The Asset Management Guide – overcoming common misconceptions

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19/10/2016 - Hospitality

Hotel owners usually trust the hotel operator to manage their property, but sometimes the two parties may not see eye to eye, which can lead to unresolved conflicts.

For this reason, hotel owners often seek a professional hotel asset manager to help overcome misunderstandings.

The appointed asset manager acts on behalf of the owner to help protect their interests. The objective of the hotel asset manager is to increase the asset’s value by ensuring hotel operations run smoothly.

TFG Asset Management has many years of hotel asset management experience and would like to share some of the assumptions hotel owners should avoid making when considering the value of their asset.

Fallacy 1: Overlook other revenue generators

Rooms are normally the highest revenue contributor. Revenue managers optimise revenue by crafting effective room management strategies. It is imperative, however, to not fall in the trap of overlooking other ancillary services that can generate additional revenues. It is advisable for hoteliers to analyse the different spending patterns of their guests. For example, guests who bargain on room rates will tend to spend less on services and large corporate groups may pay discounted room rates but spend more on banqueting services and in-house F&B. By neglecting these other operating departments and spending patterns, the hotel can miss out on potential revenue. Revenue managers need to look at hotel operations holistically, crafting strategies that will encourage the maximum spend per guest based on their which market segment they represent. By looking at the room rates they are likely to pay versus the services they are likely to spend on, optimum revenue can be achieved.

Fallacy 2: Minimise capital expenditure, boost the bottom-line

Typically, hotel owners will want to minimise their capital expenditure, believing the less they spend, the more they can save on their bottom line. However, this does not mean that optimal profit is achieved. Sometimes, investing in a high-cost asset will temporarily impact bottom-line results, but promise a short payback period with high returns on investment. A good example is the investment in LED lighting, which has a total lifespan of more than 25,000 hours, saving 80% of energy consumption, as opposed to traditional 60W incandescent lighting, which has the lifespan of just 1,000 hours.

Fallacy 3: High occupancy means robust top-line results, hence increased asset value

When measuring the performance of the hotel asset it is imperative for hoteliers to take into account two variables – the occupancy rate and the average room rate. However, hoteliers usually consider the number of room nights sold as the key indicator of the value of their asset in that demand for their hotel is high. Sometimes high occupancy is the result of lower rate offering compared to competitors, which appeals to the price-conscious traveller. The product or the hotel asset will be perceived as inferior compared to other properties in its competitive set, thereby leading to a decreased asset value.

Hoteliers and asset managers are advised to review their occupancy and average room rate strategies to generate the optimal revenue without depleting the hotel value.

Fallacy 4: Rely solely on competitive set to assess operating performance

It is logical for any hotelier and hotel asset manager to benchmark their performance against the competitive set. However, this benchmarking practice is not necessarily a precise indicator of how the property is performing. Factors such as room category and size of the property are not regularly considered. The smaller size hotel may report a higher occupancy than a larger one, which does not mean that it performs better. They might be reporting a 50% higher ADR and a 20% higher RevPAR, but the room breakdown might show more suites sold than standard rooms. A hotel apartment where 90% of the stock is studios will probably command a lower rate than offered at a competing property with more than 50% of keys in the one-bedroom category. Without in-depth analysis, we may conclude that our competitors are outperforming us.