Rapid due diligence: 8-room all-suite hotel in Greece
Navigator Consulting was asked to implement a rapid due diligence assessment for an 8-suite hotel in Greece. Our assessment revealed a major variation in terms of capital investment, operational expenditure and EBITDA, leading to a fundamental reconsideration of the hotel investment case.
The Greek tourist product emphasizes low-rise, small hotel units across a large area of the country. These developments are typically anywhere from 5 – 30 hotel rooms, usually oriented around an outdoor swimming pool, and with limited common areas: usually a single restaurant/breakfast area.
Of the 10,000 hotels currently licensed in Greece, Navigator Consulting estimates that over 7,000 units are in the latter category.
As a socio-economic development model, the choice of the Greek government to license small hotels is understandable. It offers hotel investors with low available capital to relatively rapidly enter the tourism sector. This offers a pathway to development for tens of thousands of family owners and operators of small hotels.
Moreover, the small scale of hotel development is also well-suited to the geomorphology and land plot structure of Greece. Islands like Mykonos or Santorini, for example, are far better suited to smaller hotel units than to big-box monoblock structures, which would ruin the landscape and change the character of the destination.
Greece is an archipelago of some 6,000 islands, of which only 227 are inhabited, while the Greek mainland in areas such as Halkidiki, Mani or Peleion is often rugged and difficult to access.
But this small hotel development pathway is also faced with a number of challenges:
Most Greek hotels are seasonal, operating from April – October. This means that there is inevitably a social impact as salaried workers are forced into unemployment at the end of the tourism season.
Most Greek hotels are family-operated. Their small scale of operations implies limited profitability, which may compensate an owner/operator for the long working hours during the summer months, but does not easily enable a scaling up of operations, or the hiring of highly professional staff. If these hotels have a personal but artisanal flavour to them, there is a strong economic reason for this.
The structure of reservations on a number of popular smaller Greek islands such as Naxos, Chios, Paros and others remains dominated by online tour operators like Booking.com, which in many cases account for 80-90% of total reservations. This is a contrast to destinations like Corfu, Crete, Rhodes or Kos, where larger hotel units with 150 – 300 rooms operate alongside smaller units, usually outside historic city centres, and where bookings involve tour operators who usually bundle rooms, flights, transfers and meals.
These limitations and opportunities were cast into sharp relief in a recent rapid due diligence Navigator Consulting implemented for a Greek hotel investor. The investor had been invited to invest in a greenfield development of a small, 8-room hotel on a Greek island that is among the most beautiful and historic in Greece, but suffers from very high seasonality and access challenges in the low season.
Our work was to review the financial and planning assumptions the Greek hotel developer had established for the hotel investment, which included:
Total capex of € 500,000; partial grant funding by EU Structural Funds grant;
120 day season; ADR from € 100 – 300 per day depending on season period;
Room opex of € 15 / day.
Our work included:
Detailed project and site assessment;
In-depth assessment of hotel capital expenditure;
Assessment of hotel operating expenditure and assumptions;
Independent reconstruction of capital investment forecast;
Independent reconstruction of hotel profit / loss financial model;
Assessment of hotel costs over capital cycle;
Destination and yield benchmarking and analysis.
A detailed reconstruction of the hotel operating and investment model revealed a range of significant problems with the hotel developer estimates:
Our capex estimate for a furnished hotel was € 930,000, not € 500,000.
There were no provisions made for room and common space capex costs.
There were no provisions made for OTA booking commissions.
There were no provisions made for significant and obvious operating costs.
There were no provisions made for maintenance over the capital cycle (8-10 years).
Please note that the price estimates above do not include the impact of the rapid price inflation seen over the last 18 months in Greece and the rest of Europe.
Our rapid hotel due diligence service in this case prevented an expensive valuation error on both the capital expenditure side of the investment as well as the operations side. We believe that errors of the same magnitude are being made on a daily basis by investors in Greece hotels.
For further information on hotel investment planning or hotel due diligence studies in Greece, Cyprus or other countries, or a confidential assessment of your hotel investment project, please contact us.
Date of Engagement:
July - September 2022
Countries of Operation:
Investment Advisory Services, Hotel Due Diligence