Development Basic fundamentals – 2017
By Giovanni Angelini
Successful hotels are the ones who are build and operate for the long term and the ones who continue to add value to their customers and have durable strategy of competitive advantage.
We cannot get away from the fact that in some instances, hotels are built for different reasons and purposes. The most practiced reason to develop an high-end hotel is as part of a new/large multi-use complex where the hotel normally provides “prestige-status” with the specific objective to drive up the value of the real estate within the new complex. It is clear that in those cases the hotel market and the customers/consumers are not taken into consideration. This is a concern for the industry as those hotels are the first one to apply pricing inconsistency (undercuts) in order to attract volume-occupancy.
Also we cannot avoid that in a number of cases, the objective of the developer/investor is to “build for sale” (early exit strategy) as soon as there is profit to be made. Quick profit is very attractive to many and again in those cases, the market, the customers/consumers and in some instances the employees are not taken into consideration. The “Bona-Fide” developer must take into consideration the above unhealthy development within the industry.
“Build it and they will come” no longer applies; rapid market and spending trends are changing very fast and the expansion of new technologies must be considered in designing the new hotel products. Asian/Regional developers have to spend more time on assessing the markets and do extensive feasibility study/surveys before embarking in a new hotel project regardless of the geographical location. The new products are to be set-up to meet the preferences of the travelers and of the needs/expectations of the local consumers.
“Sleep and Food”, this is what hotels are selling to their customers and the developer must fully understand this and accept the fact that to-do this well it requires knowledge of the market, of the availability/quality of the labour and of practical designs in order to create an efficient/functional hotel product making it easy for the customer to identify and buy it plus the ability to compete in any market situations. The industry has seen a number of “Emotional Driven” developers/buyers, regardless of the market situation, and this has not been positive for the industry as it created pricing and standards inconsistency. Going into the future, stricter discipline will definitely help the new hotel developers and the industry in general.
The need and the comfort of the customers (customer-centered) must be taken into consideration form the very begin of the development process starting from a clear vision & objective, that has to be reflected in the planning, in the designing and in the final works of the hotel project. Architects and designers are to be properly briefed and guided to avoid extravagant and impractical ideas/designs. It is said that “a designer dream is an housekeeping nightmare”. Customers want efficiency, comfort and uncomplicated products/systems.
The present and the anticipated market trends are to be the driving factors on planning a new hotel and it is never too early to address why the customer will eventually choose this particular new hotel once in business. The geographical source of the expected customers, the segmentation, the ever changing distribution & booking systems/practices, the individual travelers vs. the declining of the tour groups, the meeting/event participants etc..are the basis of determining the required hotel facilities i.e.: size and look of the lobby, the mix of bed (Twins vs. Kings size) the function/meeting facilities with the latest in video conferencing, the concept of the restaurants & bars, the importance of the wellness center, the private dining rooms within the restaurants, the parking facilities, the latest in technology systems making it easier for the client to book and for the operator to run the hotel and many other factors. The new hotel must have the ability of making future changes as per market trends/demands and industry evolvements without major physical disturbances/changes.
At the planning and designing stages, a smarter developer must also allocate comfortable space and provision for the latest facilities for the internal customers, the employees. It is a fact that great hotels are made by the employees, not by extravagant architecture nor by expensive crystal chandeliers and this must be embraced in full by the developers. Unfortunately in the past many hotels have not given the necessary attention to employees facilities nor adequate back-of-the-house space. Special attention must be given to training rooms, dining area, rest and recreation, employees activities and others. In some locations, it is also necessary to provide employee housing and the new hotels must get away from the cold/unfriendly dormitory that we have seen in the past.
The industry will encounter serious shortages of skilled labour force and difficulties in retaining good people therefore it is never too early to establish a competitive compensation package and employees welfare with objective to achieve low employees turnover and a full engaged team of people.
The hotel industry has made good progress in the Corporate Social Responsibility (CSR) arena during the past several years however a lot remains to be done in both the community and the sustainability by most of the hotels, the non-branded properties in particular. The hotel industry could practice less soft public relations but more concrete actions in this important area.
As a guide for new developments and for major renovations a worth-while approach would be to strive for some international recognized certification like LEED (Gold) by implementing practical measurable solutions at the design stage of the project specially in; eco-design, building insulation/envelop, sound-proof/acoustics, health & safety, internal and external traffic flow, efficiency of the vertical transportation, energy savings, water efficiency, recycling, CO-2 emission reduction, use of natural lighting and many others. Of course, the LEED Certification comes at a cost however the return on the investment is achieved with few short years (3-4) and definitely the hotels will achieve substantial savings and operational efficiency in the medium-long term that it will reflect in the performance/profit of the new projects.
And of course, new hotels have to be robot-friendly in all front & back of house.
Luxury, Upper Upscale, Upscale, Midscale, Economy, Budget OR;
5-Star, 4-Star, 3-Star, 2-Star, 1-Star
GROSS FLOOR AREA, GFA. (Indication) including Basement for new Hotels
based on 400 Keys;
-5-Star, 57,000 M2. -4-Star; 45,000 M2 -3-Star; 38,000 M2.
Profitable area around 60-65% and non-profitable area around 35-40% of total GFA.
(Rooms: 56-57%, Front of House: 18-19% Back of House: 16-17%, M&E: 6-7%,
SCHEDULE; (Indication only)
From the approval/decision time, it normally takes 36 months to complete a new hotel project; 6 months for design, 18 months for the building, 12 months for interior design and Pre-Opening.
PROJECT COST (BREAKDOWN);
-Land, -Construction, - Decoration & FF&E, -Operating equip., -Pre-Opening, Interests Cap. Total.
Define total development cost (with and without land) divided by no. of Keys or Modules.
Also define the total dev. Cost, excluding land, divided by M2.
% of equity.
% of loan, interest rate and repayment schedule.
COST BREAKDOWN BY FIXED ASSET CATEGORY (For amortization purpose);
-Land, -Building, -FF&E, -Plant and Machinery, -Pre-opening Expenses, Total.
Ideally the cost of land not more than 20% of the total development cost.
PROJECTIONS, (10 years);
- Must take into considerable the traditional up & down business cycles.
- Include annual capital improvement costs of around 3% of the GOR.
- Include major renovation at the 7th or 8th year of operation.
- Clear define the Interest Rate and the Amortization Policy including the Pre-opening expense.
PROFITABILITY, Average over 10 years;
-EBITDA as a % over total investment (14%-18%)
-Return on Investment (8%-10%)
-Return on Equity (10%-10%)
-Internal rate of return, IRR (10%-12%)
Define amount of working capital, and source, needed during the first year of operation and thereafter in case the hotel runs at loss for the first couple of years.