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COVID-19 Pandemic : Affecting Hotel Valuation

COVID-19 Pandemic - Affecting Hotel Valuation

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Lua de Villa

Lua de Villa

CRESCO Accountant

If there is one place that gives justice to the notion of a tropical paradise, it has got to be Seychelles. The small country from the Indian Ocean archipelago is known for its mangroves, coral reefs, white sandy beaches and luxury resorts. This makes Tourism the main pillar of the Seychelles economy, earning from foreign exchanges and hotels and restaurants – where 25% of its citizen workforce is tied.

Compared with other countries, the idyllic island is spared by COVID-19 where 149 cases had only been reported as to date. The country’s swift action against the virus contributed to such, where the banning of cruise ships and international flights and major lockdown are strictly implemented. Nonetheless, the global crisis has still ravaged the tourism of one of the top destinations in the world. Hospitality and real estate industry was the first asset class to experience the effects of the market disruption when public gatherings and travels bans were shut done in late February 2020. The negative impact hits direct revenue losses for hotels, resorts and conference centers and real estate business. 

Stakeholders from such industries are now facing one of the factors of their business’ going concerned – the hotel valuation. Determining the market value of real estate assets is one of the major challenges. It should be reflective of the collective perceptions and prevailing uncertainty of the market while applying the valuation standards where the buyer and seller must be willing and not under abnormal pressure.

One of the biggest changes in this pandemic-era is the way hotel business has forced appraisal experts to rely on weekly performance metrics, rather than monthly or annual reports, in order for them to analyze the current situation and make a forecast. At present, the uncertainty to the project is too far into the future, where delivery of timely data is more crucial than ever. Expert says that it is best to focus on where the cash flow of the property will likely be in the next three years, hopefully after the pandemic has subsided. A model referencing the post-2008 downturn may be used.

Another way to see in which hotel valuations are changing to reflect the pandemic-era is in how experts forecast operating expenses. The overnight shift of high occupancy performance of hotels to being empty or near-empty creates a new level of expenditures at a property – a core element of cash flow analysis. In addition, the new cost associated with operation at post COVID-19 must also be factored into the analysis. This includes but not limited to the costs related to cleaning, maintenance and inventory like the PPE on site. For now, experts assume that these new costs will remain on the expenditures for at least the near future.

When quantifying long term perspective, appraisers are modeling the post COVID-19 recovery on prior downturns. At the moment, experts are confident a recovery will happen, they’re just unsure of the exact time line. Although hotel appraisers are currently struggling to evaluate the short term performance of hotels and the present risks as they arrive at valuations, their long-term outlooks seem to remain positive. The optimism is reflected in their professional methodologies.

CRESCO Accounting is a chartered firm providing accounting and audit services in various industries. They are dedicated to helping companies, whether small or big, SMEs, individual business owners as well as large subsidiaries. The company’s services are designed based on the goal of providing proficient and cost-effective accounting solutions to offshore and onshore clientele while guiding and helping them achieve their full business potential.

For more information, you can chat with our live online customer support. We can also set-up a video conference call with our accounting team.

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