Rapid Hotel Investment Review: 8-room All-Suite Hotel in Greece

Navigator Consulting completed a Rapid Hotel Investment Review for a proposed greenfield, eight suite hotel on a Greek island. Our independent review identified major differences in the estimated capital expenditure, operating costs and EBITDA, leading the investor to reconsider the underlying hotel investment case.

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Small Hotel Investment in Greece

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A significant part of the Greek tourism sector comprises small, low rise hotels developed and operated by families or independent investors. These properties are well suited to the landscape, development density and land ownership structure of many Greek islands and coastal destinations.
 

The small hotel model nevertheless presents specific investment challenges. Properties frequently operate during a short tourism season, have limited economies of scale and depend heavily on online travel agencies for bookings. A small change in construction costs, occupancy, average daily rate, booking commissions or staffing requirements can therefore have a disproportionate effect on profitability and investment returns.
 

The proposed development comprised eight suites centred around a common outdoor area and swimming pool. The destination offered a strong tourism proposition but was also characterised by high seasonality and limited access outside the main tourism period.

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Investment Assumptions

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The initial investment proposal was based on:

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• Total capital expenditure of approximately € 500,000

• Partial grant funding through EU Structural Funds

• An operating season of approximately 120 days

• Average daily rates ranging from € 150 to € 350

• Room operating costs of approximately € 25 per occupied room per day

Navigator was asked to test these assumptions independently and determine whether the proposed development presented a viable hotel investment.

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What We Did

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Our Rapid Hotel Investment Review included:

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• Project concept and site assessment

• Destination, competitor and yield benchmarking

• Independent reconstruction of the capital investment budget

• Review of construction, furnishing and common area costs

• Assessment of hotel operating expenditure

• Independent reconstruction of the hotel profit and loss model

• Analysis of occupancy, pricing and seasonality assumptions

• Review of online travel agency commissions and distribution costs

• Assessment of maintenance and replacement expenditure over the capital cycle

• Financial scenario and investment viability analysis

Principal Findings

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Our analysis estimated that the capital required to complete and furnish the hotel would be approximately € 930,000, compared with the initial estimate of € 500,000.

In addition to capex issues, the original financial model also omitted or underestimated several material cost categories, including:

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• Furniture, fixtures and equipment replacement rates

• Common area and external space development

• Online travel agency commissions

• Staffing and operating costs

• Repairs and routine maintenance

• Refurbishment and asset replacement over an eight to ten year capital cycle

Correcting these assumptions produced a materially different operating result, EBITDA forecast and investment return.

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Outcome

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The Rapid Hotel Investment Review gave the investor a more accurate basis for structuring the project and determining its financing requirements. The revised capital expenditure and operating forecasts enabled the hotel investor to reconsider the proposed EU Structural Funds grant application, make appropriate provision for additional investment capital and recalculate EBITDA, cash flow and the expected payback period using more realistic assumptions.

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The hotel review also showed how changes to the hotel concept, development phasing, pricing strategy and funding structure could improve the investment case and support a shorter, more acceptable payback period. Rather than simply identifying reasons to reject the opportunity, the assignment enabled the investor to approach the hotel project with a clearer understanding of its capital requirements, operating risks and potential returns.

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The assignment demonstrates the importance of assessing a small hotel as both a property development and an operating tourism business. Even where the total project value is relatively modest, incomplete capital expenditure and operating assumptions can produce a significant investment error.​​​​

Client:
Confidential

Date of Engagement:
July - September 2022
 

Countries of Operation:
Greece

Business Function:
Investment Advisory Services, Hotel Due Diligence

Business Sector:

Hotel Investment

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Budget:
€ 920,000