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Feasibility Studies: The essential First Step

Feasibility Studies, Finance

Over the years, it has become increasingly clear that many hotels are struggling because of inadequate facility programming which does not meet market demand, property design which affects operations and operational flow, poor location of the property, project financing decisions that have over leveraged the property subjecting it to exist just to pay off loans, construction and interior design decisions based on owners’ egos rather than with the customer in mind, among other matters.

 

To avoid many of these challenges it is imperative to carry out a feasibility study as the first step before any hotel construction. The study encompasses a detailed market analysis, financial analysis and investment requirements which combined determine the viability of a project.. The following paragraphs highlight key aspects of a feasibility study.

 

Location! Location! Location! The importance of the location for a hotel cannot be stressed enough. Many of us have visited hotels and often asked ourselves what is this sort of property doing in a place like this. Site analysis provides the basis for the market study as this determines the type of facility that would need to be designed to attract, meet and retain client demand. The surroundings of the location have to also be reviewed to determine if this will have a positive or negative impact on the property. Accessibility to the site is critical because if clients have challenges accessing the hotel, they will just go to another one. Visibility of the site impacts marketing, advertising, directional signage requirements. Zoning considerations are critical to feasibilities as various ratios need to be considered subject to the location of the site.

 

Understanding the market demands both current and in the future is a critical element of the study. What competition is there now and what is in the pipeline? What occupancy levels is the market operating at and how will new supply be affected? What will the fair share for the new hotel be? Is the property going to need to cater for leisure, corporate, FITs, MICE market? Should it look at having a mix of short-stay and long-stay accommodation? All these questions help determine the best mix of facilities such as accommodation – number of rooms, room sizes, room types, star rating (influences ADR, occupancy, type of management required); food and beverage facilities; conferencing needs; and other services required – gym, parking, leisure facilities. This ensures that the hotel will be relevant and able to support the market demands once it opens.

 

Once the facility mix is determined, a 10-year financial projection is developed showing the anticipated occupancy, average rate, income and expense projections. The next step is determining the cost of construction based on the built-up area given by the facility mix. Determining how the hotel will be managed is critical as an independent management company might not have the same development costs requirements as international brands.

 

All the steps above are fed into the investment section of the study. Considerations at this point are the facility mix leads to financial projections and development costs. The investment analysis has to determine how to meet the development costs while considering the LTV ratio and financing costs. The project viability is finally determined using leveraged and unleveraged IRR.

 

A feasibility study has multiple uses. It acts as a reference for the Owners, it guides the Architect especially on the facility mix, owners can use it to obtain project financing and to source operators or franchise contracts.

 

Feasibility Studies are one of the key advisory services we provide as Barefoot Consultancy Ltd. Feel free to contact us for more information. We would be delighted to discuss further.

 

#keepsafe

 

By Catherine Gachie | Founder & Managing Director | Barefoot Consultancy Ltd

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