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Hotel Valuations in a COVID-19 environment


The impact of COVID -19 has been deep and swift with many hotels across Australia operating at single digit occupancies and numerous hotels deciding to close their doors temporarily.  We are clearly in an extraordinary market and the question arises how do you value hotels in a fair and objective manner when trading is being so heavily impacted ?  In addition there is vastly reduced transactional activity and as yet there are no clear indications of the likely timeline of the conclusion to the Pandemic.


A logical starting point seems to be to see if we can learn from previous disrupters to the market. Although different in many ways, the 9/11 terror attacks and the Ansett collapse which happened just days apart in September of 2001 (almost two decades ago now) is still a point of reference worth examination. The demise of Ansett led to almost 40 per cent of domestic seat capacity being wiped out and the terror attacks in New York changed the mindset of travellers and resultant security measures in the industry thereafter.  These two factors combined had a dramatic impact on tourism worldwide with International arrivals into Australia for October 2001 down by 10 per cent on the previous year, November down by 18 per cent and December down by 7 per cent.  Interestingly at the time, the traditional drive markets experienced a strong summer season.  Evidence collected by the statistical provider STR suggests this trend is once again being experienced in the drive market, particularly around the State Capitals.


SARS coronavirus (SARS-CoV) – was an epidemic which affected 26 countries and resulted in more than 8,000 cases – a stark contrast to the 14.8 million cases of COVID-19 as at 22 July 2020.  The largest decline in International arrivals due to SARS occurred in May 2003 and reflected 18 per cent which is relatively benign again if we compare to the large scale closure of International borders in Australia and around the world.  Sydney Airport is starting to see a recovery in domestic passenger traffic which according to Australian Aviation increased by 25 per cent in May in comparison to April however this still reflected a 97.2 per cent decline on May 2019.  International passengers at Sydney have continued to decline as government backed repatriation flights slowly dry up and currently reflect a 97.4 per cent decline on the same period last year.


The World Travel and Tourism Council Report on Crisis Readiness which was released in November 2019 provides useful insights into how long markets take to recover from major crises.  After analysing the impact of 90 crises between 2001 and 2018, at a national and city level; examining the time to recovery as well as lost arrivals and lost visitor spending WTTC came to the conclusion that the average recovery times for disease outbreaks, such as MERS, Zika and Ebola, was 19.4 months.


Hotels_Charting the Course_Hotel Valuations in a COVID19 environment_Graph 1

Source: World Travel and Tourism Council Report on Crisis Readiness, November 2019



Of the four crisis categories analysed, political instability proved the most challenging, with average recovery times of 22.2 months, minimum 10 months, while terrorist or security-related incidents have the shortest average recovery time of 11.5 months, with a minimum two months.  Additionally, the average recovery times for natural disasters were 16.2 months with a minimum of one month.  Clearly each crisis is unique and what makes COVID-19 extraordinary is its highly contagious nature which can only be slowed down or contained by rapid and very draconian measures.  Clearly the big unknown is if a vaccine can be found and if so how long it will take to find and then produce it on a large scale so that it can be used around the world.  There does appear to be some genuine progress being made with several vaccines at human trial stage.  However current thinking is we will not see the return of any significant International Flights until next year with Qantas targeting mid-2021. Typically the industry is modelling a three to four year recovery period to get back to 2019 revenue levels.

Looking specifically at the Sydney market, the following graph provides a snap shot of the impact of previous extraordinary events. In commenting, we would first caution that care needs to be taken when considering the 9/11 and Ansett decline to the previous year as this is comparing to the extraordinary strong trading of the Sydney Olympics in September 2000.  It can also be seen that the GFC had more of an impact than SARS, most likely as more market segments were impacted such as corporate business travel not just the international tourism market.

Hotels_Charting the Course_Hotel Valuations in a COVID19 environment_Graph 2 

Source: ABS, Small Area Data/ Colliers International



We now have STR data for the first half of the calendar year for 2020 which confirms that the impact of COVID -19 only really started to be felt in the main Australian markets in the latter half of March, with the full impact being experienced in the second quarter, all be it with some gradual month on month improvement in May and June as travel restrictions were eased and the resultant improvement in domestic leisure business.  Caution needs to be taken in comparing statistics with previous years due to distortion from a significant number of hotels being closed and not all hotels taking isolation business.

Typically occupancy in the month of June across Australia’s main markets sat between approximately 20 per cent and 35 per cent with Canberra underpinned by Government business, achieving the highest occupancy at 35.8 per cent and Hobart achieving the lowest occupancy at 20.1 per cent and clearly suffering from the closure of its borders to both Domestic and International traffic. Average room rates, similar to occupancy have shown modest recovery in June with Sydney recording the highest rate at $149.56 and Adelaide the lowest at $108.11.  The consequence for the month of June was RevPAR declines in comparison to June 2019 of between approximately 65 per cent and 75per cent.  On a year to date basis the decline is less severe due to the stronger trading in the first quarter with typical RevPAR falls of between 45 per cent and 55 per cent.  The data is summarised below:


Hotels_Charting the Course_Hotel Valuations in a COVID19 environment_Graph 3

Source: STR

Accepting that the scale of the decline in trading in the current market is unprecedented, how do we value in what is an extraordinary market?  Our opinion is there are both quantitative and qualitative tools at our disposal.


Quantitative Sources

These include:

  • Statistical data such as the aforementioned STR so that we have a clear understanding of how the broader market and immediate competitor set are trading in comparison to the hotel we are valuing.
  • Using our internal benchmarking model so we can compare the cost ratios of the subject hotel with industry standards.
  • Our access to a wide range of trading accounts of clients so that we can get an accurate picture of the typical impact of COVID-19 on hotel trading.
  • The tracking of other statistical sources such as passenger numbers entering the State Capital Airports which will be a useful barometer for tracking recovery.
  • Tracking transactional activity in the current market through both Colliers and other agents campaigns.


Qualitative Sources

These include:

  • Feedback from Colliers Hotel Investment Survey which is being conducted on a quarterly basis during the COVID-19 Pandemic. This is a comprehensive investment survey of a cross section of industry participants including owners, operators and consultants with targeted questions covering attitudes on current and likely future buying and selling sentiment together with opinions on the projected recovery in performance in key markets.
  • One to one discussions with key stakeholders in the market including, owners, operators asset managers, bank representatives, other hotel valuers and agents.


With the benefit of this research we are able to approach the valuation process from a more informed perspective, but acknowledging at the same time that we are working in an extraordinary market which is having to operate in a climate with significant restrictions such as State and International border closures, social distancing restrictions etc. Our starting point is that neither sellers or buyers are focussing on the likely low returns that will be generated over the next twelve months or even the returns generated in the much stronger 2019 market.  Instead, the logical focus is on the likely trading over the medium and longer term and the current best estimate of a return to a more normalised market. To reflect this sentiment our valuations now place more emphasis on the ten year discounted cashflow approach where the key parameters are the projected longer term trading of the hotel and likely rate of return an investor will require over this period, as well as the stabilised earnings or stabilised yield approach.  This second approach is probably less well known in the market and is typically based on the next three to four years earnings which is the current thinking on the likely return to more normal trading conditions.  In this approach the first years projected income is capitalised into perpetuity (similar to the traditional capitalisation approach). However where it differs is we then add the present value of the real growth in income projected in the subsequent years two to four years deflated and then capitalised.  These approaches in turn can be checked against the relatively crude barometer of the value on a per hotel room basis where the capital value is divided by the number of hotel rooms and is still a useful yardstick when comparing to hotel transactions in the market, particularly in the absence of any significant income. 


It is our opinion currently that any decline in values is likely from the market’s acceptance of a diminution in earnings due to COVID rather than any evidence that the market is rerating the risk attached to hotel investments and applying higher (softer) capitalisation rates.  This clearly needs to be continually monitored but with finance costs still at all-time lows and predicted to continue to be so for some time, there are currently limited signs of upwards pressure on capitalisation rates. As always the valuer needs to be aware of the particular dynamics of each market he is valuing in as they all have their own specific demand generators and are in different stages of the supply cycle and each asset will also differ in respect to the strength of its brand, capital expenditure requirements etc.



'Charting the Course' series

Colliers International Hotels team have put together a series of articles to help the hotel and tourism industry chart the course to recovery, as one of the sectors most acutely impacted by social distancing measures introduced in response to Covid-19.

For more insights and articles, please click the image below to be redirected to our home page.


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