Quantify RISK to eliminate costly Surprises…

Investors often seem to have peculiar preconceptions about the main objective of hotel investment analysis. Many believe the financing decision is the major part of the analysis. Others treat the forecasting of cash flows and hotel values as the primary focus. Still, others regard tax planning as the chief element in the process. While all of these activities have major roles, none get at the actual crux of the hotel investment process.

The real basis of investment analysis is the identification, measurement, and assessment of risk and the ways the investor can deal with risk. The concept of risk is therefore fundamental to any form of investment analysis in the hotel industry. Yet, the basic tool to evaluate risk and return, the “hotel feasibility study” hasn’t changed in almost forty years. Despite recommendations by scholars, industry professionals, and lenders for making hotel feasibility studies more effective, the essential form of the studies has remained unchanged since the early 1970’s.

Pellat (1) noted in 1972 that “the contemporary models of real estate investment analysis all are grossly inadequate and are incapable of generating realistic estimates of the overall rate of return on a real estate investment and the risk of that investment.” He could easily have said the same thing today!

The use of probabilistic simulation models can overcome many of the shortfalls of the outdated hotel feasibility analysis. These analyses generate a range of possible returns rather than a single value and also calculate the probability of receiving different rates of return, depending on how the future unfolds. The use of risk simulation models by stakeholders in hotels can have a substantial effect on their investment decisions. 

Call us today to see if your hotel investments can benefit from our innovative and sophisticated approaches to risk management. Many of our clients have used probabilistic thinking to manage risk and make better decisions.

(1) Pellat, P.G.K. (1972): “The Analysis of Real Estate Investments Under Uncertainity”, Journal of Finance, Vol 27, No.2, p.459.