Last week, someone told me a deal where someone is selling his three stars hotel for 72 million Malaysian Ringgit (Approximately 23 million US dollars). The hotel is located in downtown prime area. It has around 150 rooms. Getting at least 80% occupancy is definitely not a problem.
Unfortunately, the deal does not many any sense. Assuming that the hotel is paid in cash without loan and the occupancy rate is 100% throughout the year. An average room rates of 200 Malaysian Ringgit (65 US dollars) a night. The annual sales would be around 12 million Malaysian Ringgit (4 million US dollars).
If the cost of operation takes about 30% of the sales. That is a profit of 8.4 million Malaysian Ringgit (2.8 million US dollars). The buyer would still need 8.4 years to break even.
That is a very big if, as such deals normally involve certain amount of loans and hotels are normally required to be refurbished every three to four years. As such, the value of the property has far exceeded the value of the business.
My gut feeling tells me that the current owner was never keen in developing the hotel business. Rather they are using the property as a form of investment and sell the property when the price is right.
In my future blog entry, I will try to explain how to evaluate a project.
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