Hotel valuations earning multipliers – terminal value: Malta’s scenario

Abstract

Purpose – The purpose of this paper is to establish whether a terminal value is a substantial amount of the final figure in a hotel’s valuation. Malta’s scenario has been delved into. This due to the fact that owing to Malta’s high population density and its restrictive land area, land values attract a high premium as compared with larger developed countries. Other matters such as earnings’ multipliers derived from a cap rate (initial yield), CAPEX has also been delved into. Design/methodology/approach – The methodologies adopted in hotel valuation practice has been delved into. An extensive literature review is undertaken to analyse the earnings multiplier adopted by various authors over the past 30-year period. The hotel cap rate (initial yield) has been compared with similar yields adopted in the institutional and property markets and then compares to market-based data. A discussion is undertaken on the validity of adopting discounted cash flow, as against the short cut market appraisal approach. Capitalization rates, cap rates have also been referred to as obtained from the academic and practitioners field and compared. Depreciation and the anticipated annual accommodation charges have been analysed. A database of hotel rooms value over the past 20-year period has been referred. Findings – A table outlines the earnings’ multipliers in perpetuity or for the limited expected design life for various cap rates. This data will act as a guide in guiding practitioners to establish an earnings’ multiplier to be applied in their valuation methodology. An example in the Appendix clarifies the manner in which this data table is to be utilized. The finding of this example notes that for this hotel in Malta, as constructed on private land, the terminal value for this development hovers around the 30 per cent of the market value. Research limitations/implications – This analysis is based on five valuations as undertaken on five hotels in Malta with classification grades varying from III to V. This notes that the terminal value varies within a range of 9-45 per cent of the total value. This analysis has to be undertaken for other countries for a global range of land terminal values percentages to be established. Practical implications – Establishing the terminal value of a hotel business, will offer greater security for secured lending facilities required. It will further act as an important tool to establish the feasibility of a hotel development. Originality/value – Updated insight is given to existing hotel valuation methodologies by delving into the workings of the earnings’ multiplier and establishes that in today’s market the terminal value of the hotel basis has to be accounted for. The above findings are based on a link between theory and practice.