markets perception of trading potential.
2.1.9 In assessing the value of a hotel investment, the
level of rent in relation to profitability will be relevant, as
well as the likelihood of re-letting the property at the
end of the lease (and the potential rent).
2.2 Trading potential and personal
goodwill
2.2.1 The valuer may need to distinguish between the
trading potential that runs with a property and the
personal goodwill of the operator (see Red Book VPGA
4, paragraph 2). Personal goodwill may need to be
excluded from the valuation. The valuer may also need
to consider the extent to which trade may be replaced
or re-established by an incoming operator and how
that would be reflected by a prospective purchaser or
operator in a bid for the property. However, if the
existing operator is to stay and manage or lease the
property, the valuer needs to consider if a prospective
purchaser would anticipate similar levels of future cash
flow and, if necessary, reflect this in the valuation to
the extent that a reasonable prospective purchaser
would do so.
2.2.2 The valuer will need to identify if the valuation
will include a brand name, or the rights to a trading
name. If it does then the trading potential associated
with that name should be included. If, in the valuers
opinion, a prospective purchaser bidding for the
property in the market would believe that the hotel sold
without the brand name might not trade to the same
level as when it was associated with the brand name,
then the difference in value should be identified, where
appropriate. Conversely, where a hotel without an
existing brand or trading name is likely to be
purchased by an operator with the benefit of a brand,
then the increase or change in earnings and resultant
value should be reflected. The circumstances and
content of any management contract or franchise
agreement that relates to the business, along with any
beneficial or negative value that may result from this,
will need investigation. The valuer should reflect the
intentions of potential purchasers when addressing
these issues.
2.2.3 If the valuer considers that the value of the
property in an alternative use is likely to exceed the
market value of the property subject to its existing use,
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the client should be notified and consideration given as
to whether a valuation of the alternative use is
appropriate.
2.2.4 To comply with Red Book VPS 3 paragraph 7(h),
Nature and source of the information relied on, the
source and basis of the trading figures (actual and/or
projected) and other trading information must be stated
in the report. All trading figures provided and adopted
in the valuation should be stated exclusive of
consumption or other tax on revenues or equivalent.
2.2.5 In assessing future trading potential and
profitability on either a stabilised assessment or DCF
approach, a number of factors that can influence future
trading may be considered. Such factors can include a
change in supply to any particular market (e.g.
additional hotels being built), changes in legislation
affecting future profitability (such as increases in the
minimum wage), or economic or other trends that
might give rise to a cyclical business.
2.2.6 Where the method adopted is as specified in
paragraph 2.1.4(a), these factors will tend to be
reflected in the capitalisation factor (all risks yield)
and/or the FMOP. Where the DCF approach is used,
these factors will be reflected primarily in the cash flow
over the period of time adopted by the valuer, and/or in
the discount rate applied.
2.2.7 It is recommended that the valuation method(s)
adopted by the valuer reflects that generally used by
the market for the type of property under
consideration. The three different methods mentioned
in paragraph 2.1.4 may be considered separately or
together, depending on the type of hotel and market
practice when submitting bids for such properties. On
the other hand, different approaches may result in
different values, so the valuer has to be sufficiently
experienced to know what market practice would be.
2.2.8 Detailed management accounts for an individual
hotel, showing all items of income and expenditure,
provide the base information for a valuer. Particular
matters to consider include:
whether the stated revenues and expenditures are
in line with those considered achievable by an
REO, or are specific to the actual operator
outgoings, such as marketing, training,
accountancy, depreciation, cyclical repairs or head
office management expenses in their individual unit
management accounts (companies with a number
of outlets may not show these figures)
annual cost of any franchise or royalty under which
the hotel may be operating
RICS information paper, Asia 7
Capital and rental valuation of hotels in Asia
any adjustments for management salaries or
directors remuneration (accounts of an owner-
occupier business may not show these)
management fees, including base fees, incentive
fees and marketing fees
the extent to which costs may be fixed or variable
in nature. Some costs in hotels vary in relation to
matters such as changes in occupancy levels and
the valuer needs to reflect this in any income and
cost estimations
depreciation policies, which can vary it is
important that the valuer adds back depreciation
when assessing FMOP
adjustments reflecting the annual cost of repairing,
maintaining and renewing the property and its
fixtures, fittings, furniture and equipment to an
appropriate standard
refitting and re-equipping costs. Hotels require this
throughout their lifetime. It is important that the
valuer takes into consideration the time, income,
cost and impact on profits of such events,
especially if major capital investment is likely to be
required in the near future. In this case, an amount
may be deducted from the valuation to reflect this.
2.2.9 The valuer should be reasonably satisfied as to
the accuracy and reliability of the trading information
and/or projections supplied for the purpose of the
valuation. These details should be critically examined
against the valuers knowledge of other hotels
operating in similar trading circumstances. If in doubt
as to the veracity of the information supplied,
verification should be sought, with the valuation being
referred back for review in the event of any material
discrepancies arising from the verification process. The
valuer is not acting as an accountant or auditor but
should assess the figures by having regard to the
broader market.
2.2.10 The accuracy and reliability of trading
information, which will normally follow the Uniform
System of Accounts (an agreed presentation format for
hotel trading accounts), is generally established by the
auditing process. The valuer will need to be aware of
the reliability of audited and unaudited figures, and will
need to consider whether or not the accounts are
qualified or are a preliminary report.
2.2.11 If detailed trading information is not made
available, or is of insufficient quality, or if the accuracy
and reliability of trading information cannot be verified,
the valuer must refer to this in the report (as required
by Red Book VPS 3 paragraph 7(h)). The assessment
of the hotels trading potential relies on the valuers
expertise and judgment.
8 RICS information paper, Asia
2.2.12 The valuer should have regard to the business
mix, as well as the risks and potential profit of the
component elements. This will include accommodation
income, conference and banqueting income, food and
beverage sales together with leisure and other income
streams, such as parking.
2.3 Comparable approach
2.3.1 When comparing one hotel with another,
consider the following factors (and apply them to all
valuation approaches) in both capital and rental
valuations:
tenure and relevant lease provisions
comparables, which need to be clearly identified
and analysed in relation to the subject property
they may differ in terms of location, room sizes
and amenities, facilities, trading records, business
mix, operating costs, size of property, trading
opportunities, timing of transaction, presence of
special purchasers
existing and potential competition and its impact
on trade
quality of the operation this may be reflected in
its star rating, or else in the size of rooms, the
quality of fixtures, fittings, furnishings and
equipment, and the resultant trade
existence of any franchise or management
agreement or sublease(s)
existence of, and conditions attached, to any
planning permission or redevelopment potential
existence and impact of conservation areas, town
planning and listed building constraints
impact of any actual or potential contamination of
the property
outstanding repairs, maintenance and renewals
any fixtures, fittings or equipment that are subject
to lease purchase, hire or rental agreement, and
how they are to be considered.
2.3.2 The valuer needs to exercise caution in
relation to the approach taken when marking these
adjustments.
2.4 Capitalisation of maintainable profit
2.4.1 The valuer may decide that the correct approach
for calculating the capital value is by using a market-
derived FMOP based on historic, current and projected
trading figures over a period of 1 to 3 years (or until
trade is stabilised). In such a case, the valuer should
assess the FMOP and apply a capitalisation rate to it.

This figure will need to be discounted to reflect the
period of time between the valuation date and the year
in which trade stabilised.
2.4.2 Determination of the capitalisation factor applied
should be derived from market observations and
specific risks assessment attributed to the future
income but will also rely on the experience and
judgment of the valuer. It should reflect the valuers
opinion of the market perception regarding the risk,
security and opportunities for growth associated with a
particular hotel. It is essential that the valuer has
detailed knowledge of the returns on capital required
by prospective operators, as well as the current market
conditions and trends.
2.4.3 It is also important that the valuer refers to any
relevant comparable transactions in order to decide the
level of yield that is appropriate.
2.4.4 Comparables are not only an important
consideration for the market yield applied to a FMOP,
but also to the market approach to detailed profit and
loss figures, including gross profit levels, wages and
other costs, as well as net profit margins.
2.5 Discounted cash flow method
2.5.1 Potential purchasers may undertake a DCF in
determining the price they are prepared to pay for a
property. This is particularly the case for new
developments. In these circumstances, the valuer will
reflect the market and adopt a DCF method to value
the property.
2.5.2 Issues to consider in relation to this method
include, but are not limited to:
number of years over which the cash flow is
applied
capitalisation rate (yield) applied at the end of the
term
discount rate adopted
whether inflation is built into the cash flow
what other variables need to be considered in
respect of the cash flow in the future, including
those items mentioned in paragraph 2.2.8
trading profile of the hotel
initial and running yields, and internal rate of return
(IRR) as well as the terminal value.
2.5.3 When adopting the DCF method it is important
that market transactions (i.e. comparables) are
analysed reflecting the same method as that used in
the valuation. The required details may be more difficult
to obtain where the DCF method is adopted. However,
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market transactions will assist in assessing, among
other things, the discount rate to be adopted, the IRR
sought and the general approach taken by the market
when bidding for a property on a DCF basis.
2.6 Management contracts
2.6.1 Unlike most other types of property investments,
hotels are subject to not only occupational leases, but
also management contracts. For this type of contract,
the owner of a hotel effectively grants a management
contract to an operator who, in return for management
fees, runs the hotel on behalf of the owner. The fees
are often based on a percentage of turnover, together
with a higher percentage of gross operating profit.
2.6.2 Although the property is managed by the
contracted operator on behalf of the owner, the owner
will, in many instances, still have more than a passive
role in the operation of the hotel. For example, most
management contracts are drafted so that the owner,
not the operator, employs staff (even though they work
for the operator).
2.6.3 Hotels subject to management contracts may be
considered to be a hybrid between an operational
entity and an investment. In such circumstances,
valuers should again ensure that they have the
necessary experience in valuing hotels that are subject
to management contracts.
2.6.4 Broadly speaking the three methods specified
previously are equally applicable to the valuation of
hotels subject to management contracts. The valuer
needs to ensure that not only franchise fees (where
appropriate) are included in any trading figures, but
also management fees, as well as a fixtures, fittings
and equipment reserve (which would be considered
normal in the case of a management contract).
2.7 Rental valuations
2.7.1 There are two common approaches to the
assessment of the rental value of hotels:
a profits basis method and
by reference to comparables.
2.7.2 A profits basis method is generally used where
there are often few, if any, comparables. Where the
valuer decides that the correct method for assessing
market rent is by using a market-derived FMOP based
on historic, current and projected trading figures over a
period of 1 to 3 years (or until trade is stabilised), the
valuer assesses a FMOP accordingly. Further
adjustments are made to the FMOP to reflect tenants
RICS information paper, Asia 9
Capital and rental valuation of hotels in Asia

improvements, fitting out costs and working capital. A

tenants bid is then applied to the (adjusted) FMOP to
reflect the risk to a landlord of providing the property,
and reward to a tenant for operating the hotel. The
level of the tenants bid will depend upon a range of
factors including:
location
consistency and level of trade
existing and future competition
detailed lease terms.

2.7.3 In relation to the lease terms, the valuer will need

to understand the specification of the property that is
subject to the rental valuation, i.e. whether it is fully
fitted, first fix or shell.

2.7.4 The other approach to rental valuation is by

reference to comparables. In this regard, the points
made in 2.7.2 and 2.7.3, particularly in relation to the
specification, are very important so that comparables
are genuinely comparable.

2.7.5 When valuing a property subject to a lease it is

important to establish the rental payable under the
lease in comparison with the ability of the business to
support such rental. This may be difficult as the
relevant information may not be available. However
ascertaining the security of the income is an important
element in the valuation of leased hotels.

2.8 Apportionments
2.8.1 Where an apportionment of the valuation is
required for depreciation purposes, Red Book UK
appendix 4, Accounting for depreciation and
associated apportionments under UK GAAP, contains
relevant guidance. Where other apportionments are
requested, Red Book VPGA 4 paragraph 8,
Apportionment, will be applicable.

10 RICS information paper, Asia

 rics.org

3 Licences, consents, certificates and

permits

3.1 When hotels are sold as fully equipped and state in the report the assumptions that have been
operational entities, the new owner is normally made, and to recommend further confirmation by the
expected to renew the licences or consents. The new clients professional adviser.
owner also usually takes over the benefit of existing
approvals, certificates and permits, together with any
future bookings, which are an important part of the
ongoing business. The valuer will need to point out that
the value could be reduced if such an assumption is
not validated, or if the licences and other approvals are
lost or are in jeopardy.

3.2 In view of their importance to the ongoing

business, the valuer should state in the report whether
there has been an inspection of the licences relating to
the hotel. Given the range of jurisdictions and the
uncertainly as to the extent of the relevant rules and
regulations to be complied with, it is recommended
that a statement be included in the report to the effect
that the valuer has not checked that the property fully
complies with all such requirements, or that it relies
upon a report on title from the clients solicitors.

3.3 The relevant licences will vary by location and the

valuer should ascertain the relevant required licences
and enquire as to compliance with other local laws and
regulations such as:

those in relation to planning, or health and safety

whether the premises have relevant consent, and

whether there are any future highway or other
infrastructure proposals affecting access, planning,
parking and other relevant matters

whether the property is located in an area liable to

flooding or subsidence

whether the property is subject, or may become

subject, to contamination

whether the premises benefit from means of

escape provisions that will satisfy the fire officer or
similar statutory authority, and whether these
depend on the agreement of any adjoining owners

whether the property is within an area that protects

buildings or limits development or redevelopment.

3.4 Where it is not possible to verify information, the

valuer is required by Red Book VPS 3 paragraph 7(i) to

RICS information paper, Asia 11

Capital and rental valuation of hotels in Asia

4 Valuations for secured lending purposes

4.1 The general requirements for valuations for will also need to be equally transparent in the report.
secured lending purposes are set out in Red Book The valuer should explain the difference between the
VPGA 2. value with special assumptions compared to the value
without special assumptions.
4.2 Valuations based on trading potential are valid for
secured lending purposes, as purchasers in the open
market would tend to bid on this basis. However, the
valuer will need to state clearly that the value based on
trading potential excludes any personal goodwill.

4.3 In stating a value for secured lending purposes,

the sensitivity of the value to changes in future trading
potential will need to be emphasised. The report should
indicate the factors that may have an impact on the
value, and how market perception of risks and
opportunities associated with the future trading
potential at the property may be affected.

4.4 Unlike other types of property, when valuing for

secured lending purposes lenders may ask the valuer
to provide not only the market value of the hotel as a
fully equipped and operational entity, but also its
market value under various special assumptions. This
may include the special assumption that the property is
closed, the inventory is removed and the licences are
in jeopardy. The valuer will need to be able to provide
evidence of sales of hotels in such circumstances, and
to assess the differential between a sale of such a
hotel and the sale of a hotel as a fully operational
entity. Where there are no comparables, the valuer
should state this clearly.

4.5 Particularly in relation to hotel developments,

lenders may ask for an indication of value of the fully
operational hotel on either:

the day one value of the hotel, which is usually

the value of the hotel on the special assumption
that it is fully developed, equipped and ready to
operate, but has not yet commenced trading or

the value of the hotel on the special assumption

that it is fully equipped and operational, and has
traded for a period of time so that trade has
stabilised.

In each case, the indication of value is prepared on the

basis that the special assumption is made on the
valuation date, which is no later than the date of the
report. The valuer will need to be very clear with the
client and confirm in the terms of engagement what is
meant by each of the special assumptions. The valuer

12 RICS information paper, Asia

 rics.org

5 Other property

5.1 Where a property, such as a hotel, has mixed

uses, this information paper may be relevant to the
consideration of the value of the hotel element.
However, it should be appreciated that the value of
such properties may not necessarily be the same as
the sum of the value of the component uses.

5.2 When a mixed-use project is valued in its entirety

it may be possible that different valuation approaches
will be used for each component based on local
market practice. For example, a residential or office
block may be sold strata (that is divided into, smaller,
individual lots) title in that market (and thus the sales
comparison method may be used), while the retail and
hotel components are retained (and thus the income
approach is used). In these cases each component will
be assigned its own value, which will then be
aggregated into a total for the whole project. In such
circumstances, the value of each component will reflect
the fact that it is part of a larger mixed-use scheme
and will benefit from the synergies between the uses.

5.3 If the whole project is retained by a single owner

as an investment with each component being leased
out, whether at a fixed rent or a revenue or turnover
based rent, then the income approach may be used for
the whole project. This may be expressed as a simple
term and reversion or a DCF, but not as a mix of the
two. Since separate net income streams have to be
determined for each component it is usual to use
different capitalisation rates for each. However, but if
looked at as a single investment that cannot, or would
not, be sold in parts then the valuer may use a single
capitalisation rate to reflect the average return
expected from the whole project.

5.4 As stated in 5.2, it should be noted that in some

cases the individual elements may be complementary
and that the value of the total development may differ
from the sum of the individual parts. The existence of a
hotel as part of a mixed-use project may add value to
some of the other elements. It will be important to
ensure that this synergy is reflected in the values,
where appropriate.

RICS information paper, Asia 13

Capital and rental valuation of hotels in Asia

6 Confidentiality

6.1 Information in respect of a trading property may be

confidential. The valuer should use all best endeavours
to preserve such confidentiality, including information
obtained in respect of comparable properties.

14 RICS information paper, Asia

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