Thoughts on valuing a boutique hotel for sale in Sri Lanka

15th January 2023

We’ve had several conversations lately with the owners of boutique hotels for sale in Sri Lanka and the most consistent theme, predictably, is on pricing and some sort of fair method for valuation. 

It’s a tricky game because a boutique hotel is, by definition, the opposite of commoditized real estate. In truest sense it’s a personalised asset with a style, feel, and even market (its guests) specific to the tastes of the owner; what may be highly prized by them could be felt a liability by a new buyer with a different vision. 

So how to navigate that and present a route to fair value that both seller and buyer can understand and commit to with confidence?

Cashflow first, long-term assets second

At the most basic level, an analysis should question the fundamentals of the business operation first and the value of the physical assets behind it second. A boutique hotel that costs $5m to build but has no guests (and never will!) isn’t worth (as a boutique hotel!) a penny.

So first of all we have to have a clear understanding from buyers as to their priority and if we’re selling a hotel (boutique or not) our justifiable assumption is that we’re selling it as a commercial asset.

With that understood our first focus is on the existing economics of the operation. So we’ll present the key numbers; on the revenue side the number of rooms, average daily rate (ADR), recent historic occupancy, forward occupancy; on the costs side the total payroll, maintenance and utility costs, an indication of marketing spend. 

We won’t tend to get into anything more granular - like F&B revenue and costs or other drivers like paid activities. Those will be too specific to the model of the new buyer and, as largely variable costs, aren’t so relevant for a core understanding.

Where appropriate, as well as actual proven economics we may look at potential, i.e. what scope there is to expand or restructure and how that will impact key numbers. 

Value in bricks, mortar and land

With those numbers we can look at the so-called capitalisation (cap) rate, essentially the annual yield from an investment to acquire the hotel. That calculation simply divides the net operating income (revenue less operating costs) by the sale price. Most hoteliers would be looking for a cap rate of at least 7.5%. 

If those numbers, actual or potential, can be shown to be suitably positive and make sense as a model for the buyer then the question shifts to whether the actual property concerned presents the best opportunity to realise them. 

Obviously there’s a fairly straightforward comparison between completed and operational properties but in most cases the question for us is of whether the buyer should take this existing property or build/develop something from scratch. So at that point we can look at replacement cost with an analysis first of land values, building costs, fixtures, fittings and all the MEP, all the equipment (ovens, generators etc.), not to mention the softer touches that go into a boutique hotel (art and fabrics etc.).  

If the economics of the business make good sense and if the replacement cost is in line with the value (sale price) that the owner wants to achieve then it can be shown as a very credible option for the buyer and one at a fair price.

Value in brand and goodwill

Conversations with owners also cover the value of ‘goodwill’ within the business. It’s an asset of course difficult to put a number to but with all the nuance of Sri Lankan boutique hotels - from long-fought-for alcohol licences to smooth village politics, not to mention loyalty of returning guests and established brand - it can be something of significant value. 

Our advice to sellers, though, is that in terms of communication with the buyer, the property should stack up quite simply in terms of its operating model and, pending that, the physical value of the asset. Leaning heavily on the paper value of brand reputation to boost a sale price probably won’t do much convincing for a hesitant buyer. If it’s a fine call between an existing boutique hotel and building from scratch for roughly the same (expected!) price, then a clear understanding of the goodwill within the former should be enough to swing it. 

So…

That, then, is the simplest of our routes to understanding value for a boutique hotel in Sri Lanka. It’s a process of course tied and specific to the real estate and hospitality market here and so while it should give an understanding of what’s fair in that context it doesn’t claim to be a final arbiter of what’s the very best economic decision out there. 

In our experience, though, despite what we say above, most passionate boutique hoteliers are prepared to look a little beyond those anyway!