Who would have thought it? The government of Kenya is shaken to its core, the Finance Minister has had to step aside after a vote of no-confidence, a foreign country’s (Libya’s) sovereign fund, is involved in the scandal, and a commission of enquiry has been established, all because of the sale of a hotel. Our industry is not usually the subject of political debate and scandal, but then these are obviously special circumstances.
The hotel in question is the Grand Regency in Nairobi, a 226-room property in the centre of the capital. And the hoo-ha is over two things – first that the way in which the hotel was sold was improper, and second that the amount for which it was sold – KSh2.9 billion – was way below its “real” value. Steering well clear of the first point, I will focus on the second, that of valuation, and try to shed some light on this suddenly controversial subject
Critics of the deal, who seem to have become instant experts on the subject of hotel valuation, have bandied about figures twice or three times that figure as the real “value”, and are therefore claiming that the government has been short-changed. Investors in Africa’s hotel industry need to be mindful of the fact that government-owned hotels – and there are many of them around the continent – are highly visible to the public and to the local politicians, and that their sale can be highly emotive, more so perhaps than assets in other industries. Any price offered for hotels needs to reflect the true value, and to be supportable by the facts.
Let’s look first at the difference between “value” and “worth”. I can value anything I own at whatever price I like, and can be content with my personal delusions, but at the end of the day, the realisable value is only as much as the amount it is worth to someone else, that is, what they are prepared to pay for it. Fairly elementary, no? In the High Street, the shopkeeper prices his goods at a level that people will buy them for – any higher, then they will not sell. Still pretty elementary, I believe.
The difficult part comes when you want to work out what that “sticker price” should be. Well, international hotel valuers – and I count myself as one – mostly use the income capitalisation approach to valuation. What we say is – the value of a hotel is
what a rational buyer is prepared to pay for it, who is buying the hotel to make a return on his investment. That return will be generated by the profit from the hotel’s operations. So what is the earnings capacity of that hotel?
Expert hotel valuers look at the condition of that hotel, the way it is managed, its market positioning and competitive situation, the additional investment required to
sustain or enhance earnings, we make projections of future profitability, and then apply some truly complicated algebra to all that figuring (thank goodness for computers!), to come up with the amount of money that a willing buyer would pay a willing seller in the expectation of making x% return.
I’m not privy to the earnings figures of the Grand Regency Hotel in Nairobi, any more than are the majority of the “instant experts”. But what I can do is look at the figure for what it was reportedly sold, compare it with other hotel transactions, and generally judge it for reasonableness in light of what I know about the Nairobi market. Ksh2.9 billion is about US$46 million, which means about US$200,000 per room – and we look at it per room because it is the sale of rooms to overnight guests that is the primary generator of profits in the hotel. I understand from press reports that the hotel is a bit tired, and needs money spent on it if it is to compete properly with the likes of the (refurbished) InterContinental, the upcoming Radisson SAS and other future competitors. So a new owner may end up spending something like US$250,000 per room by the time they’ve finished.
One thing to note about the African hotel market is that the number of transactions against which to compare this figure – US$250,000 per room - is very small. Hundreds of hotels worth billions of dollars are sold each year in Europe and the USA – the annual number of hotel sales in the whole of sub-Saharan Africa, excluding South Africa, is probably less than twenty. So there isn’t much to compare the sale of the Grand Regency with. But there is one, the sale of the former Lonrho Hotels portfolio in Kenya to Kingdom Holdings. A total of 440 rooms and suites was sold in mid-2005 for an average of less than US$80,000 per room. Even with inflation, that’s less than US$100,000 per room today. This price reflected the earnings potential of the five hotels, the condition of the physical asset and the capital a new owner would be required to inject to achieve that potential. The exact same factors which any rational investor would have taken into account when sizing up the Grand Regency Hotel.
So on the face of it, KSh 2.9 billion looks about right to me. And the implied amount per room – US$427,000! - from the suggested “proper” value of KSh7 billion certainly does not! But we need more information to accurately judge what the hotel is worth, and the moral of this story is that potential investors cannot determine the true value to them without full disclosure. Buyers and sellers beware!
W Hospitality Group, Lagos