Understanding Hotel Feasibility Studies

#HotelFeasibilityStudy, #Feasibility, #HarunDagli, #FeasibiltyConsultancy, #HospitalityCode

Throughout my career, I have seen thousands of hotels some is are more impressive than others. One thing always strikes me that most of these hotels built based on;

  • The owner has some plot of land wanted to use it

  • They wanted to get government support, tax exemptions and free credits.

  • Some built in a location that is not suitable for the business, it feeds to personal ego’s and shows off their wealth

  • No feasibility works done prior to or during construction to meet the requirements and demand of the area

  • Most hotels constructed by architects who specialise in residential buildings or shopping centres but not hotels

  • Using the most expensive marbles or material rather than what suits best in the environment

  • Recruiting a lot of staff to fill the ground but not the right people to build, develop and serve to get the most out of the area and its potential.

You can add more to this list. When all is done and dusted then it will be the responsibility of the operators to struggle and find the right mix to make these hotels successful.

I always wanted to write an article on Hotel Feasibility, it is my passion and also covers all angles of the hotel business. I believe once anyone masters hotel feasibility works, they will understand the great puzzle of hospitality starting from Finance, investment, location/ size/type selection, brand selection, operations, marketing, revenue management, project and asset management as well as operating them successfully.

There are other factors such as whether it is a new hotel from scratch or buying an existing hotel and developing. And also, whether the approach should be causal with key areas to look at or more structured and literature format. I will try to cover as much as possible I can and therefore, instead of writing a boring long article, I will try to split them into two readable parts. Please bear with me, the result will be great. Finger’s cross!

Prior to building a new hotel, buying a hotel or developing current hotel the investors, the architect and development team need to create a project that is ultimately economically feasible. Unless the hotel’s owner is cash rich and ego driven rather than economically motivated, most investors are looking for a return on their invested capital. Most of these cases projects are funded by investors, international developers or financial institutions.

A Hotel Feasibility Study investigates your hotel proposal to see if it is feasible as a sustainable, profitable business model by considering its viability relating to market, location, costs and financing.

No plan is viable without some form of research. Especially if you require outside investment you will need to demonstrate you have done a feasibility study for your new hotel concept. Most of these institutions require an independently prepared market and financial feasibility study for the development of any project. They usually conduct some research of their own however it does not go in the same depth as a feasibility study conducted by independence and objectivity as third-party professional consultants.

Since feasibility means different things to different people, we have seen how many would-be hoteliers simply assume that their vision will succeed, without conducting any notable research on building a hotel business that will be consistently profitable and competitive. This could be very dangerous as any unforeseen change you might have to implement at a later stage due to a false assumption could bring with it additional costs that will have a negative impact on your bottom line.

Especially if you have raised capital investment from banks or other lenders, this puts you in a difficult position, as it might not be possible to pay off loans in the time frames agreed, or ROI will not reach the expected levels. Pressure will subsequently mount to make other changes to your concept to recuperate and offset the additional costs. Such changes might even affect the uniqueness of your original concept, but you will have no choice but to compromise and please investors.

So, what is a hotel feasibility study and do we really need one prior to any development project?

A feasibility study investigates your hotel proposal to see if it is feasible as a sustainable, profitable business model. It does this by considering its viability relating to market, location, costs and financing.

A feasibility study forms the cornerstone of your preparations for your new or remodelled hotel. It shows investors how they will receive a return on their investment (ROI).

A feasible project is one where the economic value is greater than the cost

In this article, we look at the steps involved in carrying out an effective hotel feasibility study. The process I like to use for determining whether a proposed hotel is economically feasible is to compare the total project cost (including land) with the hotel’s estimated economic value on the date it opens. A feasible project is one where the economic value is greater than the cost. Accurately estimating the total project cost is a relatively simple process for the architect and development team. However, determining the economic value is much more complicated.

Hotel feasibility entails three major components;

  • Preparation of a market feasibility study for the project,

  • Estimation of costs for all elements of the project

  • Determination of sources of financing.

You can arrange feasibility studies in two phases which are market feasibility and economic feasibility.

The feasibility study also includes a variety of work steps which enable us to evaluate historical trends and project the future competitive supply of and demand for proposed accommodations in the area. And the basic objectiv