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RICS information paper

RICS Professional Guidance, Asia

Capital and rental valuation of

hotels in Asia
1st edition

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

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,
electronic, or mechanical, including photocopying, recording, taping or
web distribution, without the written permission of RICS or in line with the
rules of an existing licence.

Typeset in Great Britain by Columns Design XML Ltd, Reading, Berks

Capital and rental valuation of hotels in Asia


RICS Valuation Professional standards (the Red 1


Acknowledgments 2

RICS professional guidance 3

1 Introduction 5

2 Valuations of hotels as fully equipped and operational 6

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 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

RICS information paper, Asia 1

Capital and rental valuation of hotels in Asia


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 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, 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 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

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

4 RICS information paper, Asia

1 Introduction

1.1 Hotels are among those types of property from the operational entity is normally the primary
generally referred to as trade related property. They concern of purchasers and, hence, valuers.
are normally bought and sold having regard to their
1.7 Valuers who prepare valuations of trade related
trading potential.
property need to have knowledge of the operational
1.2 This information paper relates only to the valuation aspects of the property type, and of the industry as a
of an individual property (or properties) that is valued whole, which is fundamental to the understanding of
having regard to its trading potential. Valuations of market transactions and the analysis required.
businesses will be covered by separate guidance. This
1.8 The following matters are considered:
information paper includes properties valued on the
basis that vacant possession is available as well as general approach to be adopted for the valuation
those to be valued as investments (i.e. without vacant of hotels
possession). trading potential
1.3 VPGA 4, Valuation of individual trade related licences, consents, certificates and permits
properties, RICS Valuation Professional Standards the various occupational structures

2014 (the Red Book) defines trade-related property as
any type of real property designed for a specific valuation of hotels for secured lending purposes.
type of business where the property value reflects the 1.9 For properties that are occupied, or are capable of
trading potential for that business. VPGA 4 considers being occupied, as hotels, but are not trading, such as
the criteria to be adopted by valuers when assessing new hotels or those closed for some reason, the same
market value or market rent for an individual trade principles and approach may be applied, with
related property. It relates to a wide range of such appropriate adjustment and weighting attached to the
properties, including hotels, public houses, bars, various factors affecting value. In such circumstances,
restaurants, nightclubs, theatres or cinemas, and valuers may also need to determine whether it is
various other types of leisure property. The valuer appropriate to consider alternative uses of such
should also have regard to the International Valuation properties on a highest and best use basis.
Standards 2013, IVS 310 Valuations of Real Property
Interests for Secured Lending, G13, Trade Related

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

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 In estimating the operating profit (and the income for
the DCF method) it is recommended that the accounts
2.1.1 Properties that are fully equipped and trading as be prepared in accordance with The Uniform System
operational entities are normally valued on their Of Accounts for the Lodging Industry. The fair
estimated future trading potential as at the valuation maintainable operating profit (FMOP) is calculated,
date. reflecting the prospective purchasers EBITDA after an
2.1.2 Hotels are usually occupied and operated on one annual allowance for furniture, fittings and equipment
of the following bases: and a reserve for repairs.

with vacant possession, i.e. owner-operated or It is common in many locations for there to be a
franchised lack of comparable sales. It is therefore usual for a
subject to a management agreement number of alternative methodologies to be adopted
subject to a lease. to enable a range of approaches to the calculation
of the value to be considered.
In all cases the valuer needs to be able to estimate the
future cash flows to the owner of the interest being It is usual for the purchaser of hotels to have regard
valued and the risks associated with such cash flows. to the future trading potential of the property. Many
Hence it is necessary to be able to estimate the future of the markets in Asia are developing and changing
trading of the property. and hence the calculation of a single FMOP may be
difficult and not always reflect the longer term
2.1.3 The valuation will include:
potential of the property.
the interest in the land and buildings
trade fixtures, fittings, furniture and equipment 2.1.5 Methods (a) and (b) require the consideration and

analysis of trading performance. Method (a)(i) requires

the operational arrangements
an explicit assessment of trading projections over the
the markets perception of the trading potential,
next 1 to 3 years (or until trading has stabilised). For
together with an assumed ability to obtain or
method (a)(ii), the assessment of trading projections
renew existing licences, consents and certificates.
should be over a longer period of time say 5 to 10
Wet and dry consumable stock, also known as stock in years. Method (b) contains implicit assumptions about
trade, and, where appropriate, badged items that do future trading.
not pass on a disposal are excluded from the valuation.
2.1.6 Such assessment and analysis of historic
2.1.4 When valuing hotels as fully equipped and performance is generally from the viewpoint of a
operational entities, the valuer will be reflecting the prospective purchaser or operator. In this context, it is
same methodology (or a combination of important to note that current and past performance is
methodologies) as adopted by prospective purchasers. no guarantee as to future potential. Where vacant
Such approaches will vary depending on the particular possession is available the task of the valuer is
type of hotel and market conditions at the particular therefore to assess future trade by a reasonably
point in time. It is important that for each instance the efficient operator (REO), rather than necessarily by the
valuer recognises the various market methodologies, existing operator. Where the property is subject to an
which include the: existing management agreement or lease it may be
(a) income approach; necessary to have regard to the assessment of the
future trade of the operator that is managing the
(i) capitalisation of a stabilised years
business and the extent to which this can be changed
assessment of fair maintainable operating
if the existing operator is not considered to be an REO.
profit (FMOP)
2.1.7 Where other assumptions are made, or various
(ii) discounted cash flow (DCF) method
occupancy structures are in place (for example, where
(b) direct comparable or market approach.

6 RICS information paper, Asia

a hotel is subject to a management agreement), these the client should be notified and consideration given as
should be clearly stated in the report. to whether a valuation of the alternative use is
2.1.8 Current performance may either overstate or
understate the markets perception of trading potential. 2.2.4 To comply with Red Book VPS 3 paragraph 7(h),
Nature and source of the information relied on, the
2.1.9 In assessing the value of a hotel investment, the
source and basis of the trading figures (actual and/or
level of rent in relation to profitability will be relevant, as
projected) and other trading information must be stated
well as the likelihood of re-letting the property at the
in the report. All trading figures provided and adopted
end of the lease (and the potential rent).
in the valuation should be stated exclusive of
consumption or other tax on revenues or equivalent.
2.2 Trading potential and personal 2.2.5 In assessing future trading potential and
goodwill profitability on either a stabilised assessment or DCF
approach, a number of factors that can influence future
2.2.1 The valuer may need to distinguish between the
trading may be considered. Such factors can include a
trading potential that runs with a property and the
change in supply to any particular market (e.g.
personal goodwill of the operator (see Red Book VPGA
additional hotels being built), changes in legislation
4, paragraph 2). Personal goodwill may need to be
affecting future profitability (such as increases in the
excluded from the valuation. The valuer may also need
minimum wage), or economic or other trends that
to consider the extent to which trade may be replaced
might give rise to a cyclical business.
or re-established by an incoming operator and how
that would be reflected by a prospective purchaser or 2.2.6 Where the method adopted is as specified in
operator in a bid for the property. However, if the paragraph 2.1.4(a), these factors will tend to be
existing operator is to stay and manage or lease the reflected in the capitalisation factor (all risks yield)
property, the valuer needs to consider if a prospective and/or the FMOP. Where the DCF approach is used,
purchaser would anticipate similar levels of future cash these factors will be reflected primarily in the cash flow
flow and, if necessary, reflect this in the valuation to over the period of time adopted by the valuer, and/or in
the extent that a reasonable prospective purchaser the discount rate applied.
would do so.
2.2.7 It is recommended that the valuation method(s)
2.2.2 The valuer will need to identify if the valuation adopted by the valuer reflects that generally used by
will include a brand name, or the rights to a trading the market for the type of property under
name. If it does then the trading potential associated consideration. The three different methods mentioned
with that name should be included. If, in the valuers in paragraph 2.1.4 may be considered separately or
opinion, a prospective purchaser bidding for the together, depending on the type of hotel and market
property in the market would believe that the hotel sold practice when submitting bids for such properties. On
without the brand name might not trade to the same the other hand, different approaches may result in
level as when it was associated with the brand name, different values, so the valuer has to be sufficiently
then the difference in value should be identified, where experienced to know what market practice would be.
appropriate. Conversely, where a hotel without an
2.2.8 Detailed management accounts for an individual
existing brand or trading name is likely to be
hotel, showing all items of income and expenditure,
purchased by an operator with the benefit of a brand,
provide the base information for a valuer. Particular
then the increase or change in earnings and resultant
matters to consider include:
value should be reflected. The circumstances and
whether the stated revenues and expenditures are
content of any management contract or franchise
in line with those considered achievable by an
agreement that relates to the business, along with any
REO, or are specific to the actual operator
beneficial or negative value that may result from this,
will need investigation. The valuer should reflect the outgoings, such as marketing, training,
intentions of potential purchasers when addressing accountancy, depreciation, cyclical repairs or head
these issues. office management expenses in their individual unit
management accounts (companies with a number
2.2.3 If the valuer considers that the value of the of outlets may not show these figures)
property in an alternative use is likely to exceed the
annual cost of any franchise or royalty under which
market value of the property subject to its existing use,
the hotel may be operating

RICS information paper, Asia 7

Capital and rental valuation of hotels in Asia

any adjustments for management salaries or 2.2.12 The valuer should have regard to the business
directors remuneration (accounts of an owner- mix, as well as the risks and potential profit of the
occupier business may not show these) component elements. This will include accommodation
management fees, including base fees, incentive income, conference and banqueting income, food and
fees and marketing fees beverage sales together with leisure and other income
the extent to which costs may be fixed or variable streams, such as parking.
in nature. Some costs in hotels vary in relation to
matters such as changes in occupancy levels and
2.3 Comparable approach
the valuer needs to reflect this in any income and
cost estimations 2.3.1 When comparing one hotel with another,
depreciation policies, which can vary it is consider the following factors (and apply them to all
important that the valuer adds back depreciation valuation approaches) in both capital and rental
when assessing FMOP valuations:
adjustments reflecting the annual cost of repairing, tenure and relevant lease provisions
maintaining and renewing the property and its comparables, which need to be clearly identified
fixtures, fittings, furniture and equipment to an and analysed in relation to the subject property
appropriate standard they may differ in terms of location, room sizes
refitting and re-equipping costs. Hotels require this and amenities, facilities, trading records, business
throughout their lifetime. It is important that the mix, operating costs, size of property, trading
valuer takes into consideration the time, income, opportunities, timing of transaction, presence of
cost and impact on profits of such events, special purchasers
especially if major capital investment is likely to be existing and potential competition and its impact
required in the near future. In this case, an amount on trade
may be deducted from the valuation to reflect this. quality of the operation this may be reflected in
2.2.9 The valuer should be reasonably satisfied as to its star rating, or else in the size of rooms, the
the accuracy and reliability of the trading information quality of fixtures, fittings, furnishings and
and/or projections supplied for the purpose of the equipment, and the resultant trade
valuation. These details should be critically examined existence of any franchise or management
against the valuers knowledge of other hotels agreement or sublease(s)
operating in similar trading circumstances. If in doubt existence of, and conditions attached, to any
as to the veracity of the information supplied, planning permission or redevelopment potential
verification should be sought, with the valuation being existence and impact of conservation areas, town
referred back for review in the event of any material planning and listed building constraints
discrepancies arising from the verification process. The impact of any actual or potential contamination of
valuer is not acting as an accountant or auditor but the property
should assess the figures by having regard to the outstanding repairs, maintenance and renewals

broader market.
any fixtures, fittings or equipment that are subject
2.2.10 The accuracy and reliability of trading to lease purchase, hire or rental agreement, and
information, which will normally follow the Uniform how they are to be considered.
System of Accounts (an agreed presentation format for
2.3.2 The valuer needs to exercise caution in
hotel trading accounts), is generally established by the
relation to the approach taken when marking these
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. 2.4 Capitalisation of maintainable profit
2.2.11 If detailed trading information is not made 2.4.1 The valuer may decide that the correct approach
available, or is of insufficient quality, or if the accuracy for calculating the capital value is by using a market-
and reliability of trading information cannot be verified, derived FMOP based on historic, current and projected
the valuer must refer to this in the report (as required trading figures over a period of 1 to 3 years (or until
by Red Book VPS 3 paragraph 7(h)). The assessment trade is stabilised). In such a case, the valuer should
of the hotels trading potential relies on the valuers assess the FMOP and apply a capitalisation rate to it.
expertise and judgment.

8 RICS information paper, Asia

This figure will need to be discounted to reflect the market transactions will assist in assessing, among
period of time between the valuation date and the year other things, the discount rate to be adopted, the IRR
in which trade stabilised. sought and the general approach taken by the market
when bidding for a property on a DCF basis.
2.4.2 Determination of the capitalisation factor applied
should be derived from market observations and
specific risks assessment attributed to the future 2.6 Management contracts
income but will also rely on the experience and
judgment of the valuer. It should reflect the valuers 2.6.1 Unlike most other types of property investments,
opinion of the market perception regarding the risk, hotels are subject to not only occupational leases, but
security and opportunities for growth associated with a also management contracts. For this type of contract,
particular hotel. It is essential that the valuer has the owner of a hotel effectively grants a management
detailed knowledge of the returns on capital required contract to an operator who, in return for management
by prospective operators, as well as the current market fees, runs the hotel on behalf of the owner. The fees
conditions and trends. are often based on a percentage of turnover, together
with a higher percentage of gross operating profit.
2.4.3 It is also important that the valuer refers to any
relevant comparable transactions in order to decide the 2.6.2 Although the property is managed by the
level of yield that is appropriate. contracted operator on behalf of the owner, the owner
will, in many instances, still have more than a passive
2.4.4 Comparables are not only an important role in the operation of the hotel. For example, most
consideration for the market yield applied to a FMOP, management contracts are drafted so that the owner,
but also to the market approach to detailed profit and not the operator, employs staff (even though they work
loss figures, including gross profit levels, wages and for the operator).
other costs, as well as net profit margins.
2.6.3 Hotels subject to management contracts may be
considered to be a hybrid between an operational
2.5 Discounted cash flow method entity and an investment. In such circumstances,
valuers should again ensure that they have the
2.5.1 Potential purchasers may undertake a DCF in
necessary experience in valuing hotels that are subject
determining the price they are prepared to pay for a
to management contracts.
property. This is particularly the case for new
developments. In these circumstances, the valuer will 2.6.4 Broadly speaking the three methods specified
reflect the market and adopt a DCF method to value previously are equally applicable to the valuation of
the property. hotels subject to management contracts. The valuer
needs to ensure that not only franchise fees (where
2.5.2 Issues to consider in relation to this method
appropriate) are included in any trading figures, but
include, but are not limited to:
also management fees, as well as a fixtures, fittings
number of years over which the cash flow is
and equipment reserve (which would be considered
normal in the case of a management contract).
capitalisation rate (yield) applied at the end of the
discount rate adopted 2.7 Rental valuations
whether inflation is built into the cash flow 2.7.1 There are two common approaches to the
what other variables need to be considered in assessment of the rental value of hotels:
respect of the cash flow in the future, including a profits basis method and

those items mentioned in paragraph 2.2.8 by reference to comparables.

trading profile of the hotel
2.7.2 A profits basis method is generally used where
initial and running yields, and internal rate of return
there are often few, if any, comparables. Where the
(IRR) as well as the terminal value.
valuer decides that the correct method for assessing
2.5.3 When adopting the DCF method it is important market rent is by using a market-derived FMOP based
that market transactions (i.e. comparables) are on historic, current and projected trading figures over a
analysed reflecting the same method as that used in period of 1 to 3 years (or until trade is stabilised), the
the valuation. The required details may be more difficult valuer assesses a FMOP accordingly. Further
to obtain where the DCF method is adopted. However, 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:
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

3 Licences, consents, certificates and


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

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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

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

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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