Staying with a good friend of mine at his family run Country side Bed & Breakfast hotel for a weekend.
After spending a delicious kettle style “paprikás krumpli” (sausage & red paprika with potato) we have exchanged few word on business and life in general.
I was asked about my opinion on the market value of his property if I had given a task of appraisal.
Well it would be a challenging valuation project considering the property diversity and else.
We have agricultural land(forest, grazed-land, arable) and farm building and the hotel itself with the building plot it’s on.
When it comes the agricultural land and forest we have a fairy easy job. Given the fact that these type of properties should be valued using a formula given and describe in the national law & regulation.
However the apprising of a 20 room Bed & Breakfast would raise a couple of challenging question in our current market.
Usually we can use market base approach and collect comparable evidence of sold establishment similar in nature and location. However lately we are experiencing lack of new transactions. What we have are most likely pre- Corvid agreements (or agreed before and closed during the pandemic) and as such may not reflect the current market sentiment.
Applying discounted cash flow method using the hotel net operational income with a market rate applicable. Normal practice that we use past data of occupancy rate, net income normally allow us to project future net income (may be inflation adjusted)for the holding period.
Now this is where I stated to wonder (get a bit insecure).
How would you take the recent pandemic of Covid into account when using the discount interest rate?
The discount rate is intended to reflect the hypothetical buyer’s assessment of the risk inherent in the property.
However this pandemic is something new in terms of risk. Hotels and restaurants have never been shut down before as we had experienced during the pandemic.
We cannot know how it will impact on long term yield expectation.
Can the pre-pandemic data be still used?
What if an extra discount rate will be expected for the extra vulnerability?
It would be logical if the yield expectation would go up. If so we make a mistake not to figure that in, hence over-valuing assets.
On the other hand looking at the appetite of investors on the stock market lately that is irrationally risk-taking so I am not sure anymore.
I believe we will have to watch closely the future transactions in order to see on what yield they will take place. Only then we will know if there is any long term effect on yield expectation that may cause by the pandemic.
by Robert Langos