Valuing a hotel means looking at the operation and the property at the same time. The metrics investors use — RevPAR, GOP, EBITDA, value per key, capitalisation rate — and how they combine into a valuation.
A hotel owner who asks what their asset is worth often gets very different answers depending on whether they ask a property agent, a hotel operator or a fund. All of them are partly right, because they look at different metrics. Understanding those metrics is the first step to negotiating well.
Operating metrics
- Occupancy: the percentage of rooms sold against rooms available.
- ADR (average daily rate): the average price per room sold.
- RevPAR (revenue per available room): rooms revenue per available room. It combines occupancy and price in a single metric and is the most widely used way to compare hotels.
- GOP (gross operating profit): operating profit before ownership costs such as rent, property insurance and management fees.
- EBITDA: the result after those costs, which matters to anyone buying the operation.
Two hotels with the same RevPAR can have very different EBITDA, depending on the weight of food and beverage, staff costs and overheads. That is why buyers ask for departmental accounts.
The property investor’s logic: the capitalisation rate
An investor buying the property looks at the net income it generates — the operation’s EBITDA after a reserve for maintenance and equipment replacement, or the rent paid by an operator — and divides it by the return they require. That rate is the cap rate, or capitalisation rate.
An illustrative example: a hotel generating net income of one million euros, valued at a seven per cent capitalisation rate, is worth around fourteen million. At the same rate, every additional hundred thousand euros of income adds around one point four million euros of value. The required rate varies with location, segment, operator quality and market timing — and small changes move the value a great deal.
The quick reference: value per key
Many investors compare transactions by price per room. It is useful for framing, but it can mislead: a hotel with small rooms and generous public areas, or with a destination restaurant, does not compare well with one with large rooms and minimal services.
The factors that weigh most on price
- Location and access. The one factor that cannot be changed.
- Condition of the property. Overdue investment is discounted, almost always with a margin.
- Trend in results. Three years of growth are worth more than one exceptional year.
- Operator or brand contracts. They can add value or limit the pool of possible buyers.
- Licensing and classification. Irregularities delay or block a sale.
- Untapped potential. Rooms that could be added, under-used areas, underdeveloped revenue management — the buyer pays for part of that potential if it is demonstrated.
Combining the methods
A serious valuation cross-checks income capitalisation, the EBITDA multiple for buyers of the operation, value per key in comparable transactions and, in some cases, the cost of building new. When the methods converge, the value is defensible. When they diverge, the explanation points to how it can be increased.
GestInvest values hotels and handles their sale and acquisition with operators and investors across Europe and beyond. Read more about our private deals or about why a hotel transaction is not a property deal.
Frequently asked questions
What is RevPAR?
Rooms revenue divided by the number of rooms available in the period. It equals occupancy multiplied by average daily rate.
Is a hotel worth more with or without an operator?
It depends on the buyer. Property investors prefer a contract with a strong operator; operators prefer to buy the hotel unencumbered so they can impose their own brand.
What is the right capitalisation rate?
There is no single one. It varies with the city, the segment, the condition of the asset and market timing, and should be checked against recent comparable transactions.
