Wolfgang Fercher
Feasibility Studies for Hotels
An analysis of essential elements in the preparation process of feasibility studies for
hotel projects
ISBN-10: 3-8324-9914-8
ISBN-13: 978-3-8324-9914-3
Druck Diplomica® GmbH, Hamburg, 2006
Zugl. IMC -International Management Center GmbH, Krems, Österreich, Diplomarbeit,
2005
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Abstract
Wolfgang Fercher
III
ABSTRACT
The intensity of competition in the tourism business, especially in the hotel industry
has continuously grown during the last years. This development leads to the
situation that capital investments in the hospitality industry are connected with ever
increasing risks. In order to minimize these risk potentials, a detailed evaluation of
the competitiveness and market compatibility of a planned project is an essential
part of any project development process. Those analyses are covered in the
course of a feasibility study which encloses all aspects that influence the success
of a hotel project. In this context, a feasibility study serves as an information tool
for project developers, investors, tenants, hotel operators and financiers in order to
make decisions with regard to a specific hotel project.
The preparation of a feasibility study requires the combination of a multitude of
aspects, hence input from all participants in the project development process.
Getting hold of information and the appropriate usage of this information is crucial
in order to ensure the success of a study. The main objective of this diploma thesis
is to identify the most important and current issues in feasibility evaluation of hotel
projects. In practice, many studies are prepared following a fixed model, which has
not been changed for years. However, the hospitality industry is highly competitive
and dynamic, new additions to the existing supply therefore need to be analyzed
very carefully. The focus of this diploma thesis is specifically put on the hospitality
industry. This means that feasibility evaluation for other types of project
development in the tourist industry is not subject to this study. The aim of the
thesis is on the one hand to point out aspects that have to be taken into
consideration in any study, and to give suggestions for improvements on the other
hand. The author has laid down the following four hypotheses that serve as the
main source for the research questions.
Hypothesis 1 The sensitivity analysis is the most important component of a
feasibility study.
Hypothesis 2 A feasibility study is the most important decision making factor for
the investor in a hotel project.
Abstract
Wolfgang Fercher
IV
Hypothesis 3 If the results of a feasibility study seem to turn out negative, then
the operative concept of the project is changed.
Hypothesis 4 The level of the construction cost is the factor that is most difficult
to estimate and is therefore the most frequent source of mistakes in the hotel
development process.
The research work is divided into hermeneutic and empiric parts which are not
secluded from each other but interact and support statements. An expert
questionnaire was designed in order to identify current industry issues. This
questionnaire was sent out via e-mail to selected groups of experts including
hospitality consultants, hotel operating companies, investors and financiers and
project development companies. The total number of questionnaires amounted to
88 and a return rate of about 40% was achieved.
The theoretical principles of feasibility studies are tackled in chapter 2. Basically,
there is no general definition for the term `feasibility study' and the terminology
varies significantly. Feasibility studies can be described as market demand studies
or as studies comprising a detailed market analysis and thorough financial
forecasts. It must be emphasized that a feasibility study as known in the
international context is much more than a study that proves whether a project is
`feasible'. A feasibility report can answer a number of questions as to the market,
rates achievable and the possible positioning of a project.
In the subsequent chapter the overall concept of project development in the hotel
industry is described. This includes an indication of the position of feasibility
studies in the course of the development process. Analysing both the information
provided in the specific literature and the expert questionnaires, it becomes
obvious that a thorough feasibility evaluation is an inevitable part in developing
any new hotel project. Chapter 4 deals with the question of structuring a feasibility
study. The structure of the study depends to a large extent on the person or
consultancy preparing it. Internal request lists or handbooks provide some kind of
pattern according to which reports are being prepared. A possible outline for a
Abstract
Wolfgang Fercher
V
feasibility report is suggested at this stage and the various components are
described in detail. Some of the aspects covered in this respect include the
analysis of existing supply and demand, identification of primary and secondary
competitors, and the description of the project idea and project location.
The next part is concerned with the issue of forecasting, which represents another
vital part of any feasibility study. In this context forecasts relate to estimating the
future development of the market as far as demand and supply are concerned.
From this basis, substantial items such as occupancy, average room rate, room
yield and revenue per available room are projected. The experts generally suggest
a 5 to 10 year period for these forecasts. Financial projections constitute a major
part of feasibility studies. These prognoses include profit & loss estimates, the
evaluation of investments with the use of ratios and discounted cash flows, and a
possible financing scenario for a planned property.
The author then identifies four major categories that influence the decision making
process with regard to the results of a feasibility study. These factors are
described as project related criteria, financial results, economic forecasts, and
market related criteria. This is followed by an evaluation and detailed description of
the most important elements and success factors of feasibility studies. Among
those rank the project site, market segmentation, investment estimation, and the
development of a concept suitable to the market requirements.
The identification of the most common and frequent sources of mistakes in the
preparation process of feasibility studies can be seen in close relation to the
success factors. The issue of mistakes is hardly covered in the scientific literature
but is analyzed in detail in the course of this diploma thesis. Some of the main
aspects in this respect, such as unqualified consultants, biased studies and
overestimation or misinterpretation of the future developments in the market, are
described in an accurate way. Eventually, a comparative analysis of two Austrian
hotels is carried out as well. This analysis compares some of the key values
projected in feasibility studies with the actual results of the respective properties.
Abstract
Wolfgang Fercher
VI
ABSTRACT
Die Wettbewerbsintensität am touristischen Markt, insbesondere in der Hotellerie,
ist in den letzten Jahren deutlich und kontinuierlich angestiegen. Dies bedeutet
auch, dass Kapitalinvestitionen im Tourismus mit erhöhten Risiken verbunden
sind. Um diese Gefahrenpotentiale zu minimieren, kommt der detaillierten Analyse
und Prüfung der Wettbewerbsfähigkeit und Marktverträglichkeit eines zu
initiierenden Projektes essenzielle Bedeutung zu. Intuitive Entscheidungen im
Rahmen des Entwicklungsprozesses werden durch fundierte Recherchearbeiten
ersetzt. In unmittelbarem Zusammenhang dazu steht die Erstellung einer
Feasibility Studie.
Der Begriff Feasibility Studie umfasst eine vorausschauende Wertung aller
Gegebenheiten, die auf die Frage der Verwirklichung eines geplanten Projektes zu
beziehen sind. Diese Studien dienen als Entscheidungshilfe für Projektentwickler,
Investoren, Pächter und Verpächter, Hotelbetreiber, aber auch Finanzdienstleister.
Die vorliegende Diplomarbeit analysiert die Bedeutung von Feasibility Studien für
die Entwicklung von Hotelprojekten. Dafür sind vom Autor folgende Hypothesen
aufgestellt worden:
Hypothese 1 Die Sensitivitätsanalyse ist der wichtigste Bestandteil einer
Feasibility Studie.
Hypothese 2 Eine Feasibility Studie ist die wichtigste Entscheidungsgrundlage
für den Investor eines Hotelprojektes.
Hypothese 3 Zeichnen sich im Rahmen der Erstellung einer Studie negative
Ergebnisse ab, kommt es zu einer Abänderung des operativen Konzeptes.
Hypothese 4 Die Höhe der Baukosten ist vom Ersteller einer Feasibility Studie
am schwersten einzuschätzen und stellt daher die häufigste Fehlerquelle im
Rahmen der Entwicklung von Hotelprojekten dar.
Der Autor setzt sich zum Ziel, die Problematik von fehlerhaften und nicht
relevanten Studien aufzuzeigen und häufige Fehlerquellen aus Sicht der
Abstract
Wolfgang Fercher
VII
verschiedenen Interessensgruppen ausführlich zu kommentieren. Die spezifischen
Bedürfnisse und Anforderungen der oben genannten Gruppen werden analysiert
und daraus resultierend ein Optimierungsprozess gestartet. Schlussendlich sollen
Verbesserungsvorschläge für die Erstellung von Feasibility Studien geliefert
werden. Weiters wird die Bedeutung von Machbarkeitsstudien als Teil des
Projektentwicklungsprozesses dargestellt.
Die Forschungsarbeiten gliedern sich in einen hermeneutischen und einen
empirischen Teil. Die theoretischen Grundlagen werden anhand der vorhandenen
Fachliteratur, d.h. Bücher, Fachjournale, Magazine und Internetquellen erörtert
und dargestellt. Der empirische Teil wird mit der Erstellung eines Fragebogens für
die oben erwähnten Expertengruppen bearbeitet. Das Hauptaugenmerk dieser
Befragung liegt darin, qualitative Forschungsergebnisse in Bezug auf die
Bedeutung und den Inhalt von Feasibility Studien zu erhalten. Die Diplomarbeit ist
limitiert auf Projektentwicklung und Studien im Hotelbereich, daher wird davon
abgesehen, Projekte anderer touristischer Segmente zu berücksichtigen.
Der erste Abschnitt der Arbeit stellt diverse Definitionsmöglichkeiten für Feasibility
Studien dar. Die vorhandenen Begriffsbestimmungen in der Fachliteratur zeigen,
dass keine einheitliche Definition existiert. Vor allem im deutschsprachigen Raum
wird der Begriff Feasibility Studie oft fehlinterpretiert, da eine wortwörtliche
Übersetzung so viel wie ,Machbarkeitsstudie' bzw. ,Durchführbarkeitsstudie'
bedeutet. Eine Feasibility Studie wie sie im internationalen Kontext gesehen wird,
ist jedoch nicht eine reine Prüfung der Machbarkeit eines Projektes, beinhaltet
jedoch viele Aspekte, wie z.B. detaillierte Analyse des Marktes, der Nachfrage und
des Wettbewerbes.
Das darauf folgende Kapital widmet sich dem breiten Feld der Projektentwicklung
im Bereich der Hotellerie und gibt einen Überblick über die Position von Feasibility
Studien im Rahmen dieser Entwicklungsprozesse. Kapitel 4 der vorliegenden
Diplomarbeit analysiert eine mögliche Strukturierung einer Feasibility Studie. In
diesem Zusammenhang gibt es keine allgemeingültige Gliederung, welche
Abstract
Wolfgang Fercher
VIII
bestimmte Inhalte vorgibt. Der Autor zeigt an dieser Stelle eine mögliche Struktur
für eine Studie auf und analysiert die vorgeschlagenen Bereiche im Detail.
Prognosen für die zukünftige Entwicklung des Marktes unter Berücksichtigung des
Angebotes, der Nachfrage und der Mitbewerber sind ein essenzieller Bestandteil
jeder Feasibility Studie. Ein weiteres wichtiges Element ist in der
Wirtschaftlichkeitsvorschau zu sehen. Hier wird letztendlich die Rentabilität eines
Projektes abgeschätzt, indem detaillierte Prognoserechnungen mit G&V
Rechnung, Planbilanz, Kennzahlenanalyse und Liquiditätsvorschau erstellt
werden. In diesem Kontext wird auch ein mögliches Finanzierungsszenario
dargestellt.
Die Entscheidung für ein Investment basierend auf den Resultaten einer
Feasibility Studie ist von vielen Faktoren abhängig. Diese werden vom Autor in
vier Hauptkategorien unterteilt, es sind dies projektbezogene Kriterien, finanzielle
Ergebnisse, Wirtschaftlichkeitsvorschau und marktbezogene Kriterien. Der Erfolg
einer Feasibility Studie wird von einer Vielzahl an Aspekten mitbestimmt. Diese
Erfolgsdeterminanten werden ausführlich evaluiert und dargestellt und beinhalten
unter anderem den Standort des geplanten Hotels, eine adäquate Schätzung der
gesamten Investitionskosten, die Segmentierung des Marktes und Empfehlungen
bezüglich des Projektkonzeptes.
In weiterer Folge werden häufige Fehlerquellen bei der Erstellung von Feasibility
Studien aufgezeigt. Zu diesen sind vor allem schön gerechnete Ergebnisse,
Gefälligkeitsgutachten, falsche Positionierung des Projektes, Einschätzung des
Marktes und des Projektstandortes zu zählen. Schlussendlich wird eine
komparative Erhebung durchgeführt. Hierfür werden die Feasibility Studien für
zwei österreichische Hotels, deren Inbetriebnahme auch tatsächlich realisiert
wurde, analysiert. Einige wichtige prognostizierte Kennzahlen werden mit den
aktuellen Resultaten in Vergleich gesetzt und evaluiert. Generelle Empfehlungen
zur Verbesserung von Feasibility Studien bilden den Abschluss der Arbeit.
Table of Contents
Wolfgang Fercher
IX
TABLE OF CONTENTS
TABLE OF CONTENTS ... IX
TABLE OF FIGURES ... XII
TABLE OF ABBREVIATIONS... XIII
1
INTRODUCTION ...1
1.1
PROBLEM STATEMENT
... 1
1.2
O
BJECTIVES AND RELEVANCE
... 2
1.3
L
IMITATIONS OF THE DIPLOMA THESIS
... 2
1.4
M
ETHODOLOGY
... 3
1.5
D
IPLOMA THESIS DESIGN
... 4
2
FUNDAMENTALS OF FEASIBILITY STUDIES...6
2.1
D
EFINITION OF FEASIBILITY STUDIES
... 6
2.1.1
Market Study ... 9
2.1.2
Financial Feasibility Analysis... 10
2.1.3
Pre-Feasibility Studies... 10
2.2
G
ENERAL RULES FOR THE PREPARATION OF STUDIES
... 11
2.3
P
REREQUISITES
,
REASONS AND PURPOSE
... 12
2.4
O
BJECTIVES OF A FEASIBILITY STUDY
... 14
2.5
T
IME FRAME
... 15
2.6
I
NFORMATION SOURCES
DATA DOCUMENTATION
... 16
3
HOTEL PROJECT DEVELOPMENT...18
3.1
D
EFINITION
... 18
3.2
P
ROJECT DEVELOPMENT COMPONENTS
... 19
3.3
H
OTEL
D
EVELOPMENT
C
OSTS
... 19
3.4
P
ARTNERS IN THE PROJECT DEVELOPMENT PROCESS
... 21
3.5
P
OSITION OF FEASIBILITY STUDIES WITHIN PROJECT DEVELOPMENT
... 22
3.6
C
RITICAL SUCCESS FACTORS
... 23
4
STRUCTURE OF A FEASIBILITY STUDY ...24
4.1
E
XECUTIVE
S
UMMARY
... 25
4.2
I
NTRODUCTION
... 26
4.3
E
CONOMIC SITUATION
... 26
4.4
D
ESCRIPTION OF THE MARKET IN GENERAL
MARKET RESEARCH
... 26
4.5
A
NALYSIS OF EXISTING SUPPLY
... 27
4.6
A
NALYSIS OF DEMAND
... 28
4.7
A
NALYSIS OF PRIMARY AND SECONDARY COMPETITORS
... 32
4.8
SWOT
AND ANALYSIS OF BUSINESS POTENTIAL
... 33
4.9
A
NALYSIS OF MICRO AND MACRO LOCATION
... 34
4.10
D
ETAILED DESCRIPTION OF THE PROJECT
... 37
4.11
F
INANCIAL PROJECTIONS AND FORECASTS
... 38
4.12
C
ONCLUSION
... 39
5
FORECASTS...40
5.1
R
EPORTING FORMAT
... 41
Table of Contents
Wolfgang Fercher
X
5.2
D
EFINITION OF FUTURE SUPPLY
... 41
5.3
F
UTURE
D
EMAND
... 42
5.4
R
OOM OCCUPANCY
... 44
5.5
A
VERAGE
R
OOM
R
ATE
... 44
5.5.1
Rack rates ... 45
5.5.2
Double Occupancy factor (DOF) ... 45
5.5.3
Discounts... 46
5.6
R
OOM
R
EVENUES
... 46
5.6.1
RevPar... 46
5.6.2
Performance of global hotel markets... 47
5.6.3
Additional benchmark ratios ... 48
6
FINANCIAL PROJECTIONS ...49
6.1
P
ROFIT
&
L
OSS
E
STIMATE
... 49
6.1.1
Revenues... 49
6.1.2
Operating Costs... 50
6.1.2.1
Payroll cost ... 50
6.1.2.2
Cost of goods... 51
6.1.2.3
Other expenses... 52
6.1.3
Gross Operating Profit (GOP) ... 52
6.1.4
EBDIT ... 53
6.1.5
Income before Income Tax... 53
6.2
R
ATIO
&
B
ENCHMARKING
A
NALYSIS
... 53
6.2.1
Required Rate of Return... 53
6.2.2
Return on Investment (ROI) ... 54
6.2.3
Return on Owners' Equity (ROE) ... 55
6.3
D
ISCOUNTED
C
ASH
F
LOW
M
ETHODS
... 55
6.3.1
Net Present Value (NPV)... 56
6.3.2
Internal rate of return (IRR) ... 57
6.4
F
INANCING
S
CENARIO
... 58
6.5
N
ET
C
ASH
F
LOW
... 58
7
MAIN DECISION CRITERIA...60
8
SUCCESS FACTORS OF FEASIBILITY STUDIES ...63
8.1
E
SSENTIAL COMPONENTS OF FEASIBILITY STUDIES
... 63
8.2
F
ORMAL DECISION TO GET STARTED
... 66
8.3
S
TANDARDIZATION OUTLINE
... 67
8.4
M
ICRO
-
AND MACRO
-
LOCATION
... 68
8.5
S
ENSITIVITY ANALYSIS
... 69
8.6
B
REAK EVEN ANALYSIS
... 70
8.7
S
CENARIO ANALYSIS
... 71
8.8
S
PACE PROGRAMME
... 72
8.9
C
ONCEPT DEVELOPMENT AND POSITIONING
... 72
8.10
M
ARKET SEGMENTATION
... 73
8.11
I
NVESTMENT ESTIMATION
... 75
8.12
P
RE
-
OPENING COSTS
... 75
8.13
P
ERMITS
... 76
8.14
A
DDITIONAL IMPORTANT FACTORS
... 76
9
POSSIBLE SOURCES OF MISTAKES...78
9.1
C
ONSTRUCTION
C
OST
E
STIMATES
... 78
9.2
F
UTURE DEMAND ESTIMATES
... 79
9.3
C
ONSIDERATION OF COMPETITORS
... 80
Table of Contents
Wolfgang Fercher
XI
9.4
W
RONG POSITIONING OF THE PROJECT
... 81
9.5
T
OTAL INVESTMENT COST
... 81
9.6
I
NFLUENCE BY CLIENT
... 82
9.7
A
DDITIONAL ASPECTS
... 82
10
ANALYSIS OF PREVIOUS STUDIES ...84
10.1
M
ETHODOLOGY
... 84
10.2
H
OTEL
A... 84
10.2.1
Room occupancy ... 85
10.2.2
Average Room Rate... 86
10.2.3
Rooms Yield... 87
10.2.4
Gross Operating Profit (GOP) ... 88
10.3
H
OTEL
B... 90
10.3.1
Room occupancy ... 90
10.3.2
Average Room Rate... 91
10.3.3
Rooms Yield... 92
11
RECOMMENDATIONS ...94
12
CONCLUSION ...97
BIBLIOGRAPHY... XV
APPENDIX... XXI
Table of Figures
Wolfgang Fercher
XII
TABLE OF FIGURES
F
IGURE
1:
S
TRUCTURE OF A FEASIBILITY STUDY
...8
F
IGURE
2:
T
YPES
,
USES AND SOURCES OF INFORMATION
...17
F
IGURE
3:
H
OTEL
D
EVELOPMENT
C
OST
S
URVEY PER
-
ROOM AVERAGES FOR
2003 ...20
F
IGURE
4:
P
LAYERS IN HOTEL DEVELOPMENT
...21
F
IGURE
5:
H
OTEL DEVELOPMENT PHASES
...22
F
IGURE
6:
F
ACTORS TO CONSIDER IN SITE APPRAISALS FOR HOSPITALITY FACILITIES
...36
F
IGURE
7:
F
INANCIAL PROJECTIONS
...38
F
IGURE
8:
F
UTURE DEMAND FORECASTS
...43
F
IGURE
9:
P
ERFORMANCE OF GLOBAL HOTEL MARKETS
-
2004...47
F
IGURE
10:
M
AIN DRIVERS INFLUENCING DECISION MAKING
...61
F
IGURE
11:
T
HE MOST IMPORTANT ELEMENTS OF A FEASIBILITY STUDY
...63
F
IGURE
12:
I
NDEXATION OF FEASIBILITY COMPONENTS
...64
F
IGURE
13:
I
NDEX VALUES OF THE ELEMENTS OF A FEASIBILITY STUDY
...65
F
IGURE
14:
S
TANDARDIZATION OUTLINE FOR FEASIBILITY STUDIES
...67
F
IGURE
15:
C
OMPARISON OF PROJECTED AND ACTUAL ROOM OCCUPANCY
H
OTEL
A ..85
F
IGURE
16:
C
OMPARISON OF ESTIMATED AND ACTUAL
ARR
H
OTEL
A ...86
F
IGURE
17:
R
EVISED
ARR
FORECASTS
H
OTEL
A ...87
F
IGURE
18:
R
OOMS
Y
IELD
H
OTEL
A ...88
F
IGURE
19:
C
OMPARISON OF PROJECTED AND ACTUAL
GOP
H
OTEL
A...89
F
IGURE
20:
GOP
IN ABSOLUTE FIGURES
H
OTEL
A...89
F
IGURE
21:
C
OMPARISON OF PROJECTED AND ACTUAL ROOM OCCUPANCY
H
OTEL
B ..91
F
IGURE
22:
C
OMPARISON OF ESTIMATED AND ACTUAL
ARR
H
OTEL
B ...92
F
IGURE
23:
R
OOMS
Y
IELD
H
OTEL
B ...93
Table of Abbreviations
Wolfgang Fercher
XIII
TABLE OF ABBREVIATIONS
ADR
Average Daily Rate
approx. approximately
ARR
Average Room Rate
ARI
Average Rate Index
BAHA
British Association of Hotel Accountants
CVP
Cost-volume-profit
DCF
Discounted Cash Flow
DOF
Double Occupancy Factor
EBIT
Earnings before interest and taxes
EBITDA
Earnings before interest, taxes, depreciation and amortization
e.g.
exempli
gratia (for example)
et al.
et alii (and others)
ETIC
Estimated Total Investment Cost
F & B
Food & Beverage
FF&E
Furniture, fittings & equipment
GDP
Gross Domestic Product
GNP
Gross National Product
GOP
Gross Operating Profit
IAS
International Accounting Standards
IAUE
Income after undistributed expenses
i.e.
id est (that is)
IBFC
Income before fixed charges
IFRS
International Financial Reporting Standards
IRR
Internal Rate of Return
MPI
Market Penetration Index
NOP
Net Operating Profit
NPV
Net Present Value
P&L
Profit & Loss
RevPar
Revenue per available room
Table of Abbreviations
Wolfgang Fercher
XIV
RGI
Revenue Generation Index
ROCE
Return on capital employed
ROE
Return on Equity
ROI
Return on Investment
STAHR
Standard der Abrechnung für Hotels und Restaurants
TIC
Total Investment Cost
USALI
Uniform System of Accounts for the Lodging Industry
USP
Unique Selling Proposition
vs.
versus
WACC
Weighted average cost of capital
Introduction
Wolfgang Fercher
1
1 INTRODUCTION
1.1
PROBLEM STATEMENT
The intensity of competition in the tourist industry, especially in the hospitality
sector has continuously grown during the last years. This development leads to
the situation that capital investments in the hotel industry are connected with ever
increasing risks. In order to minimize these risk potentials, a detailed evaluation of
the competitiveness and market compatibility of a project is an essential part of
any development process. Those analyses are covered in the course of a
feasibility study which encloses all aspects that influence the success of a planned
hotel project.
The preparation of a feasibility study requires the combination of a multitude of
aspects, hence input from all participants in the project development process.
Getting hold of information and the appropriate usage of data is crucial in order to
ensure the success of a study. The hospitality industry is highly competitive, new
additions to the existing supply therefore need to be analyzed very carefully.
The major problem in this context can be found in the nature of the feasibility study
itself. These studies comprise a huge amount of elements that are crucial parts in
developing a new project. From a theoretical point of view, the preparation of such
a study seems to be quite straight forward. However, in reality the situation is quite
different, i.e. feasibility studies turn out not to be of relevance for the parties
concerned with it. In this case, a study is prepared because it is supposed to be
part of the project development process but its practical use is limited. This subject
matter provides the framework for the diploma thesis, the specific objectives
thereof are described in the following chapter.
Introduction
Wolfgang Fercher
2
1.2
O
BJECTIVES AND RELEVANCE
The main objective of the diploma thesis is to identify the most important and
current issues in feasibility evaluation of hotel projects. In practice, many studies
are prepared following a fixed model, which has not been changed for years.
However, the hotel industry is subject to constant changes that influence the
building of new hospitality properties as well. Therefore, the aim of this thesis is on
the one hand to point out aspects that have to be taken into consideration in any
study, and to give suggestions for improvements on the other hand. In this
connection, the author has laid down four hypotheses to be tested in the course of
the thesis.
Hypothesis 1 The sensitivity analysis is the most essential component of a
feasibility study.
Hypothesis 2 A feasibility study is the most important decision making factor for
the investor in a hotel project.
Hypothesis 3 If the results of a feasibility study seem to turn out negative, then
the operative concept of the project is changed.
Hypothesis 4 The level of the construction cost is a factor that is difficult to
estimate and is therefore the most frequent source of mistakes in the hotel
development process.
These four hypotheses function as the main source for the research questions to
be answered in this diploma thesis.
1.3
L
IMITATIONS OF THE DIPLOMA THESIS
The focus of this diploma thesis is specifically put on the hospitality industry. This
means that feasibility evaluation for other types of project development in the
Introduction
Wolfgang Fercher
3
tourist industry is not subject to the study. In addition, it must be mentioned that
the term feasibility study in this case is limited to the market and financial aspects
of a project, whereas the technical feasibility is not being evaluated.
Furthermore, the thesis is intended to provide a general point of view about
feasibility studies in the hotel industry. Issues diverging from one specific country
to another are therefore not discussed in detail. This diploma thesis does further
not relate to the real estate factor that comes into play in the hotel industry. The
emphasis is put on the operational side and does not consider aspects such as
resale value of the property and interest rates.
1.4
M
ETHODOLOGY
The first research phase included the identification of important issues and
theoretical principles with regard to project development and feasibility evaluation
in the hotel industry. Financial records, scientific literature, articles and additional
quantitative and qualitative data were mainly consulted at the library of the Vienna
University of Economics, the library of the International Management Center
Krems and the Danube University in Krems and at the library of the Klagenfurt
University.
In addition to that, an expert questionnaire was designed in order to identify
current industry issues. For this reason, experts have been divided into the
following main categories:
Consultants frequently involved in hotel project development and the
preparation of market and financial feasibility studies.
Hotel operating companies both on a national and international level.
Investors and financiers such as representatives of the banking sector
concerned with project finance.
Project development companies focusing on hotel real estate.
Introduction
Wolfgang Fercher
4
To be able to get sufficient qualitative as well as quantitative information, the
questionnaire was sent out via e-mail to representatives of the various groups. The
overall number of questionnaires amounted to 88. In total, 35 responses were
received, which equals a return rate of around 40%. However, 10 of these did not
complete the questionnaire for various reasons. Therefore, 25 questionnaires were
eventually included in the empiric analysis. A draft questionnaire is enclosed in the
appendix of this thesis. The list of experts who responded to the questionnaire is
integrated into the bibliography. The questionnaires were first sent out on February
10, 2005, a follow up e-mail on March 04, 2005. The experts were asked to
complete the questionnaire until March 25, 2005 latest.
Furthermore, three personal and one telephone explorative expert interview were
conducted. The results of the expert questionnaires and interviews were analyzed,
important aspects were identified and summarized. The evaluation and
interpretation of the results was done with the help of Microsoft Excel 2002. The
data was integrated and commented on throughout this diploma thesis, with
specific focus on chapters 5 to 9. All field and desk research was conducted
between June 2004 and March 2005.
The approach to this qualitative research is called recursive. Data gathering,
hypothesis formulation, and even the identification of concepts is a two-way
process. "In this approach hypothesis formation evolves as the research
progresses; data analysis and collection take place concurrently; and writing is
also often an evolutionary, ongoing, process, rather than a separate process which
happens at the end of the project."
1
1.5
D
IPLOMA THESIS DESIGN
The thesis basically consists of hermeneutic and empiric elements, however,
these are not strictly divided into two secluded parts. There is continuous
1
Veal (1997), 131
Introduction
Wolfgang Fercher
5
interaction, i.e. the theoretical fundamentals are supported by and compared to
empiric results and vice versa.
The theoretical principles of feasibility studies are described in chapter 2. This
includes various possible definitions, general rules, prerequisites and the time
frame needed for the preparation of feasibility studies. Furthermore the main
objectives of feasibility studies are identified. Chapter 3 gives an overview about
the topic of hotel project development, including partners in the development
process and a comparison of hotel development costs in different hotel categories.
Chapter 4 is exclusively dedicated to the structure of a feasibility report. The
author identifies 12 parts that should be contained in any feasibility study. All those
elements and various methodologies inherent are described in detail, and the
empiric results underline the theoretical fundamentals.
The essential issue of future forecasts will be tackled in chapter 5. Forecasting
plays a major role in the evaluation of the feasibility of an envisaged project. The
most important forecasting parameters such as future demand and the
determination of rates are described throughout this chapter. Chapter 6 explains
the main aspects regarding the projection of financial results. This is closely linked
to the forecast values analyzed in chapter 5. The financial projections represent
the actual parameters that prove whether a project is considered feasible.
Chapter 7 depicts the main investment decision criteria which are categorized into
four groups. Chapter 8 deals with the success factors of feasibility studies. These
are identified through the general literature review and the results of the
questionnaires. The most frequent sources of mistakes in the preparation of
feasibility studies form the basis for chapter 9. A multitude of factors is identified in
this respect. Moreover, all the aspects are analyzed and covered from a critical
point of view. Chapter 10 comprises a comparative analysis of two feasibility
studies with actual results achieved by the respective hotel properties. Finally,
chapters 11 and 12 provide the reader with recommendations and a conclusion.
Fundamentals of Feasibility Studies
Wolfgang Fercher
6
2 FUNDAMENTALS
OF
FEASIBILITY STUDIES
At this stage it seems necessary to provide accurate definitions of essential terms
and expressions that form part of this diploma thesis. The following chapter will
therefore concentrate on the theoretical principles of feasibility studies in the hotel
industry and provide some information on the general foundations and principles
to be considered.
2.1
D
EFINITION OF FEASIBILITY STUDIES
In order to clearly identify what the term feasibility study actually refers to, various
definitions will be quoted in this chapter. It must be mentioned repeatedly,
however, that these definitions and basics are specifically elaborated for the hotel
industry and do further not include the technical aspects to be taken into
consideration when it comes to the development of a hotel project.
C
OLTMAN
and J
AGELS
define a feasibility study as "an in-depth analysis of the
financial feasibility of a property development, rather than a promoter's guess that
a new idea will be economically viable."
2
However, a feasibility study is not only
designed to prove that a new venture will be profitable. An independent study that
is professionally prepared by an impartial third party could result in either positive
or negative recommendations.
P
ANDIT
takes the approach that "in the hotel industry as in any other business, it is
necessary to investigate in advance the possibility of selling the items and the cost
of their production in order to be able to foresee the anticipated profit before taking
a decision in favour of or against the venture."
3
The detailed process of this
investigation and measurement is known as a feasibility study. Furthermore
2
Coltman / Jagels (2001), 526
3
Pandit (1986), 3
Fundamentals of Feasibility Studies
Wolfgang Fercher
7
P
ANDIT
states that the term feasibility in this case covers the necessity,
practicability and justifiability of an investment.
P
AYNE
4
sees feasibility studies as market demand studies with estimated operating
results, and an independent and objective analysis of a proposed hotel
development. Each study is different and judgment is an important element of
every study. In any case, there are basic standards and procedures that are
applicable to most situations.
I
TTEN
5
defines a feasibility study as a concise version for a number of analyses.
These analyses lead to a comprehensive comparison of efficiency between
previous and future production or services, considering all influencing factors. Only
a proper comparison, with specific attention to the expected construction and
operating costs, allows for a right investment decision.
W
ARD
6
divides feasibility studies into 25% information, 25% common sense, 25%
experience and judgment and 25% analysis. The complexity of the development
process of hospitality facilities means that it needs to be guided by a market and
financial feasibility study from the outset. The feasibility study is furthermore
described as an assessment of supply and demand, the factors affecting the
market, and how the proposed facility can fit into and exploit the market for profit.
"In any way it is more than a report which says `yes, this is feasible'."
7
"A decision involving capital investment will require supporting information in the
form of an in-depth analysis of the financial feasibility of the project. The nature of
the investment may range from a decision to purchase new equipment through to
a major new property development."
8
4
Payne (2004)
5
Itten (1972) in Krippendorf (1972),
154
6
Ward (2004), in Ransley, Ingram (2004), 41-42
7
Ward (2004), in Ransley, Ingram (2004), 42
8
Adams (1997), 136
Fundamentals of Feasibility Studies
Wolfgang Fercher
8
S
CHAETZING
9
defines the term feasibility study as a forecasting assessment of all
circumstances which relate to the realization of a planned project. It is therefore
more than just a figure oriented profitability prognosis. The following table shows
the most important components of a feasibility study as proposed by S
CHAETZING
.
A more detailed description of the individual parts that constitute a feasibility study
will be provided in Chapter 4.
Figure 1: Structure of a feasibility study
10
Some analysts evaluate feasibility by calculating an internal rate of return (IRR)
and seeing if the resultant return is sufficient to account for the potential risks.
Another procedure would be to compare the economic value of a proposed hotel
upon its opening to its total development cost. If the total costs to build the hotel
are higher than what the hotel is worth, then the project is not feasible. On the
9
Schaetzing (2004), 463
10
Schaetzing (2004), 464
F
EASIBILITY
S
TUDY
Project
concept
development
Profitability
prognosis
Analysis of
demand,
competitors
and supply
Evaluation of
project
location
Summarizing
assessment
General
description of
the market
A
B
C
D
E
F
Fundamentals of Feasibility Studies
Wolfgang Fercher
9
other hand, when a hotel opens and its value is greater than the building costs, it
is considered feasible.
11
The preceding paragraphs have clearly shown that there is a wide range of
possible definitions for feasibility studies. For this reason, the following chapters
will evaluate the major parts of any study. Generally speaking, these include both
a market study and a prospective financial analysis for the planned project. In
practice, market studies are also done with no reference to the financial feasibility
of a venture. In addition, the concept of a pre-feasibility study will be introduced.
2.1.1 Market Study
A market study for a hotel is an objective, rational forward-looking process during
which market and financial data are gathered and analyzed. The objective of a
market study is to reach a determination as to the market viability of a proposed
project. This involves a detailed analysis of the site for the subject hotel, the
market in which it would operate, the current supply of competitive hotels, the
demand for rooms in the market area and future estimates as to the supply and
demand situation.
12
"Due to the dynamic nature of the lodging industry and individual hotel markets,
hotel market studies can be a useful analytical tool from the early stages of a
hotel's development throughout its economic life."
13
Generally speaking, a
professional market study for a hotel investment represents the unbiased opinions
and recommendations of an expert. It therefore mitigates the risk for both owners
and investors since a third party evaluates the potential of various hotel investment
strategies.
The preceding definitions have clearly indicated the distinction between the terms
`market study' and `feasibility study'. In addition to the future estimations of supply
11
Rushmore (2002)
12
Horwath International (1998), A-2
13
Raleigh / Roginsky (1999), 137
Fundamentals of Feasibility Studies
Wolfgang Fercher
10
and demand provided in a market study, the complete feasibility study also
includes financial projections for the first years of operation of a planned hospitality
project. On the other hand, one can state that a market study is an imperative part
of any feasibility study.
2.1.2 Financial Feasibility Analysis
According to H
AZINSKI
, the financial feasibility of a hotel depends on several
factors, including:
14
Estimated net operating income
Construction
cost
Interest
rate
levels
Availability of equity
Seasonality and volatility of the local hotel market
Other factors that affect the allocation of investment risk and return
The prospective financial analysis is generally a cash flow from operations before
replacement of fixed assets, debt service and income taxes. This analysis takes
the total investment requirements of a project and the related net cash flow into
consideration. Net cash flow refers to the funds available to the owners of the
project after providing for the receipt and disbursement of invested and borrowed
funds, debt service payments, income taxes and the replacement/addition of fixed
assets.
15
The extent and variations of financial projections will be covered in
greater detail in chapter 6 and 7.
2.1.3 Pre-Feasibility Studies
A preliminary feasibility or pre-feasibility study is the first draft presentation of the
project's economic situation on the basis of available data. Various results can be
14
Hazinski (2004)
15
Horwath International (1998), A-3
Fundamentals of Feasibility Studies
Wolfgang Fercher
11
obtained through a pre-feasibility study. It is for instance possible that the
information provided in the study will lead to decision making, whereas on the
other hand, certain factors might have to be analyzed in further detail. Even the
complete rejection of a project idea could eventually be the result of a feasibility
study.
16
A pre-feasibility study examines "whether the business meets minimum financial
requirements, whether or not there is a market for the finished product and
whether it is technically feasible."
17
This stage is sometimes referred to as the `pre-
investment study'.
However, a pre-feasibility study cannot replace a proper feasibility analysis, but is
to be seen as an assisting tool. Moreover, it will only be prepared if there are
specific doubts about the viability of a project. If it becomes obvious that the
proposed project is not viable after having analyzed both site and market, the
project is either stopped or repositioned.
18
The next chapter will present some of
the basic guidelines that are applicable to the preparation of any feasibility study.
2.2
G
ENERAL RULES FOR THE PREPARATION OF STUDIES
A feasibility study is not undertaken in isolation, but is prepared by a specialized
consultant in conjunction with an architect, the client, the investor, the
management company, and any other parties involved in the project. If during the
preparation of the feasibility study it seems as if the project proposal is likely not to
work out, then the consultant will usually collaborate with the client and the other
members of the team in order to find an appropriate solution. Another option for a
consultant would be that many potentially negative studies are eliminated by not
accepting the assignment when it is obvious that the proposed site or market will
not work.
19
16
Stepic (1995), 315
17
Western Australian Tourism Commission (2000)
18
Hartl (2005)
19
Ward (2004), in Ransley, Ingram (2004), 24
Ende der Leseprobe aus 123 Seiten
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- , 2005, Feasibility Studies for Hotels, Hamburg, Bedey Media GmbH, https://www.diplom.de/document/225031
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