Column - Creating Hotel Assets Is Like Solving A Jigsaw Puzzle

While there is a lot of fascination for people who own and build hotels from the public and apprehension from those in the ‘know,’ unless one is in the business of developing hotels, it is hard to understand the trials and tribulations involved in making a hotel ‘work.’ Hotels are like complex jigsaw puzzles in which hundreds of pieces need to be placed just right for the whole picture to come together.

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While developing a hotel, there are many aspects for an owner to consider. If one was to simplify them into eight key components, listed below are the ones worth looking into.

Location

While evaluating the location for potential hotel development, an owner would generally ask the following: Does the location have ‘room’ for a hotel? Is there a catchment whose needs aren’t being addressed? Is there more demand than supply? If a new hotel enters this market in the next three years, what will the catchment look like? Is there a growing demand in the area? What is the purchasing and spending power of the people residing and working in the area? Where will the demand come from? How will this locality grow in the next three to five years? It’s important to note that the location is one that has a ‘ready’ market for the new supply of rooms, in order for the hotel to be able to ramp up quickly and make healthy returns.

Land price

The more ‘ready’ and suitable a location is for a hotel, the more expensive the land is likely to be. Land prices can make or break the viability of a hotel, so buying at the right price is the key. There is no thumb rule for the price to pay for land as it completely depends on the market rates and the revenues one can expect from the hotel. The feasibility study is crucial at this stage because overestimating revenues can lead to overpaying for the land and underestimating revenues can lead to underbidding for the property. As a result, one may lose out on the opportunity. Alternatively, if the land is too expensive, one can evaluate leasing the land for at least 30 plus years or even creating the hotel as part of mixed-use development to keep the land cost under control.