Cornell Study Compares Hotel Valuation Models
In determining accurate values for hotel properties, analysts typically use either of two methods, one based on comparable sales that includes hotel characteristics and another that relies on projected income estimates using capital market variables.
A new study from the Cornell Center for Hospitality Research (CHR) concludes that neither model is superior to the other, and further that combining the two models does not result in more precise hotel valuations.
The CHR report, titled "Do Property Characteristics or Cash Flow Drive Hotel Real Estate Value? The Answer Is Yes," was written by Crocker H. Liu, the Robert A. Beck Professor of Hospitality Financial Management and a professor of real estate at the Cornell University School of Hotel Administration(SHA), and Jack Corgel, a professor of real estate at SHA.
The study compares price estimates based on property characteristics (such as number of rooms, hotel age, location, and market segment) with estimates based on income calculations (such as discounted cash flow and net operating income) to assess which is the most effective in explaining the variation in prices of hotels. Results show that the hotel valuation model based on property characteristics performs as well as the model that only includes income-related variables. The findings also indicate that the implicit prices of hotel property characteristics capture both fixed location income streams and income streams associated with local and national economic conditions.
Regarding which characteristics are significant drivers of hotel valuation, the study shows that a hotel sells for a higher price if it has more rooms, it is newer, and it is located in a central business district. Hotels also command a higher price if they are historic landmarks, have undergone a major renovation, or are in a higher quality hotel segment. Capital market factors, including discount rate and cash flows, are also critical drivers of hotel pricing, the report states.
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