Sha563 Wellington

HVS International Wellington Hotel, Main Square, Newtown, UK
Economic Study and Valuation

Report
Wellington Hotel, Main Square,
Newtown, UK
Prepared by:
HVS International
14 Hallam Street
London W1W 6JG
Tel: +44 (20) 7878 7700

Fax: +44 (20) 7436 3386
Submitted to:
Mr Nicholas Bishop
This sample report was created for
Director
illustration purposes only. None of
Venture Capital Trust
the information represents actual
Norfolk Court
data and any correlation or
21 Warwick Road
similarity with an existing hotel or
London, EC2A 1ED
location is purely coincidental.
31 January 2001
We hope you enjoy reading this
sample report.
HVS No: 2000050001/110101/
31 January 2001
Mr Nicholas Bishop
Director
Venture Capital Trust
Norfolk Court
21 Warwick Road
London, EC2A 1ED
Dear Mr Bishop
Re: Wellington Hotel

Main Square, Newtown, UK
In accordance with your request, we herewith submit our Economic

Study and Valuation Report pertaining to the above property. We have
inspected the site and facilities and analysed the hotel market conditions
in the Newtown area. Our report has been prepared in accordance with
the Royal Institution of Chartered Surveyors’ (RICS) Appraisal and
Valuation Manual, March 1997.
Based on the available data, together with our analysis and experience in
the hotel industry, it is our opinion that the open market value of the
freehold interest in the property described in this report, as at 1 January
2001, is:
£24,000,000
TWENTY FOUR MILLION POUNDS STERLING
We hereby certify that we have no undisclosed interest in the property,

and our employment and compensation are not contingent upon our
findings and valuation. This opinion of value and the entire report are
subject to the comments made throughout and to all assumptions and
limiting conditions set forth herein.
Yours sincerely
HVS INTERNATIONAL
Justin Lanzkron
Consultant & Valuation Analyst
Charles Human, ARICS

Director
CH:JL:fp
HVS No: 2000050001
HVS International Table of Contents
Table of Contents
1. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Nature of the Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. Market Area Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Description of the Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5. Market for Transient Accommodation . . . . . . . . . . . . . . . . . . . 16
6. Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. Projection of Hotel Demand, Occupancy and Average Rate . . . . . . 27
8. Projection of Income and Expense . . . . . . . . . . . . . . . . . . . . . 39
9. Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
10. Investment Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Addendum
1. Statement of Assumptions and Limiting Conditions
2. Photographs of the Wellington Hotel

HVS International Executive Summary 1
1. Executive Summary
Property: Wellington Hotel

Address: Main Square, Newtown,
TG1 9JB, UK
Date of Inspection: 1 September 2000
Interest Valued: Freehold
Date of Value: 1 January 2001
Property Description
Site Area: Approximately 10,200 m²
Age: Opened January 1994
Property Type: Four-star
Guestrooms: 250 guestrooms
Number of Storeys: Eleven storeys
Food and Beverage Facilities: Two restaurants and one bar
Meeting Facilities: Five meeting rooms, 1,025 m² total
space
Car Parking: 150 spaces
Table 1-1 Summary of Historical & Forecast Income and Expense Performance
Forecast
1999 2000 2001 2002 2003 2004
Occupancy 75 % 74 % 71 % 71 % 73 % 74 %
Average Rate (£) 73 74 76 78 80 82
Rooms Revenue (£000s) 4,989 5,000 4,951 5,085 5,356 5,565

Total Revenue (£000s) 9,431 9,475 9,336 9,579 10,055 10,429
House Profit (£000s) 3,685 3,580 3,310 3,402 3,670 3,857

Net Income (£000s) 2,550 2,454 2,222 2,285 2,489 2,627
House Profit as a % of Total Revenue 39.1 % 37.8 % 35.4 % 35.4 % 36.5 % 37.1 %
Net Income as a % of Total Revenue 27.0 % 25.9 % 23.8 % 23.7 % 24.7 % 25.3 %
HVS International Executive Summary 2
Summary of Valuation Parameters

Number of Years to Stabilise: Four
Stabilised Year: 2004
Stabilised Inflation Rate: 2.5%
Loan-to-Value Ratio: 65%
Mortgage Interest Rate: 7.5%
Holding Period: 10 years
Amortisation Period: 15 years
Equity Yield Rate: 17.0%
Terminal Capitalisation Rate: 9.0%
Brokerage and Legal Fees: 1.5%
Unleveraged Internal Rate of Return: 12.3%
Estimates of Value
Income Capitalisation Approach: £24,000,000
Cost Approach: £22,000,000
Sales Comparison Approach: £19,600,000-£44,300,000
Open Market Value

as at 1 January 2001: £24,000,000
Open Market Value

Per Room (approx.): £96,000
HVS International Nature of the Assignment 3
2. Nature of the Assignment
Subject of the The subject of the Economic Study and Valuation Report is the freehold
Economic Study and interest in the Wellington Hotel located at Main Square, Newtown, UK
Valuation Report (‘the Hotel’). The Hotel has 250 guestrooms and opened in 1994. In
addition to the guestrooms, the Hotel contains a 125-seat café restaurant,
an 80-seat speciality restaurant, a 50-seat bar, 1,025 m2 of meeting and
banquet space, a fitness centre and other facilities typically found in a
four-star, city centre, business Hotel.
Purpose of the The purpose of the Economic Study and Valuation Report is to estimate
Economic Study and the open market value of the freehold interest in the Hotel with vacant
Valuation Report possession of the Hotel.
Open market value is defined as:
‘An opinion of the best price at which the sale of an interest in the
property would have been completed unconditionally for cash
consideration on the date of valuation, assuming:
1. a willing seller;
2. that, prior to the date of valuation, there had been a reasonable
period (having regard to the nature of the property and the state
of the market) for the proper marketing of the interest, for the
agreement of the price and terms and for the completion of the
sale;
3. that the state of the market, level of values and other
circumstances were, on any earlier assumed date of exchange of
contracts, the same as on the date of valuation;
4. that no account is taken of any additional bid by a prospective
purchaser with a special interest; and
5. that both parties to the transaction had acted knowledgeably,
prudently and without compulsion.’1
Property Rights Valued The property rights valued are the freehold interest in the land and
premises, including the furniture, fixtures and equipment (FF&E).
1
RICS Appraisal and Valuation Manual, The Royal Institution of Chartered
Surveyors, London SW1P 3AD, March 1997, PS 4.2.
The Hotel has been valued assuming that, as at the date of value, it
would be available free and clear of any specific management or
operating leases. For the purpose of this valuation, we have assumed
that a competent international or national operator will manage the
Hotel.
Marketing and We estimate the marketing period for the Hotel to be six to twelve
Exposure Period months. The exposure period, referring to the amount of time necessary
for the Hotel to have been exposed retrospectively, prior to our value, is
estimated to be less than or equal to 12 months.
Pertinent Dates The effective date of value is 1 January 2001. All projections are
expressed in inflated pounds sterling, and the value estimate represents
year 2001 pounds sterling. The Hotel was inspected by Justin Lanzkron
on 4 January 2001, and our analysis was performed shortly thereafter.
Use of the Economic This Economic Study and Valuation Report has been prepared for
Study and Valuation Venture Capital Trust. The information presented in this report should
Report not be disseminated to the public or third parties without the express
written consent of HVS International.
Scope of the Economic All information was collected and analysed by the staff of HVS
Study and Valuation International. Information such as historical operating statements, site
Report plans, floor plans and so forth was supplied by Venture Capital Trust.
We have investigated comparable sales in the market area and have
spoken with buyers, sellers, brokers, property developers and public
officials. Unless otherwise noted, we have inspected the competitive
hotels and analysed the hotel sales summarised in this report, and our
value conclusion has been based on this investigation and analysis.
Method of Study The methodology used to develop this Economic Study and Valuation
Report has been based on the market research and valuation techniques
set forth in the textbooks written by HVS International for the American
Institute of Real Estate Appraisers and the Appraisal Institute, entitled
The Valuation of Hotels and Motels,2 Hotels, Motels and Restaurants:
Valuations and Market Studies,3 The Computerized Income Approach to
Hotel/Motel Market Studies and Valuations,4 and Hotels and Motels: A Guide
to Market Analysis, Investment Analysis, and Valuations.5
2
Stephen Rushmore (1978) The Valuation of Hotels and Motels, American Institute
of Real Estate Appraisers, Chicago.
3
Stephen Rushmore (1983) Hotels, Motels and Restaurants: Valuations and Market
Studies, American Institute of Real Estate Appraisers, Chicago.
4
Stephen Rushmore (1990) The Computerized Income Approach to Hotel/Motel
Market Studies and Valuations, American Institute of Real Estate Appraisers,
Chicago.
5
Stephen Rushmore (1992) Hotels and Motels: A Guide to Market Analysis,
Investment Analysis, and Valuations, Appraisal Institute, Chicago.
The valuation was calculated as follows:

1. The subject site has been evaluated from the viewpoint of its
physical utility for the operation of a hotel, as well as access,
visibility and other relevant location factors.
2. The Hotel's existing premises have been inspected for their
quality of construction, design, layout efficiency and items of
physical deterioration and functional obsolescence.
3. The surrounding economic environment, on both an area and a
neighbourhood level, has been reviewed to identify specific
hotel-related economic and demographic trends that may have
an impact on the future demand for hotels.
4. Dividing the market for transient accommodation into individual
segments has defined specific market characteristics for the types
of traveller expected to utilise the area's hotels. The factors
investigated include purpose of visit, average length of stay,
facilities and amenities required, seasonality, daily demand
fluctuations and price sensitivity.
5. An analysis of existing and proposed competition has provided
an indication of the current accommodated demand, along with
market penetration and the degree of competitiveness.
6. Documentation for an occupancy and average rate projection has
been derived from an analysis of market-wide demand and
supply combined with a penetration analysis to derive the
Hotel’s projected occupancy.
7. A projection of income and expense has been made in
accordance with the Uniform System of Accounts for Hotels. This
projection sets forth the anticipated economic benefits of the
Hotel for ten years and provides the basis for the income
capitalisation approach.
8. The report considers three approaches to value: income
capitalisation, cost and sales comparison. Because hotels are
income-producing properties that are normally bought and sold
on the basis of capitalisation of their anticipated stabilised
earning power, the greatest weight has been given to the value
indicated by the income capitalisation approach. We find that
most hotel investors employ a similar procedure in formulating
their purchase decisions, and thus the income capitalisation
approach most closely reflects the rationale of typical buyers.
HVS International Market Area Analysis 6
3. Market Area Analysis
The macro-economic climate in which a hotel operates is an important

consideration in forecasting hotel demand and income potential.
Economic and demographic trends that reflect the amount of visitation
provide a basis from which the demand for hotel accommodation can be
projected.
The Hotel’s market area is defined by Newtown city centre and its
suburbs. The purpose of the market area analysis is to review available
economic and demographic data to determine whether the defined
market area will undergo economic growth, stability or decline. In
addition to predicting the direction of the economy, the rate of change
must be quantified. These trends are then correlated based on their
propensity to reflect variations in hotel demand with the objective of
forecasting the amount of growth or decline in transient visitation by
individual market segment.
National Economic The overall economic condition of an area is reflected by the propensity
Overview of individuals to travel there. Key indicators of future hotel demand are
those trends that reflect the relative health of the economy and the
spending power of individuals. This section of the report presents a
discussion of the primary domestic economic factors that are likely to
have the greatest influence on the UK's hotel demand. The following
table contains a summary of these economic indicators.
Table 3-1 Key Economic Indicators - UK
Actual Forecast
1996 1997 1998 1999 2000 2001 2002 2003 2004
Real GDP growth (%) 2.3 3.4 2.1 2.1 3.0 2.4 2.2 2.2 2.1
Consumer price inflation (av %) 2.4 2.8 2.6 2.4 2.1 2.4 2.5 2.5 2.5
Budget balance (% of GDP) -4.3 -2.1 -0.3 0.6 1.0 1.3 1.5 1.4 1.5
Current account balance (% of GDP) 0.0 0.4 0.2 -1.5 -1.3 -1.1 -0.7 -0.2 -0.1
Short term interest rate (av %) 6.0 6.5 6.8 5.5 6.1 5.8 6.0 6.2 6.0
Exchange rate £:$ (av) 0.64 0.61 0.60 0.62 0.66 0.64 0.61 0.58 0.59
Exchange rate £:Euro (av) - - 0.68 0.65 0.64 0.66 0.67 0.68 0.69
Source: Economist Intelligence Unit September 2000

The Economist Intelligence Unit (EIU) UK Country Forecast (September

2000) has forecast national GDP growth for the UK at 2.9% for 2000, 2.4%
for 2001 and 2.5% for 2002. We have used these national estimates as the
starting point for our evaluation of the potential growth in demand for
hotel accommodation by market segment in the market area, although
we have specifically taken into account the state of, and prospects for,
the immediate local area economy.
The EIU has forecast retail price inflation for the UK at 2.1% in 2000,
2.4% in 2001 and approximately 2.5% thereafter. We have used these
estimates as the starting point for our evaluation of the potential growth
in achievable average room rates by market segment in the market area,
and to determine the likely change in operating costs over time,
although we have specifically taken into account local hotel market
conditions.
Our assumptions and projections relating to hotel demand growth and

average room rate growth are explained in Section 5, Market for Transient
Accommodation, and Section 7, Projection of Hotel Demand, Occupancy and
Average Rate.
Market Area and Local The market area activity is affected by the general level of economic
Economy activity in the immediate and surrounding area. We have taken into
consideration both general national economic indicators (such as GDP
growth) and specific local activity, including that actual and planned.
The Wellington Hotel is located in Newtown city centre at Main Square,

adjacent to Gateway train station.
Newtown is ideally situated next to the intersection of the M4 and the

M5 motorways, which run west to east and north to south. The M4 links
Newtown City centre to the M4, which gives easy access to all parts of
the country. Journey times from Newtown to London and Birmingham
and are approximately two hours and one hour 25 minutes, respectively.
Newtown Airport Airport passenger counts are important indicators of transient hotel
demand. A sizeable percentage of arriving passengers may need hotel
accommodation depending upon the type and location of a particular
airport. Trends showing changes in passenger counts also reflects local
business activity and the overall economic health of an area. Table 3-2,
below, summarises the volume of passenger traffic for the past nine
years. Total passenger movements include the sum of arrivals,
departures and transient movements.
Table 3-2 Airport Passenger Movements for Newtown International Airport – 1991-99
% % % Domestic International
Year Total Change Domestic Change International Change % Share % Share
1991 1,142,734 - 344,551 - 798,183 - 30.2 % 69.8 %

1992 1,250,703 9.4 % 312,760 (9.2) % 937,943 17.5 % 25.0 75.0
1993 1,373,165 9.8 264,291 (15.5) 1,108,874 18.2 19.2 80.8
1994 1,615,761 17.7 279,557 5.8 1,336,204 20.5 17.3 82.7
1995 1,884,116 16.6 344,730 23.3 1,539,386 15.2 18.3 81.7
1996 1,823,029 (3.2) 390,916 13.4 1,432,113 (7.0) 21.4 78.6
1997 1,881,322 3.2 359,428 (8.1) 1,521,894 6.3 19.1 80.9
1998 2,139,900 13.7 378,336 5.3 1,761,564 15.7 17.7 82.3
1999 2,288,173 6.9 390,752 3.3 1,897,421 7.7 17.1 82.9
Compound Annual
Growth 9.1 % 1.6 % 11.4 %
Source: Airports Council International
As illustrated in the above table, Newtown International Airport has

experienced tremendous growth over the past eight years. The number
of passengers handled at the airport has increased by a little over 9% per
year on average since 1991, with a larger gain recorded in the
international passenger segment, at over 11%.
Newtown International Airport is located some seven miles south-west

of the city centre and can be reached from the Hotel in 20 to 30 minutes
by road. Newtown International Airport is the fastest growing major
regional airport in the UK, providing direct flights to all major UK
destinations, plus several in Europe and some in North America,
including New York, Washington and Boston. A new £42 million
terminal building has just opened, providing greater capacity and
increasing the number of destinations provided, especially for business
customers.
The major commercial demand generators are located in or around

Newtown city centre, and in the office and business parks such as
Newtown West business park to the north of the city. Generally,
industrial activity has been high in the Newtown market in recent years.
Key manufacturing industries in the region include aerospace and
defence, paper, printing and publishing, electronics and electrical
engineering. There are over 1,900 manufacturing companies in the
region, employing over 150,000 people.
Among the major organisations located in Newtown city centre and

north of the city centre are Somerfield, Sony, Axa Sun Life, RAC and
HSBC (a very short distance from the subject Hotel). Hi-tech industry,
supported by university research facilities, continues to grow. Many hi-

tech businesses have invested in the Newtown area in recent years,
including Orange, Hewlett Packard, and Toshiba. Prospects for the
region’s future activity are good. Newtown has become known as one of
England’s largest financial services centres outside London. The
structure of the workforce in Newtown is detailed in Table 3-3, below.
Table 3-3 Employment by Sector in Newtown - 2000
Sector Employment
Newtown UK Average
Manufacturing Industries 24,900 11.4 % 11.0 %

Construction/Utilities/Agriculture 8,400 3.8 3.5
Distribution/Hotels & Restaurants 42,300 19.4 18.0
Transport & Communications 11,600 5.3 4.0
Banking, Finance & Insurance 70,900 32.5 38.0
Public Administration, Education & Health 51,600 23.6 22.0
Other Services 8,700 4.0 3.0
Total 218,400 100% 100%
Source: Newtown Economic Development Department, June 2000
There is only a moderate level of tourist visitation to Newtown city

centre at this time, and the number of overnight stays from leisure
visitors is relatively low. There are only a few major attractions in the
city centre, including Newtown Museum of Archaeology, the Tudor
House Museum, the Newtown Zoological Gardens and a number of art
galleries. In addition, Sunnyside Theme Park and Rockland Park, two
major tourist attractions situated within easy reach of Newtown,
generate some weekend and general holiday period visitation for the
area.
Located to the north of Newtown near Tower Hill is the ‘Valley’

shopping centre, considered to be one of the largest regional shopping
centres in the UK. The Tower Hill retail area also includes a multiplex
cinema and the ‘Venue’ leisure centre.
An attraction that is expected to generate both commercial and tourism-

related visitation is the major regeneration of the Newtown
Harbourside. The £90 million, 15-acre ‘Newtown Park’ project will bring
science, nature, and art together in innovative new ways. The scheme
includes ‘Explore Zone’, a science world theme park, and ‘Wildscreen
Zone’, a virtual reality theme park with an IMAX cinema and botanical
garden, as well as new residential and commercial office space.
‘Newtown Park’ is expected to attract 450,000 visitors in its first year. The
project opened at the beginning of July 2000.
Another major development project that is currently under construction

in Newtown, is the city centre regeneration project at Main Square
adjacent to Gateway train station. The development will provide a
mixed-use environment of 23 acres combining office accommodation
with a full range of retail and leisure facilities. HSBC are relocating their
headquarters to Main Square and Tesco will occupy their new regional
headquaters in Newtown in 2001. Other companies moving to Main
Square include BT Plc and Barclays Bank. The Wellington Hotel is
located near this development. Other office and business park
developments planned in the Newtown region are summarised in Table
3-4 below.
Table 3-4 Proposed Office and Business Park Developments in Newtown as at

January 2001
Location Description Size m 2
North Newtown
Parkway North Office Park 130,000
Newtown Business Park Office Campus 150,000
The Quadrant Offices and light assembly 50,000
Westerliegh, Tate Business Park 190,000
East Newtown
Somerdale Offices and industrial use 150,000
South Newtown
South Newtown Business Park Offices and industrial use 80,000
Wills Factory Manufacturing and light industrial/warehousing 260,000
Regeneration Potential
Grove Park Regeneration Area 1,010,000
Source: Newtown Economic Development Department, September 2000
We highlight overleaf the aspects of Newtown which we consider to

have a specific bearing upon historic, current and potential future hotel
demand:
• The regeneration project at Main Square;

• The continuing redevelopment of Newtown city centre, for
example the Harbourside and North Shore developments and the
growth of new businesses which will increase future commercial
hotel demand;
• The recently opened, £42 million terminal building at Newtown

International Airport will further enhance commercial and leisure
visitation in the Newtown area;
• The new ‘Newtown Park’ development at the Harbourside;
• The potential development of an Eco-Park/Zoo in Canons Marsh,
located in north Newtown some fifteen minutes’ drive from the
Wellington Hotel, is likely to enhance leisure demand further in
the area. Development of the park is anticipated to start in 2002;
• The ongoing expansion of existing business and industrial parks
located in or near Newtown, for example the Newtown West
Business Park located in North Newtown, is likely to create
further commercial hotel demand.
Conclusion Our review of various national, regional and local economic data
indicates that Newtown benefits from strong levels of commercial room
night demand generated from local businesses, supported by modest
numbers of leisure visitors, although Newtown Park and the proposed
Eco Park could have some impact on leisure visitation. Specific local
economic activity appears to be increasing beyond general national
levels due to a combination of factors, these include the ongoing
development of good quality offices and business parks, including Main
Square as well as the Newtown Harbourside redevelopment.
HVS International Description of the Hotel 12
4. Description of the Hotel
LOCATION A hotel’s location within a specific neighbourhood can have a direct

impact upon its performance relative to a competitive market. The
following paragraphs describe the location of the Hotel in relation to its
immediate surroundings and its market area, as described in Section 3.
Following this site and location analysis the property’s physical facilities
are described.
The Hotel is located near the Main Square development adjacent to

Gateway train station. We consider the Hotel to occupy a prime location
in Newtown city centre.
Size and Topography of According to Venture Capital Trust, the size of the site of the Wellington
the Site Hotel is approximately 10,200 m². The site is roughly rectangular in
shape and the topography of the site is generally flat.
The Wellington Hotel is adjacent to the Main Square office

development. The Hotel is located on the east side of the development
and is currently bordered by the Floating Harbour on the east and
Gateway railway station on the south. To the north of the Hotel is the
HSBC Building, which is currently almost complete. In the centre of the
Main Square development are the headquarters of Tesco and located on
the west side of the Main Square development are the new offices of
Barclays Bank, both these buildings are currently almost built.
Access The Hotel benefits from excellent access to and from Castle Way and
Castle Gate. The roundabout immediately west of the site links it
through Piccadilly Street to the beginning of the M34, and further to the
M8 and the M35. Heading to the south gives access to the A5, the A40 to
Newtown Airport and south to the M35 and the A37. Gateway railway
station is situated adjacent to the site, approximately two minutes walk
south of the Hotel. Newtown International Airport is located some seven
miles to the south-west via the A40, some 15 to 20 minutes’ drive from
the site.
Visibility The visibility of the Hotel is likely to be very good from all approaches to
the site, including Castle Way, Castle Gate and Regent Street.
Proximity to Demand Ease of access to primary generators of demand is vital for the successful
Generators operation of a hotel. One of the primary factors when choosing a hotel
over competitive facilities is its location relative to local demand
generators, whether these are commercial businesses or tourist

attractions. The Hotel enjoys a good location in relation to the following
demand generators:
• Newtown city centre;

• M34 motorway;
• The Main Square development;
• Gateway railway station;
• Companies located in Newtown city centre;
• ‘Newtown Park’.
Conclusion The Wellington Hotel enjoys an excellent location. It is centrally located
within Newtown city centre and easily reached by several modes of
transport. The Hotel also benefits from its proximity to all the major
demand generators in Newtown.
HOTEL FACILITIES The quality of a property's physical facilities has a direct influence on its
marketability and attainable occupancy and average rate. The design
and functionality of the structure can also affect operating efficiency and
overall profitability. The following paragraphs describe the Hotel and
mixed-use rental space’s physical premises and facilities in an effort to
determine how they contribute to its total value. A number of
photographs of the Hotel are provided in Addendum 2.
Summary of the Based on our inspection and information provided by the management
Facilities of the Wellington Hotel, Table 4-1 summarises the facilities available at
the Wellington Hotel.
Table 4-1 Facilities Summary
Address: Main Square Opening Date: January 1994

Newtown
Tenure: Freehold
Refurbishment History: 1997 - 80 Bedrooms, lobby, meeting rooms, IT and exterior

1998 - 70 Bedrooms, lobby, meeting rooms, kitchen, exterior
1999 - 100 Bedrooms, bar/restaurant, and exterior
Guestrooms Approximate Area/m² Number

Single 25 85
Double 28 90
Executive 35 60
Suite 40 15
Total 250
Maximum
Capacity/Persons
Meeting Rooms Approximate Area/m² Theatre Style
Ballroom 500 400
Pre-Function Room 185 n/a
Board Room 40 20
Meeting Room 1 150 120
Meeting Room 2 150 120
Total 1,025 660
Food and Beverage Facilities Approximate Area/m² Approximate Number of Seats

Café Restaurant - Bon Marche 200 125
Speciality Restaurant - Oh! Cajun 120 80
Bar/Lounge 70 50
Total 390 255
Car Parking: Approximately 150 parking spaces
Leisure facilities: Fitness centre with sauna, solarium and whirlpool spa.
Condition of the The Hotel opened at the beginning of 1994 and since that time has been
Building and Facilities well maintained. We have been provided with information on historic
capital expenditure at the Hotel. From our inspection of the Hotel, it
appears that the Hotel is in very good working order and no immediate
material capital expenditure requirement has been identified.
Conclusion – Hotel In general, the Hotel’s premises appear to be very well-suited for hotel
Facilities use. The building is straightforward in design and configuration,
permitting efficiency of operation and convenient guest and staff flow.
The exterior design of the building is both modern and inviting and the
interior finishes are of a high quality. The guestrooms are excellent in
terms of size and decoration and the Hotel’s ancillary facilities are
appropriate for the operation of a four-star commercial, city centre hotel
in the UK, outside London.
HVS International Market for Transient Accommodation 16
5. Market for Transient Accommodation
The analysis of demand by the use of individual market segments is

important because each market segment often exhibits unique
characteristics relating to factors such as growth potential, seasonality of
demand, average length of stay, double occupancy, facility
requirements, price sensitivity and so forth. By quantifying the overall
room night demand by market segment and defining the individual
characteristics of each segment, the future potential for each market
segment can be projected.
Accommodated Room Demand for transient accommodation in the defined market area is
Night Demand generated primarily by the following five market segments.
Segment 1 Commercial
Segment 2 Meeting & Conference
Segment 3 Individual Leisure
Segment 4 Group Leisure
Segment 5 Airline
Based on our fieldwork, area analysis and knowledge of the local hotel
market, we estimate that, in 2000, the distribution of accommodated
hotel room night demand for those hotels that we consider to be
competitive with the Hotel is as shown in Table 5-1. Further details of
these hotels are given in Section 6, Competition.
Table 5-1 Accommodated Room Night Demand - Competitive Market 2000
Accommodated Percentage of
Market Segment Demand Total
Commercial 229,455 55 %
Meeting & Conference 57,552 14
Individual Leisure 77,990 19
Group Leisure 25,783 6
Airline 24,239 6
Total 415,018 100 %
This aggregate market mix, with business demand accounting for

approximately 75% and leisure demand accounting for approximately
25% of total area-wide demand, reflects the area as primarily a business
destination. As a result, historically, hotel occupancies in the area have

been stronger during weekdays and commercial periods and weaker
during weekends and holiday periods.
Commercial Segment Commercial demand is strongest on Monday to Thursday nights,

declining significantly on Fridays and Saturdays and increasing
somewhat on Sundays. This demand in the Newtown area is relatively
constant throughout the year, with some drop-off noticeable in the
period from November to February and August when travellers,
especially business and conference visitors, take holidays to other
destinations.
Future demand in this segment is tied primarily to the business and

economic health of Newtown and of the UK in general. As the local
economy shows improved stability and growth, business travel should
increase accordingly. With the continued development of Newtown city
centre and business parks in and around Newtown, such as the
Newtown West Business Park, we anticipate a continued growth in the
commercial sector which is likely to show increased activity in the next
two to three years.
In light of the potential for further developments in and around

Newtown and the Hotel’s immediate neighbourhood, we consider that
demand for this segment is likely to grow at a rate slightly above
national GDP for the next few years. We have selected growth rates of
2.5% in 2001 and 3% in 2002 and 2003. From 2003 onward we have
assumed a stabilised growth rate of 2.5%.
Meeting & Conference The Meeting & Conference segment in the market area mostly comprises
Segment demand from local companies. They typically require meeting venues
which are conveniently located and which offer suitable space and
facilities. For the purpose of analysing hotel demand, we have
considered conference demand to be only those hotel guests attending
meetings and conferences in the hotel at which they are staying. Those
attending ‘city ’ events in non-residential venues are considered to be
part of commercial demand.
Peak conference demand typically occurs in the spring and autumn,

summer represents the slowest period and winter demand can be
variable. The average length of stay for typical conference groups ranges
from two to four nights. Most commercial groups require
accommodation during the weekday period of Monday to Thursday, but
associations and social groups will sometimes utilise the weekends.
Future demand potential in the Meeting & Conference segment is

closely related to the growth trend expected for the Commercial
segment. Because most meetings have either a direct or an indirect
business purpose, the economic considerations that have an impact on
business travel also affect Meeting & Conference demand. For the
purpose of our analysis, we have chosen to apply the same growth rates
for Conference & Meeting demand as for Commercial demand.
Individual Leisure Individual Leisure demand comprises both those people travelling in
Segment groups and those travelling individually for tourism and leisure
purposes. These sectors comprise the majority of weekend demand in
the market area, but are also responsible for some weekday demand
during the summer and other holiday periods.
As stated previously, there are a limited number of tourist attractions in

the immediate area of Newtown. Generally, these attractions generate a
high level of day visitation but the demand for overnight hotel
accommodation is limited. However, it is important to note that the
recently opened Newtown Park development on the Harbourside,
should start to attract additional leisure demand to Newtown and this
should contribute to an increase in demand for hotel accommodation at
weekends.
For the purpose of this analysis, we have chosen to apply a growth rate
of 2.5% in 2001 and 4% in 2002. From 2003 onwards we have assumed a
stabilised growth rate of 2.5%.
Group Leisure Segment The Group Leisure segment generally comprises visitors who have
purchased package holidays that include the cost of travel, hotel
accommodation and some provision for meals, or what is termed an
‘inclusive tour’. Tour operator rates are generally contracted annually at
rather low levels, but are used to help fill lower occupancy periods.
Because of the low rate of this segment, this demand will be replaced by
higher yielding demand as market occupancy increases, when demand
timing permits.
Group Leisure demand in the Newtown area is derived from several

sources including coach tours travelling to the continent or elsewhere in
Britain and shoppers. For the purpose of our analysis, we have chosen to
apply the same growth rates for the Group Leisure demand as for the
Individual leisure demand.
Airline Segment This segment mostly comprises airline crew contracts, which generally
achieve significant discounts compared to commercial segments. We
applied a growth rate of 2.5% from 2001 onwards.
Conclusion The purpose of segmenting hotel demand is to define each major type of
demand, identify customer characteristics and estimate future growth
trends. Starting with an analysis of the local area, five segments were
defined as being representative of the Hotel's market. Various types of
economic and demographic data were then evaluated to determine their
propensity to reflect future changes in hotel demand. Based on this
procedure we have made the following forecast of market segment

growth rates. These growth rates will be utilised in subsequent sections
of this study to forecast changes in hotel demand.
Table 5-2 Forecast Annual Growth Rates by Market Segment

Competitive Market 2001-05
Annual Compounded Growth Rate

Market Segment 2001 2002 2003 2004 2005
Commercial 2.5 % 3.0 % 3.0 % 2.5 % 2.5 %

Meeting & Conference 2.5 3.0 3.0 2.5 2.5
Individual Leisure 2.5 4.0 2.5 2.5 2.5
Group Leisure 2.5 4.0 2.5 2.5 2.5
Airline 2.5 2.5 2.5 2.5 2.5
Base Demand Growth 2.5 % 3.2 % 2.8 % 2.5 % 2.5 %

HVS International Competition 20
6. Competition
The Competitive An integral component of a market area’s supply and demand

Market relationship that has a direct impact on the performance is the current
and anticipated supply of competitive hotel facilities. To evaluate an
area's competitive environment, the following steps should be taken:
• Identify the area's hotel facilities and determine which are directly
and indirectly competitive with the Hotel;
• Determine whether additional hotel rooms (net of attrition) will
enter the market in the foreseeable future;
• Quantify the number of existing and proposed hotel rooms
available in the market;
• Review the rate structure, occupancy levels, market orientation,
facilities and amenities of each competitor.
Based on an evaluation of the occupancy, rate structure, market
orientation, chain affiliation, location, facilities, amenities, reputation
and quality of the area's hotels, as well as the comments of management
representatives, we have identified two properties that are considered to
be primarily competitive with the Wellington Hotel. Including the Hotel,
these primary competitors total 781 rooms. Twelve additional hotels are
judged to be only secondarily competitive.
Although the facilities, rate structures or market orientations of these

hotels prevent their inclusion among the primarily competitive supply,
they do compete with the Hotel to some extent. The room count of each
secondary competitor has been weighted to reflect the degree to which it
competes with the Wellington Hotel. The aggregate weighted room
count of the secondary competitors is 740.
The following Tables (6-1, 6-2 and 6-3) summarise the important
operating characteristics of the primary and the secondary competitors
for 1998 to 2000. This information was compiled from personal
interviews, inspections, hotel directories and our in-house library of
operating data.
Table 6-1 sets out each competitive hotel’s market segmentation,

occupancy, average room rate and rooms revenue per available room
(RevPAR). RevPAR is calculated by multiplying a hotel’s occupancy by
its average rate. This calculation serves to gauge how well a hotel is
maximising its rooms revenue.
Table 6-2 details each property's penetration factor. Penetration is the

ratio between a specific hotel's operating results and the corresponding
data for the market. If the penetration factor is greater than 100%, the
property is performing better than the market as a whole; conversely, if
the penetration is less than 100%, the hotel is performing at a level
below the market-wide average.
Table 6-3 sets out the key physical characteristics of each of the main
competitive hotels and includes information about each hotel’s
published rates and brand affiliation. The location of each primary and
secondary competitive hotel is shown in the Competition Map which
follows Table 6-3. The Competition Map also shows the location of the
Hotel relative to its defined primary and secondary competitors as well
as the location of those proposed hotels we consider to be relevant (see
below).
Proposed Competition In our analysis we have included four developments which we consider
will also become competitive with the Wellington Hotel.
• A 128-room Marriott Hotel is due to open at the beginning of

2002 on Manor Road in Newtown city centre. We consider
this hotel to be 100% competitive with the Wellington Hotel;
• A 220-room Travel Inn is due to open at the beginning of
2001 at Exchange House in Newtown city centre. We have
considered this hotel to be 25% competitive with the
Wellington Hotel as it will be positioned significantly below
it. We have therefore added 55 competitive rooms into the
market from February 2001;
• A 123-room Travelodge is due to open at the beginning of
2001 on John Street in Newtown city centre. We have also
considered this hotel to be 25% competitive with Wellington
Hotel for the same reason. We have added 31 competitive
rooms into the market from January 2001;
• A 110-room Premier Lodge Hotel is due to open in January
2001 on Queen Street in Newtown city centre. We have also
considered this hotel to be 25% competitive with the
Wellington Hotel for the same reason. We have added 28
competitive rooms into the market from January 2001.
There are currently unconfirmed proposals for two other hotel
developments in Newtown. However, we have not taken these into
consideration in our analysis as there was sufficient doubt still
surrounding these projects at the time of our study. These include:
• A 100-room Express by Holiday Inn at Grange Hill, near

Newtown Grange Hill train station. The hotel has been
linked with Stannifer Hotels, an existing Express franchisee;
• A 150-room Quality Hotel, near Junction 17 of the M8 at
Tower Hill (A4018).
It is our opinion that, even if these hotels are developed, they will be
targeted at lower rate paying business and leisure travellers, and due to
their distance from the Wellington Hotel they are unlikely to be
significantly competitive with the Hotel.
Table 6-1 Operating Profiles of the Primary and Secondary Competitors 1998-00 (£)
Estimated 2000 Market Segmentation Estimated 1998 Estimated 1999 Estimated 2000
2000
l
ercia
rence
Confe &
Total Weighted
dual
re
ing
re
No of Comp Annual Rm Average Average Average
Group
Leisu
e
Comm
Meet
Indivi
Leisu
Airlin
Primary Competitors Rooms Level Count Occ Rate RevPAR Occ Rate RevPAR Occ Rate RevPAR
Wellington Hotel 250 55 % 15 % 20 % 5% 5% 100 % 250 76 % £72 £55 75 % £73 £55 74 % £74 £55
Holiday Inn 242 60 10 20 5 5 100 242 73 70 51 74 72 53 73 73 53
Hilton 289 60 10 20 5 5 100 289 75 57 43 79 62 49 75 62 47
Sub-Totals/Averages 781 58 % 12 % 20 % 5% 5% 100 % 781 75 % £66 £49 76 % £68 £52 74 % £69 £51
Secondary Competitors
Corus Hotel 187 55 % 15 % 15 % 7 % 8 % 75 % 140 82 % £45 £37 85 % £46 £39 81 % £51 £41
Berkeley Hotel 40 55 8 30 0 7 75 30 71 54 38 69 55 38 70 56 39
Forte Posthouse 182 55 15 20 5 5 75 137 69 59 41 70 60 42 70 53 37
Jarvis International 201 50 20 10 10 10 75 151 82 50 41 79 50 40 76 53 40
City Hotel 40 60 5 20 10 5 50 2 0 0 0 0 0 0 80 57 46
Swallow 128 55 15 20 5 5 50 64 71 57 40 66 60 40 72 72 52
Moat House 142 40 25 25 5 5 50 71 72 55 40 79 56 44 76 58 44
Novotel 200 55 15 20 5 5 25 50 76 50 38 68 53 36 77 56 43
Express by Holiday Inn 68 50 10 25 10 5 25 17 72 44 32 70 46 32 77 58 45
The Piccadilly Hotel 167 55 15 15 10 5 25 27 0 0 0 0 0 0 75 35 26
Thistle Hotel 94 55 0 15 25 5 25 24 0 0 0 0 0 0 87 39 34
The Grand Hotel 112 45 20 20 10 5 25 28 71 35 25 71 46 33 71 45 32
Sub-Totals/Averages 1,561 52 % 16 % 18 % 7% 7% 50 % 740 76 % £51 £39 75 % £53 £40 75 % £54 £40
Totals/Averages 2,342 55 % 14 % 19 % 6% 6% 65 % 1,521 75 % £59 £44 76 % £61 £46 75 % £62 £46

Table 6-2 Operating Performance Analysis – Primary and Secondary Competitors 1998-00 (£)
Estimated 1998 Estimated 1999 Estimated 2000

Total 2000 Weighted
Number of Competitive Annual Room Fair Occ Average Rate RevPAR Occ Average Rate RevPAR Occ Average Rate RevPAR
Property Rooms Level Count Share Penetration Penetration Penetration Fair Share Penetration Penetration Penetration Fair Share Penetration Penetration Penetration
Wellington Hotel 250 100 % 250 17 % 101 % 122 % 124 % 17 % 99 % 120 % 118 % 16 % 99 % 120 % 119 %
Holiday Inn 242 100 242 16 97 119 115 16 98 118 115 16 98 119 116
Hilton 289 100 289 20 100 97 97 20 104 102 106 19 100 101 101
Corus Hotel 187 75 140 0 109 76 83 0 112 75 84 9 108 83 90
Berkeley Hotel 40 75 30 53 94 92 87 53 91 90 82 2 94 91 85
Forte Posthouse 182 75 137 0 92 100 92 0 92 98 91 9 94 86 81
Jarvis International 201 75 151 47 109 85 93 47 104 82 85 10 102 86 88
City Hotel 40 50 2 0 0 0 0 0 0 0 0 0 107 93 99
Swallow 128 50 64 100 94 97 91 100 87 98 86 4 96 117 113
Moat House 142 50 71 0 96 93 89 0 104 92 96 5 102 94 96
Novotel 200 25 50 0 101 85 86 0 90 87 78 3 103 91 94
Express by Holiday Inn 68 25 17 0 96 75 72 1 92 75 70 1 103 94 97
The Piccadilly Hotel 167 25 27 10 0 0 0 0 0 0 0 2 100 57 57
Thistle Hotel 94 25 24 10 0 0 0 0 0 0 0 2 116 63 74
The Grand Hotel 112 25 28 10 94 59 56 2 94 75 71 2 95 73 69
Primary Competitors 781 100 % 781 53 % 99 % 112 % 111 % 53 % 100 % 112 % 113 % 51 % 99 % 112 % 111 %
Secondary Competitors 1561 47 % 740 47 % 101 % 87 % 87 % 47 % 99 % 86 % 86 % 49 % 101 % 87 % 88 %
Sub-Totals/Averages 2,342 65 % 1,521 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Table 6-3 Facilities of the Primary and Secondary Competitors (£)
Published Rate (£)

Maximum
Number of Year Market Single Double Number of Number Conference Meeting Space Meeting Space Capacity Leisure
Property Rooms Opened Brand/Chain Affiliation Positioning Weekend Weekend Restaurants of Bars Rooms (m²) per room (m²) Theatre Style Facilities
Wellington Hotel 250 1991 Independent Four Star 127 70 2 1 11 1,025 1.7 200 No
Holiday Inn 242 1974 Hilton International Four Star 104 74 2 1 22 745 2.6 600 Yes
Hilton 289 1991 Bass Hotels and Resorts Four Star 140 88 2 2 21 824 3.4 300 Yes
Corus Hotel 187 1994 Corus Hotels Three Star 95 69 1 2 25 770 4.1 320 No
Berkeley Hotel 40 1990 Independent Three Star 78 80 1 1 0 0 0 0 No
Forte Posthouse 182 1874 Forte Hotels Granada Group Three Star 110 45 1 2 12 1,205 6.6 600 No
Jarvis International 201 1980 Jarvis hotels Four Star 110 43 1 1 10 760 3.8 350 Yes
City Hotel ¹ 40 2000 Independent Budget 150 150 1 1 3 50 1.3 72 No
Swallow 128 1991 Whitbread Four Star 134 78 1 1 21 602 4.7 200 Yes
Moat House 142 1987 Queens Moat House Four Star 139 68 1 2 13 915 6.4 200 Yes
Novotel 200 1985 Accor Three Star 99 94 1 1 25 769 3.8 250 Yes
Express by Holiday Inn 68 1995 Bass Hotels and Resorts Budget 119 90 1 1 6 600 8.8 150 Yes
The Piccadilly Hotel 167 2000 Independent Four Star 52 45 1 1 2 40 0.2 45 No
Thistle Hotel 94 2000 Thistle Hotels Four Star 55 45 0 1 0 0 0 0 No
The Grand Hotel 112 1950 Independent Three Star 95 39 1 1 2 75 0.7 45 No
COMPETITION MAP
Key
Ù Wellington Hotel
Primary Competitors
u Holiday Inn
v Hilton
Secondary Competitors
1) Corus Hotel
2) Berkeley Hotel
3) Forte Posthouse
4) Jarvis International
5) City Hotel
6) Swallow
7) Moat House
8) Novotel
9) Express by Holiday Inn
10) The Piccadilly Hotel
11) Thistle Hotel
12) The Grand Hotel
Proposed Competitors
u Marriott Hotel
v Travel Inn
w Travelodge
x Premier Lodge Hotel
HVS International Projection of Hotel Demand, Occupancy and Average Rate 27
7. Projection of Hotel Demand, Occupancy and

Average Rate
CALCULATION OF From our fieldwork and in-house library of market data, we have
HISTORICALLY estimated the year-end 2000 occupancy rates of the Hotel's competitors
ACCOMMODATED and thereby the total number of occupied rooms in the competitive
DEMAND market.
A weighted average of the market mix of each competitive property has

then been calculated to determine the overall market segmentation of
the hotels within the subject Hotel's market. The Year 2000 area-wide
estimate of room night demand, by market segment, forms the historical
base demand. The result of these calculations for the Hotel's competitive
market area is shown in the following table.
Table 7-1 Accommodated Room Night Demand – Competitive Market 2000
Accommodated Percentage of
Market Segment Demand Total
Commercial 229,455 55 %
Meeting & Conference 57,552 14
Individual Leisure 77,990 19
Group Leisure 25,783 6
Airline 24,239 6
Total 415,018 100 %
The above table illustrates the accommodated room night demand in the
Hotel's competitive market. Because this estimate is based on hotel
occupancies, it considers only those hotel rooms utilised by guests.
Latent demand accounts for guests who could not be accommodated by
the existing competitive supply for a variety of reasons. Latent demand
can be divided into Unaccommodated Demand and Induced Demand.
Base Demand Growth In Section 5, Market for Transient Accommodation we set out our
assumptions regarding the prospects for demand growth, by market
segment, for the competitive market. These demand growth rates (as
summarised in Table 5-2 in Section 5, Market for Transient Accommodation)
are applied in our analysis to the base level of accommodated demand,
which has been estimated in Table 7-1 above.
Thus market-wide base demand is forecast to grow as illustrated in Table

7-2 below:
Table 7-2 Projection of Market-wide Base Demand 2000-04
Base Year
2000 2001 2002 2003 2004
Commercial 229,455 235,191 242,247 249,514 255,752

Meeting & Conference 57,552 58,991 60,760 62,583 64,148
Individual Leisure 77,990 79,940 83,137 85,216 87,346
Group Leisure 25,783 26,427 27,484 28,171 28,876
Airline 24,239 24,845 25,466 26,103 26,755
Total 415,018 425,393 439,095 451,587 462,877

Demand Growth - 2.5% 3.2% 2.8% 2.5%
Unaccommodated Unaccommodated demand refers to individuals who are unable to

Demand secure accommodation in the market because all the competitive hotels
are full. These visitors must defer their trips, settle for less desirable
accommodation, or stay in hotels located outside the market area.
Because this demand did not yield occupied room nights within the
competitive set, it is not included in the historical accommodated room
night demand estimate.
Unaccommodated demand is often a form of excess demand resulting

from the cyclical nature of the hotel business. For example, in
commercial markets where demand is not equally spaced throughout
the week, hotels often exhibit peaks and troughs in their daily
occupancies. In general, commercial hotels enjoy strong occupancies
from Monday to Thursday, when business travel is most frequent, and
lower occupancies on Friday and Saturday. When hotels operating
under these market conditions realise occupancies greater than 70% to
75%, or when weekly demand patterns fill area hotels to capacity on one
or more nights per week, it can generally be assumed that excess
weekday demand exists and a certain amount of patronage must be
turned away. If additional hotels are expected to enter the market, it is
reasonable to assume that this unaccommodated demand will be
accommodated and, thus, an estimate of the amount of
unaccommodated demand should be made. Unaccommodated demand
is generally estimated as a percentage of accommodated demand.
Because the competitive hotels achieve an overall occupancy of 75%, it is

likely that there will be days when all the primary hotels will be full and
unaccommodated demand will exist. Based on our fieldwork and
market analysis, we estimate that in 2000, unaccommodated demand in
the competitive market was likely to amount to approximately 1.6% of
accommodated demand. Overall this equates to approximately 7,200

room nights per year for the 1,521 room competitive market, or
approximately 80 rooms turned away on 90 days of the year.
This level of unaccommodated demand has been allowed to increase in

our projections year by year in line with the base demand growth rates
explained above. Table 7-3 below shows our projection of
unaccommodated demand for the defined competitive market from
2000 forward.
Table 7-3 Projection of Market-wide Unaccommodated Demand 2000-04
Base Year
2000 2001 2002 2003 2004
Commercial 4,589 3,528 4,845 4,990 5,115

Meeting & Conference 1,151 885 1,215 1,252 1,283
Individual Leisure 780 600 831 852 873
Group Leisure 258 198 275 282 289
Airline 242 186 255 261 268
Total 7,020 5,397 7,421 7,637 7,828

Demand Growth - -23.1% 37.5% 2.9% 2.5%
It should be noted that because of the seasonality of demand described

earlier, a proportion of this unaccommodated demand could remain
unaccommodated during the projection years. In our analysis, we have
termed this Residual Unaccommodated Demand. In practice the amount of
unaccommodated demand which becomes accommodated (i.e. that
which is no longer residual) is dependent upon market-wide occupancy
and seasonality, and the introduction of new supply.
Induced Demand Induced demand represents the additional room nights that will be
attracted to a market area as a result of the introduction of a new
demand generator. Situations where induced demand can be created
include the opening of a new manufacturing plant, the expansion of a
convention centre or the addition of a new hotel bringing a different
chain affiliation or unique facilities.
The opening of new hotels is expected to induce some additional room

nights in the competitive market. In our projections we have included
induced demand equal to around 8,500 room nights per year, allocated
between the commercial, meetings and conference, and leisure
segments. This equates to 9% of occupancy for the new competitive
rooms we have brought into the market between 2001 and 2002.
Table 7-4, overleaf, shows the total amount of induced demand that we
have estimated will be available in the competitive market between 2001
and 2004. The demand induced by new hotels is considered to continue,
and is included in demand computations for future years. Induced

demand does not grow in line with the rates of base demand growth
explained earlier.
Table 7-4 Projection of Market-wide Induced Demand 2001-04
2001 2002 2003 2004
Commercial 2,696 5,184 5,184 5,184

Meeting & Conference 630 1,212 1,212 1,212
Individual Leisure 824 1,584 1,584 1,584
Group Leisure 318 612 612 612
Airline 250 480 480 480
Total 4,717 9,072 9,072 9,072
Total Potential Total potential demand is the sum of base demand, unaccommodated
Demand demand and induced demand for the competitive market. As previously
discussed, base demand and unaccommodated demand are assumed to
grow in line with the growth rates explained in Section 5. Table 7-5
shows the total potential demand for the competitive market as
projected for the period 2001 to 2004.
Table 7-5 Projection of Market-wide Potential Demand 2001-04
2001 2002 2003 2004
Commercial 241,415 252,276 259,688 266,051

Meeting & Conference 60,506 63,188 65,047 66,643
Individual Leisure 81,363 85,553 87,652 89,803
Group Leisure 26,944 28,371 29,065 29,776
Airline 25,281 26,201 26,844 27,503
Total 435,508 455,588 468,296 479,776

Demand Growth - 4.6% 2.8% 2.5%
As already discussed, some of the potential demand will continue to be

unaccommodated during certain years as a result of market-wide and
individual hotel seasonality, and supply constraints. A certain amount of
residual unaccommodated demand will result. Table 7-6 overleaf
summarises the residual demand computed in the course of our analysis
and projections. The residual demand presented for 2000, the base year,
is equal to the base amount of unaccommodated demand in Table 7-3.
Table 7-6 Estimate of Market-wide Residual Unaccommodated Demand 2000-04
Base Year
2000 2001 2002 2003 2004
Commercial 4,589 0 0 0 0
Meeting & Conference 1,151 0 0 0 0
Group Leisure 258 0 0 0 0
Airline 242 0 0 0 0
Total 7,020 0 0 0 0
Total Usable Room Total usable room night demand is the combined total of accommodated
Night Demand room night demand and usable latent demand (i.e. that latent demand
that can be absorbed is based on the number of additional hotel rooms
expected to enter the market). Table 7-7 summarises our projections of
total usable demand, or occupied room nights, for the competitive
market from 2000 to 2004. The amount of residual demand is also
shown, as is the growth per annum of occupied room nights.
By applying the total projected occupied room nights to our estimates of

total rooms supply for the competitive market, market-wide occupancy
is estimated for each year. We have used the 2000 accommodated and
unaccommodated room night demand as a base and projected levels of
demand into the future using the growth rates selected for each market
segment. The table setting forth out forecast of annual hotel demand is
presented below.
Table 7-7 Total Usable Room Night Demand – Competitive Market 2000-04
2000 2001 2002 2003 2004

Commercial
Occupied Room Nights 229,455 241,415 252,276 259,688 266,051
Residual Demand 4,589 0 0 0 0
Accommodated Demand Growth — 5.2 % 4.5 % 2.9 % 2.5 %
Meeting & Conference
Individual Leisure
Residual Demand 780 0 0 0 0
Group Leisure
Airline
Totals
Available Room Nights per Year 555,220 597,832 648,258 648,386 648,386
Available Room Night Growth 9.8 % 8.3 % 0.0 % 0.0 %
Market-wide Occupancy 75 % 73 % 70 % 72 % 74 %
We consider that the stabilised market-wide occupancy for this market

in Newtown is approximately 74%, and, based on the projected market
fluctuations in demand and supply, we anticipate that the market will
reach this level of occupancy in 2004. This stabilised occupancy is
intended to reflect the anticipated results of the market excluding from
consideration any abnormal relationship between supply and demand
and non-recurring conditions that may result in unusually high or low
occupancies. Although the market-wide occupancy may rise above this
stabilised level, we consider it equally possible for new competition and
temporary economic downturns to force occupancy below this selected
point of stability.
Penetration Factor The Hotel's forecast market share and occupancy level have been based
Analysis on its anticipated competitive position within the market, as quantified
by its penetration factor.
The forecast market share of the Hotel is based upon a penetration factor
analysis. The penetration factor is the ratio between a property's market
share and its fair share. If a property with a fair share of 5% is capturing
5% of the market in a given year, then its occupancy will equal the
market-wide occupancy, and its penetration factor will equal 100%
(5%/5% = 100%). If the same property achieves a market share in excess
of its fair share, then its occupancy will be greater than the market-wide
occupancy, and its penetration factor will be greater than 100%.
Penetration factors can be calculated for each market segment of a
property, and for the property as a whole.
Table 7-8 below shows the specific penetration factors that we have
assumed for the Hotel from the date of value until it reaches a stabilised
level of performance relative to its competitive market. Penetration
factors have been estimated for each market segment for each calendar
year and reflect our view of how the subject hotel is likely to perform
relative to its fair share, or the aggregate of its competitive market.
Because of the new supply entering the competitive market over the
next couple of years, particularly the Marriott Hotel which is due to
open at the beginning of 2002, thus affecting the penetration of the
Wellington Hotel, we have therefore increased the Wellington Hotel’s
penetration in the commercial and individual leisure segments.
Table 7-8 Market Penetration Input by Segment – Wellington Hotel

2000-04
Base Year
Market Segment 2000 ¹ 2001 2002 2003 2004
Commercial 98.5 % 109.0 % 115.0 % 115.0 % 115.0 %

Group Leisure 79.7 90.0 90.0 90.0 90.0
Airline 84.8 85.0 85.0 85.0 85.0
¹ Actual historic penetration
Because the supply and demand balance for the competitive market is
dynamic, particularly in relation to proposed new hotel supply entering
the competitive market, there is a circular relationship between the
penetration factors of each hotel in the market. The performance of
individual new hotels has a direct effect upon the aggregate
performance of the market, and consequently upon the calculated
penetration factor for each hotel in each market segment. The same is
true when the performance of existing hotels changes, either positively
(following a refurbishment, for example) or negatively (when an under-
maintained or poorly marketed hotel loses market share).
A hotel’s penetration factor is calculated as its achieved market share of

demand divided by its fair share of demand. Thus, if one hotel’s
penetration performance increases, thereby increasing its achieved
market share, this leaves less demand available in the market for the
other hotels to capture and the penetration performance of one or more
of those other hotels consequently declines (other things remaining
equal). This type of market share adjustment takes place every time
there is a change in supply, or a change in the relative penetration
performance of one or more hotels in the competitive market.
Our projections of penetration, demand capture and occupancy

performance for the subject Hotel take into account these types of
adjustment to market share within the defined competitive market.
Consequently, the actual penetration factors applicable to the subject
Hotel for each market segment in each projection year (the output
penetration factors) vary somewhat from the input penetration factors
set out in Table 7-8 above.
Table 7-9 below shows the output penetration factors applicable to the
subject Hotel, after the effect of market share adjustment has been taken
into account.
Table 7-9 Market Penetration Output by Segment – Wellington Hotel 2000-04

Base Year
Market Segment 2000 2001 2002 2003 2004
Commercial 98.5 % 107.8 % 113.0 % 112.3 % 111.9 %

Group Leisure 79.7 88.2 88.3 88.3 88.3
Airline 84.8 85.2 85.5 84.9 84.6
Overall Penetration 99.0 % 99.4 % 102.8 % 102.5 % 102.2 %
It is these output penetration factors which drive our estimates of

demand capture and occupancy for the subject Hotel, as can be seen in
Table 7-10 overleaf. This sets out the result of these market share
adjusted (output) penetration factors by segment upon the subject
Hotel’s future demand capture and occupancy performance, the annual
market-wide occupancy and the resultant market mix, or total captured
demand analysed by market segment. These projections are in calendar
years from 2001 until 2004, by which time we consider that the Hotel will
have reached a stabilised level of performance in terms of market
penetration and occupancy.
Table 7-10 Projected Penetration, Demand Capture and Occupancy – Wellington Hotel 2000-04
Base Year
Market Segment 2000 2001 2002 2003 2004
Commercial
Demand 229,455 241,415 252,276 259,688 266,051
Market Share 16.2 % 16.1 % 15.6 % 15.5 % 15.5 %
Capture 37,139 38,940 39,399 40,293 41,138
Penetration 98.5 % 107.8 % 113.0 % 112.3 % 111.9 %

Demand 57,552 60,506 63,188 65,047 66,643
Market Share 17.6 % 11.1 % 10.2 % 10.1 % 10.1 %
Capture 10,129 6,703 6,438 6,581 6,718
Penetration 107.1 % 74.0 % 73.7 % 73.2 % 72.9 %
Individual Leisure
Demand 77,990 81,363 85,553 87,652 89,803
Market Share 17.3 % 15.2 % 14.5 % 14.6 % 14.5 %
Capture 13,505 12,373 12,363 12,790 13,057
Penetration 105.4 % 101.6 % 104.6 % 105.6 % 105.2 %
Group Leisure
Demand 25,783 26,944 28,371 29,065 29,776
Market Share 13.1 % 13.2 % 12.2 % 12.2 % 12.2 %
Capture 3,376 3,555 3,460 3,545 3,632
Penetration 79.7 % 88.2 % 88.3 % 88.3 % 88.3 %
Airline
Demand 24,239 25,281 26,201 26,844 27,503
Market Share 13.9 % 12.7 % 11.8 % 11.7 % 11.7 %
Capture 3,376 3,223 3,095 3,150 3,216
Penetration 84.8 % 85.2 % 85.5 % 84.9 % 84.6 %
Total Room Nights Captured 67,525 64,795 64,755 66,359 67,761
Available Room Nights 91,250 91,250 91,250 91,250 91,250
Occupancy 74 % 71 % 71 % 73 % 74 %
Total Penetration 99 % 99 % 103 % 103 % 102 %
Table 7-11, below, sets out the resultant market mix, or total captured
demand analysed by market segment.
Table 7-11 Projected Market Mix – Wellington Hotel 2000-04

Base Year
2000 2001 2002 2003 2004
Commercial 55 % 60 % 61 % 61 % 61 %
Meeting & Conference 15 10 10 10 10
Group Leisure 5 5 5 5 5
Airline 5 5 5 5 5
Total 100 % 100 % 100 % 100 % 100 %
Conclusion – Overall We expect the Hotel to reach a stabilised level of penetration (occupancy
Occupancy performance relative to its competitive market) in 2004. By this time we
expect the Hotel to achieve an overall penetration of 102%. The
stabilised occupancy is intended to reflect the anticipated results of the
property over its remaining economic life given any and all changes in
the life cycle of the Hotel.
FORECAST OF The average rate forecast for the Hotel has been based upon the
AVERAGE RATE consideration of projected market mix changes and rate increase
projections related to each demand segment.
In forecasting average rate growth, we have anticipated a base

underlying inflation rate of 2.5%. As stated in Section 3, Market Area
Analysis, we have relied upon inflation estimates supplied by the
Economist Intelligence Unit (EIU). We have applied various market and
hotel-specific growth factors to the average rate of the respective
demand segments. The following table illustrates the estimated increases
in average rate for each market segment.
Hotel room rate inflation is not necessarily the same as the general
economic rate of inflation experienced in the local community. It is
impacted more by market conditions such as the relationship between
supply and demand. When hotel room rate inflation is projected into
the future, the movement in average rate up to the point where the
hotel achieves its stabilised occupancy is generally attributed to
property- and market-specific factors. After a hotel achieves occupancy
stabilisation, most forecasts assume that room rates will continue to
increase at the anticipated general economic rate of inflation expected
for the local market area.
Table 7-12 Projected Average Rate Growth by Market Segment

Wellington Hotel 2001-04 (£)
Base Year Projected Growth Rate

Market Segment 2000 2001 2002 2003 2004
Commercial 85.00 2.5 % 2.5 % 2.5 % 2.5 %

Group Leisure 45.00 2.5 2.5 2.5 2.5
Airline 55.00 2.5 2.5 2.5 2.5
Total 74.00 2.7 % 2.6 % 2.6 % 2.5 %
Although we have applied growth rates of 2.5% in 2002 to each

segment’s rate the overall change in 2002 was 2.8%, this is because of the
slight change in the Hotel’s market mix towards the higher paying
commercial segment. The same is true in 2003.
The following table shows how the projected changes in average rate by
segment, in conjunction with forecasts of demand by segment, affect
overall average rate for the period 2001-2004.
Table 7-13 Average Rate Forecast by Market Segment - Wellington Hotel (£)
Base Year
2000 2001 2002 2003 2004
Commercial
Average Rate Growth — 2.5 % 2.5 % 2.5 % 2.5 %
Captured Room Nights 37,139 38,940 39,399 40,293 41,138
Rooms Revenue 3,156,794 3,392,672 3,518,472 3,688,271 3,859,772
Average Rate 85.00 87.13 89.30 91.54 93.82
Rooms Revenue 759,656 515,259 507,270 531,548 556,146
Average Rate 75.00 76.88 78.80 80.77 82.79
Individual Leisure
Rooms Revenue 742,775 697,542 714,367 757,513 792,691
Average Rate 55.00 56.38 57.78 59.23 60.71
Group Leisure
Rooms Revenue 151,931 163,996 163,591 171,790 180,394
Average Rate 45.00 46.13 47.28 48.46 49.67
Airline
Rooms Revenue 185,694 181,697 178,864 186,593 195,264
Average Rate 55.00 56.38 57.78 59.23 60.71
Total
Rooms Revenue 4,996,850 4,924,387 5,050,895 5,308,754 5,556,436
Average Rate 74.00 76.00 78.00 80.00 82.00
CONCLUSION – Based on the preceding analysis, the Hotel's occupancy and average rate
OCCUPANCY AND have been estimated as follows:
AVERAGE RATE
Table 7-14 Forecast Occupancy and Average Rate - Wellington Hotel (£)
Average Average Rate in

Year Occupancy Rate RevPAR 2000 Prices
2000 74 % £ 74 £ 55 £ 74
2001 71 76 54 74
2002 71 78 55 75
2003 73 80 58 75
2004 74 82 61 75
HVS International Projection of Income and Expense 39
8. Projection of Income and Expense
Based on our preceding projection of occupancy and average rate, and

our knowledge of both the Hotel’s and comparable hotels’ financial
operating profiles, we have developed a ten-year forecast of income and
expense commencing on 1 January 2001. We have selected an annual
inflation rate of 2.5%.
The forecast of income and expense is expressed in inflated pounds

sterling for each projection year. The stabilised year is intended to reflect
the anticipated operating results of the Hotel over its remaining
economic life, given any or all applicable stages of build-up, plateau and
decline in the life cycle of the Hotel. Thus, income and expense estimates
from the stabilised year forward exclude from consideration any
abnormal relationship between supply and demand, as well as any non-
recurring conditions that may result in unusual revenues or expenses.
For the purposes of determining the Hotel's open market value, it is

assumed that the Hotel is sold as at the date of value; the projection of
income and expense therefore reflects the achievements of a typical
anticipated new owner.
Review of Operating Because the Hotel is an existing hotel with an established operating
History performance, its historical income and expense experience can serve as a
basis for projections. The following income and expense statements were
provided by management and are unaudited. Where applicable, we
have reorganised the statements in accordance with the Uniform System
of Accounts for Hotels.
These historic statements of income and expense show an efficiently

operated lodging facility. The revenues reflect a leadership position in
the market and the operating expense ratios generally indicate strong
control and competent management. Our review of the subject’s
financial operating history did not reveal any abnormalities that could
impact the future operating performance of this property.
Table 8-1 Historical Operating Performance - Wellington Hotel (£ 000s)
2000 1999
Number of Rooms: 250 250
Occupied Rooms: 67,525 68,438
Days Open: 365 Amount per Amount per 365 Amount per Amount per
Occupancy: 74.0% Percentage Available Occupied 75.0% Percentage Available Occupied
Average Rate: 74.00 of Revenue Room Room 73.00 of Revenue Room Room
REVENUE
Rooms 5,000 52.8 % 20,000 74.05 4,989 52.9 % 19,956 72.90
Food & Beverage 3,900 41.2 15,600 57.76 3,880 41.1 15,520 56.69
Telephone 175 1.8 700 2.59 172 1.8 688 2.51
Other Income 400 4.2 1,600 5.92 390 4.1 1,560 5.70
Total 9,475 100.0 37,900 140.32 9,431 100.0 37,724 137.80
DEPARTMENTAL EXPENSES
Rooms 1,230 24.6 4,920 18.22 1,200 24.1 4,800 17.53
Food & Beverage 2,714 69.6 10,858 40.20 2,648 68.3 10,593 38.69
Telephone 112 63.9 447 1.66 109 63.4 436 1.59
Other Expenses 200 50.0 800 2.96 190 48.7 760 2.78
Total 4,256 44.9 17,025 63.03 4,147 44.0 16,589 60.60
DEPARTMENTAL INCOME 5,219 55.1 20,875 77.29 5,284 56.0 21,135 77.20
OPERATING EXPENSES
Administrative & General 777 8.2 3,108 11.51 758 8.0 3,032 11.08
Marketing 265 2.8 1,061 3.93 259 2.7 1,035 3.78
Property Operations & Maintenance 360 3.8 1,440 5.33 351 3.7 1,405 5.13
Energy 237 2.5 948 3.51 231 2.5 924 3.38
Total 1,639 17.3 6,557 24.28 1,599 17.0 6,397 23.37
HOUSE PROFIT 3,580 37.8 14,318 53.01 3,685 39.0 14,738 53.84
Management Fee 284 3.0 1,137 4.21 290 3.1 1,160 4.24
INCOME BEFORE FIXED CHARGES 3,295 34.8 13,181 48.80 3,395 36.0 13,578 49.60
FIXED EXPENSES
Property Taxes 199 2.1 796 2.95 194 2.1 776 2.84
Insurance 28 0.3 114 0.42 28 0.3 111 0.41
Incentive Fee 330 3.5 1,318 4.88 339 3.6 1,358 4.96
Reserve for Replacement 284 3.0 1,137 4.21 283 3.0 1,132 4.13
Total 841 8.9 3,365 12.46 844 9.0 3,377 12.34
NET INCOME 2,454 25.9 % 9,816 36.34 2,550 27.0 % 10,201 37.26
Forecast of Income Based on the market for hotel accommodation in the Newtown area, as
and Expense well as the Hotel's anticipated future market position, we have
developed a forecast of income and expense. The forecast starts on 1
January 2001 and represents our opinion of how a competent
management company would operate the Hotel.
In forecasting revenues and expenses for a hotel, we use a fixed and

variable component model. This model is based on the premise that
hotel revenues and expenses have one component that is fixed and
another that varies directly with occupancy or facility usage. A
projection can be made by taking a known level of revenue or expense
and calculating the fixed and variable components. The fixed
component is adjusted only for inflation, while the variable component
is also adjusted for the percentage change between the projected
occupancy and facility usage that produced the known level of revenue
or expense.
Rooms Revenue
Rooms revenue is determined by two variables, occupancy and average

rate, as discussed in Section 7, Projection of Hotel Demand, Occupancy and
Average Rate.
Food Revenue The Uniform System of Accounts for Hotels defines food revenue as
‘revenue derived from the sale of food, including coffee, milk, tea and
soft drinks. Food sales do not include staff meals. Food revenue also
includes meeting room rental, cover charges, service charges and
miscellaneous banquet revenue. Our forecast of food revenue is based
on the Hotel’s historic performance, and is in line with comparable
hotels. Food revenue has been projected at approximately £48 per
occupied room (POR) in 2000 prices.
Beverage Revenue Beverage revenue is generated from the sale of alcoholic beverages in
restaurants and banquet rooms and the sale of alcoholic and non-
alcoholic beverages in a hotel's bars and lounges. The Hotel is expected
to continue to draw additional local patronage to that of in-house
residents. Our forecast of beverage revenue is based on the Hotel’s
historical beverage to food revenue ratio. Beverage revenue has
therefore been projected at approximately 30% of food revenue.
Telephone Revenue Telephone revenue varies directly with changes in occupancy, although
a small portion of this category is fixed. This fixed component consists of
public telephone revenue generated by non-resident patrons using the
Hotel's food, beverage and meeting outlets.
In recent years, the hotel industry has experienced diverging trends

with respect to telephone revenue. Prices per call have increased, in
some cases dramatically, resulting in departmental profits as high as 50–
55%. However, the number of long-distance calls billed POR has
declined as a result of the extensive use of long-distance carrier services
and mobile telephones. More recently, however, consumption has
started to increase as guests use the telephone service to access the
Internet and e-mail facilities. Based on the Hotel’s historical performance
we have projected telephone revenue at £2.50 POR in 2000 prices.
Other Income The content of other income varies considerably between hotels, making
a comparison of this department with other hotels invalid. Other
income, in the case of the Hotel, is primarily composed of shop rentals,
laundry, dry cleaning and interest income. We have based our forecast
of £5.00 POR on the Hotel’s historical performance.
Rooms Expense Rooms expense consists of items relating to the sale and upkeep of
guestrooms and public space. Salaries, wages and employee benefits
account for a substantial portion of this category. Although payroll is
somewhat variable with occupancy because managers can schedule
room-cleaning staff, porterage personnel and house cleaners to work
when occupancy requires, much of a hotel's payroll is fixed.
Other rooms department expenses include the cost of cleaning materials,

commissions payable to travel agents and reservations costs. The historic
rooms expense for the Hotel appears to be in line with other hotels of
this type. We have forecast rooms expenses at approximately £18.00 POR
at 2000 prices in line with the historic performance of the Hotel.
Food and Beverage Food and beverage expense consists of items necessary for the operation
Expense of a hotel's food, beverage and banquet facilities. Our forecast of food
and beverage expenses is based on the Hotel’s historical ratio between
food and beverage expenses and food and beverage revenues. Food and
beverage expenses have therefore been projected at approximately 70%
of food and beverage revenue.
Telephone Expense Telephone expense consists of all costs associated with the operation of
the telephone department. The bulk of the telephone expense consists of
the cost of local and long-distance calls billed by the telephone
companies that provide this service. Unless a particular hotel
department incurs high expenses, use of telephone services by hotel
employees is generally charged to this account. The remaining costs,
which include salaries, wages, equipment rental and other expenses, are
mostly fixed.
Based on the historical performance of the Hotel, we have projected

telephone expense at 60% of telephone revenue. This is in line the
operating history and with industry norms.
Other Income Expense Other income expense consists of costs associated with the generation of
other income, and is dependent on the nature of the revenue. We have
forecast other income expense based on the historical departmental
ratio. Based on the historical performance of the Hotel, we have
projected other income expenses at 50% of other income revenue.
Administrative and Administrative and general expense includes the salaries of all
General Expense administrative personnel and those not directly associated with a
particular department. Expense items related to the management and
operation of the property are also allocated to this category. Most
administrative and general expenses are fixed. The exceptions are cash
surpluses and shortages, commissions on credit card charges and
provisions for bad debts.
In recent years, several new items have been added to the administrative
and general expense category, such as human resources administration
costs and security expenses. Also included in this expense category is
general insurance, including premiums for public liability, theft and
business interruption insurance. Fire and extended coverage insurance
on the building and contents is a separate insurance expense category
included under ‘Fixed Expenses’.
Based on the historical performance of the Hotel, and with reference to

the performance of comparable hotels, we have projected administration
and general expenses at approximately £3,000 per available room (PAR)
in 2000 prices.
Marketing Expense Marketing expense consists of all costs associated with advertising, sales
and promotion; these activities are intended to attract new customers
and retain existing ones. Marketing can be used to create an image,
develop customer awareness and stimulate patronage of a property's
various facilities.
The marketing category is unique in that all expense items, with the
exception of fees and commissions, are totally controllable by
management. Most hotel operators establish an annual marketing
budget that sets forth all planned expenditures. If the budget is
followed, total marketing expenses can be forecast accurately.

the performance of comparable hotels we have projected marketing
expenses at approximately £1,000 PAR in 2000 prices.
Property Operations Property operations and maintenance expense is another expense

and Maintenance category that is largely controllable by management. Except for repairs
Expense necessary to keep the facility open and prevent damage (to plumbing,
heating and electrical systems and so forth), most maintenance items can
be deferred for varying lengths of time.
Maintenance is an accumulating expense. If management elects to

postpone a required repair, they have not eliminated or saved the
expenditure; they have only deferred payment until a later date. A hotel
that has operated with a lower-than-normal maintenance budget is
likely to have accumulated a considerable amount of deferred
maintenance.
The age of a hotel greatly influences the required level of maintenance.

A new or thoroughly renovated property is protected for several years
by modern equipment and manufacturers' warranties. However, as a
hotel grows older, maintenance expenses escalate. A well-organised
preventive maintenance system often helps to delay deterioration, but
most facilities face higher property operations and maintenance costs
each year, regardless of what the occupancy trend may be.
Property operations and maintenance is considered to be an operating

expense; as such, it contains only those components that can be
expensed, rather than capitalised. Valuers account for capital
replacements of items such as FF&E in the reserve for replacement
account, which is discussed later in this section.

the performance of comparable hotels, we have projected property
operations and maintenance expenses at approximately £1,500 PAR in
2000 prices.
Energy Expense A large portion of a hotel's energy consumption is relatively fixed and
varies little with changes in occupancy. Other than bedrooms and
meeting space, most areas of a hotel must be continually lit and heated
or air-conditioned, regardless of occupancy. The marginal energy cost of
an additional occupied room is minimal.

the performance of comparable hotels, we have projected energy
expenses at approximately £1,000 PAR in 2000 prices.
Management Fee Management fee expense consists of the basic fee paid to the hotel
Expense management company that is anticipated to operate the Hotel. Some
companies provide management services alone, while others offer both
management services and a brand name affiliation. In line with the
operating history and management contract we have projected the
management fee at 3% of total revenue.
Incentive Fee Expense In line with the operating history and management contract we have
projected the incentive fee at 10% income before fixed charges.
Insurance Expense The insurance expense category consists of the cost of insuring the Hotel
and its contents against damage or destruction by fire, weather,
sprinkler leakage, boiler explosion, plate glass breakage, and so forth. It
does not include liability coverage, which is a component of
administrative and general expense. Insurance expense is compared on
a PAR basis and appears to be in line with similar properties.
Based on the historical performance of the Hotel, we have projected

insurance expenses at approximately £125 PAR in 2000 prices.
Reserve for FF&E are essential to the operation of a hotel, and their quality often
Replacement Expense influences the standard or grading of a property. Included in this
category are all non-real-estate items that are typically capitalised rather
than expensed. The FF&E of a hotel are often exposed to heavy use and
must be replaced at regular intervals.
Periodic replacement of FF&E is essential to maintain the quality, image

and income potential of a hotel. Because capitalised expenditures are not
included in the operating statement but nevertheless affect an owner's
cash flow, a valuation should reflect these expenses by deducting an
appropriate reserve for replacement.
Our industry experience indicates that a reserve for replacement of 3%

to 4% of total revenue generally is sufficient to provide for the timely
replacement of FF&E. Based on an analysis of comparable hotels, we
consider that a reserve of 3% of total revenue is sufficient to provide for
the periodic replacement of the Hotel's FF&E and provide funds for
additional equipment necessary to maintain the Hotel's competitive
position.
Ten-Year Projection The following projection of income and expense is intended to reflect
our judgement of how a typical buyer would project the Hotel's
operating results.
Table 8-2 Forecast of Income and Expense - Wellington Hotel 2001-10 (£ 000s)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Number of Rooms: 250 250 250 250 250 250 250 250 250 250
Occupied Rooms: 64,788 64,788 66,613 67,525 67,525 67,525 67,525 67,525 67,525 67,525
Occupancy: 71% % of 71% % of 73% % of 74% % of 74% % of 74% % of 74% % of 74% % of 74% % of 74% % of
Average Rate: £76.00 Gross £78.00 Gross £80.00 Gross £82.00 Gross £84.47 Gross £86.58 Gross £88.75 Gross £90.97 Gross £93.24 Gross £95.57 Gross
REVENUE
Rooms £4,951 53.0 % £5,085 53.1 % £5,356 53.3 % £5,565 53.4 % £5,704 53.4 % £5,847 53.4 % £5,993 53.4 % £6,142 53.4 % £6,296 53.4 % £6,453 53.4 %
Food & Beverage 3,876 41.5 3,973 41.5 4,157 41.3 4,305 41.3 4,412 41.3 4,523 41.3 4,636 41.3 4,752 41.3 4,871 41.3 4,992 41.3
Telephone 167 1.8 171 1.8 180 1.8 186 1.8 191 1.8 196 1.8 201 1.8 206 1.8 211 1.8 216 1.8
Other Income 342 3.7 350 3.7 362 3.6 373 3.6 382 3.6 392 3.6 401 3.6 411 3.6 422 3.6 432 3.6
Total 9,336 100.0 9,579 100.0 10,055 100.0 10,429 100.0 10,689 100.0 10,957 100.0 11,231 100.0 11,511 100.0 11,799 100.0 12,094 100.0
DEPARTMENTAL EXPENSES
Rooms 1,226 24.8 1,256 24.7 1,302 24.3 1,342 24.1 1,375 24.1 1,410 24.1 1,445 24.1 1,481 24.1 1,518 24.1 1,556 24.1
Food & Beverage 2,721 70.2 2,789 70.2 2,885 69.4 2,970 69.0 3,045 69.0 3,121 69.0 3,199 69.0 3,279 69.0 3,361 69.0 3,445 69.0
Telephone 102 61.4 105 61.4 109 60.4 112 60.0 115 60.0 117 60.0 120 60.0 123 60.0 126 60.0 130 60.0
Other Expenses 172 50.4 177 50.4 182 50.1 186 50.0 191 50.0 196 50.0 201 50.0 206 50.0 211 50.0 216 50.0
Total 4,221 45.2 4,326 45.2 4,477 44.5 4,610 44.2 4,725 44.2 4,844 44.2 4,965 44.2 5,089 44.2 5,216 44.2 5,346 44.2
DEPARTMENTAL INCOME 5,115 54.8 5,253 54.8 5,578 55.5 5,819 55.8 5,964 55.8 6,114 55.8 6,266 55.8 6,422 55.8 6,583 55.8 6,747 55.8
OPERATING EXPENSES
Administrative & General 763 8.2 782 8.2 806 8.0 829 7.9 849 7.9 871 7.9 893 7.9 915 7.9 938 7.9 961 7.9
Marketing 407 4.4 417 4.4 430 4.3 442 4.2 453 4.2 464 4.2 476 4.2 488 4.2 500 4.2 513 4.2
Property Operations & Maintenance 381 4.1 391 4.1 403 4.0 414 4.0 425 4.0 435 4.0 446 4.0 457 4.0 469 4.0 481 4.0
Energy 254 2.7 261 2.7 269 2.7 276 2.6 283 2.6 290 2.6 298 2.6 305 2.6 313 2.6 320 2.6
Total 1,805 19.4 1,851 19.4 1,908 19.0 1,961 18.7 2,010 18.7 2,061 18.7 2,112 18.7 2,165 18.7 2,219 18.7 2,275 18.7
HOUSE PROFIT 3,310 35.4 3,402 35.4 3,670 36.5 3,857 37.1 3,954 37.1 4,053 37.1 4,154 37.1 4,257 37.1 4,364 37.1 4,473 37.1
Management Fee 280 3.0 287 3.0 302 3.0 313 3.0 321 3.0 329 3.0 337 3.0 345 3.0 354 3.0 363 3.0
INCOME BEFORE FIXED CHARGES 3,030 32.4 3,115 32.4 3,369 33.5 3,544 34.1 3,633 34.1 3,724 34.1 3,817 34.1 3,912 34.1 4,010 34.1 4,110 34.1
FIXED EXPENSES
Property Taxes 196 2.1 201 2.1 211 2.1 219 2.1 224 2.1 230 2.1 236 2.1 242 2.1 248 2.1 254 2.1
Insurance 29 0.3 30 0.3 30 0.3 31 0.3 32 0.3 33 0.3 34 0.3 34 0.3 35 0.3 36 0.3
Incentive Fee 303 3.2 311 3.3 337 3.4 354 3.4 363 3.4 372 3.4 382 3.4 391 3.4 401 3.4 411 3.4
Reserve for Replacement 280 3.0 287 3.0 302 3.0 313 3.0 321 3.0 329 3.0 337 3.0 345 3.0 354 3.0 363 3.0
Total 808 8.6 830 8.7 880 8.8 917 8.8 940 8.8 964 8.8 988 8.8 1,013 8.8 1,038 8.8 1,064 8.8
NET INCOME £2,222 23.8 % £2,285 23.7 % £2,489 24.7 % £2,627 25.3 % £2,693 25.3 % £2,760 25.3 % £2,829 25.3 % £2,899 25.3 % £2,972 25.3 % £3,046 25.3 %
1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
HVS International Valuation 47
9. Valuation
APPROACHES TO In evaluating property to assess its open market value, the professional
VALUE valuer has three approaches from which to select: the income
capitalisation, cost and sales comparison approaches. The most relevant
of these three is the income capitalisation approach. However, the
prudent valuer would also consider and have regard to the cost
approach and the sales comparison approach. The former, in certain
circumstances, indicates what the ‘cost of entry’ into the market would
be, whilst the latter typically provides a range of values per room, both
of which have some influence on operators' or investors' judgements.
The Income Capitalisation Approach takes a property's forecast net

income before debt service and allocates these future benefits to the
mortgage and equity components, based on market rates of return and
loan-to-value ratios. Through a discounted cash flow and income
capitalisation procedure, the value of each component is calculated. The
total of the mortgage component and the equity component equals the
value of the property. This approach is often selected as the preferred
valuation method for income-producing properties, because it most
closely reflects the investment thinking of knowledgeable buyers.
Our international experience with numerous hotel buyers and sellers

indicates that the procedures used in estimating market value by the
income capitalisation approach are comparable to those employed by
the hotel investors who actually constitute the marketplace. For this
reason, the income capitalisation approach produces the most
supportable value estimate and is generally given the greatest weight in
the hotel valuation process.
The Cost Approach estimates market value by computing the current cost
of replacing a property and subtracting any depreciation resulting from
one or more of the following factors: physical deterioration, functional
obsolescence and external (or economic) obsolescence. The value of the
land, as though it were vacant and available, is then added to the
depreciated value of the premises in order to produce a total value
estimate.
The cost approach may provide a reliable estimate of value for newly
constructed properties; however, as buildings and other forms of
premises increase in age and begin to deteriorate, the resultant loss in
value becomes increasingly difficult to quantify accurately. We find that
knowledgeable buyers of hotels generally base their purchase decisions

upon economic factors, such as forecast net income and return on
investment. Because the cost approach does not reflect any of these
income-related considerations, this approach is given minimal weight in
the hotel valuation process, apart from providing an estimate of the cost
to enter the marketplace.
The Sales Comparison Approach estimates the value of a property by

comparing it to similar properties recently sold on the open market. To
obtain a supportable estimate of value, the sales price of a comparable
property should be adjusted to reflect any dissimilarities between the
comparable property and the Hotel.
The sales comparison approach may provide a useful value estimate for
simple forms of property, such as vacant land and single-family homes,
where the properties are homogeneous and the adjustments are few in
number and relatively simple to compute. However, in the case of more
complex investments such as shopping centres, office buildings,
restaurants and hotels – where the adjustments are numerous and more
difficult to quantify – the sales comparison approach loses much of its
reliability.
Hotel investors typically do not rely upon the sales comparison

approach in reaching their final purchase decisions. Various factors, such
as the lack of timely comparable hotel sales data, the numerous
unsupportable adjustments that are necessary and the general inability
to determine the true financial terms and human motivations of
comparable transactions, often make the results of the sales comparison
approach questionable. Nevertheless, the sales comparison approach
may provide a range of values to bracket and support the final estimate
of value, and we generally use the sales comparison approach as a guide
to bracket the final estimate of value and support any adjustments in our
valuation conclusions.
INCOME The income capitalisation approach is based on the principle that the
CAPITALISATION value of a property is indicated by the net return to the property, or
APPROACH what is also known as the present worth of future benefits. The future
benefits of income-producing properties, such as hotels, are net income
before debt service and depreciation, derived by a forecast of income
and expense, and any expected reversionary proceeds from a sale. These
future benefits can be converted into an indication of market value
through a capitalisation process and discounted cash flow analysis.
Mortgage and Equity The conversion of a property's forecast net income into an estimate of
Components value is based on the premise that investors typically purchase real
estate with equity cash (20% to 50%) and mortgage financing (50% to
80%). The amounts and terms of available mortgage financing and the
rates of return that are required to attract sufficient equity capital form
the basis for allocating the net income between the mortgage and equity
components and deriving a value estimate.
Data for the Mortgage Component are developed from analysing the
prevailing interest rates offered in the marketplace coupled with
interviews with hotel investors, banks and other investment institutions.
To reflect the appropriate rates and investment yields required by

international banks, we have reviewed the ten-year money rates, which
are around 6.5%. A typical premium of 100 to 150 basis points is typically
added to the yield for the risks associated with a project of this nature.
Based on this information and the perceived risk of the Hotel's location,
it is our opinion that a 7.5%, 10-year term mortgage is appropriate for
the Hotel. Furthermore, we consider that an international mortgage
provider will lend up to 65% of the Hotel's market value as determined
by this valuation.
In order to estimate the value of the Hotel’s Equity Component, we have

assumed a 65% loan-to-value ratio, and taken into account the risk
inherent in achieving the projected income stream, the age, condition
and anticipated market position of the Hotel, the freehold nature of the
site, and the opportunities for competition to enter the market. It is our
opinion that an equity investor is likely to require an equity yield rate of
17.0% for a hotel investment such as this. This yield includes an
allowance for the payment of the incentive fee to the operator.
Terminal Capitalisation Inherent in this valuation process is the assumption of a sale at the end
Rate of an assumed ten-year holding period. The estimated reversionary sale
price as of this date is calculated by capitalising the projected 11th year's
net income by an overall terminal capitalisation rate. From this sale
price, a percentage is deducted for the seller's transaction costs,
brokerage and legal fees. The net proceeds to the equity interest are
calculated by deducting the outstanding mortgage balance from the
reversion.
We have used a terminal capitalisation rate of 9.0% and assumed that

the transaction costs at the time of this sale would be 1.5% of the sale
price.
Purchaser’s Costs - The Income Capitalisation Value has been adjusted to allow for
Sales Tax and Legal deductions for stamp duty (4% of value) and legal fees (0.5% of value),
Fees which we have treated as purchaser’s costs in arriving at the price which
would be paid for the Hotel.
Deduction for Required The Hotel opened at the beginning of 1994 and since that time has been
Capital Expenditure well maintained. We have been provided with information on historic
capital expenditure at the Hotel. From our inspection of the Hotel, it
appears that the Hotel is in very good working order and no immediate
material capital expenditure requirement has been identified. We have
therefore made no deduction of capital expenditure from our opinion of
value.
Summary of Valuation The following table summarises the key valuation parameters utilised in
Parameters deriving the value of the Hotel by the income capitalisation approach.
Table 9-1 Summary of Valuation Parameters
Stabilised Year: 4
Inflation: 2.5 %
Loan to Value: 65 %
Amortisation: 15 Years
Term: 10 Years
Interest Rate: 7.5 %
Terminal Cap Rate: 9.0 %
Transaction Costs: 1.5 %
Equity Yield: 17.0 %
Total Property Yield: 12.3 %
Mortgage-Equity To estimate the value of the Hotel, we have used a discounted cash flow
Discounted Cash Flow analysis. The cash flow to equity and the equity reversion are discounted
Analysis to the present value at the equity yield rate, and the income to the
mortgagee is discounted at the mortgage interest rate. The sum of the
equity and mortgage values is the total property value. The process of
estimating the value of the mortgage and equity components is as
follows.
1. The terms of typical hotel financing are established, including

interest rate, amortisation period and loan-to-value ratio.
2. An equity yield rate of return is established. Numerous hotel
buyers base their investments on an equity yield rate projection
that takes into account income growth and perceived risk.
3. The value of the equity component is calculated by first
deducting the annual debt service from the forecast net income,
leaving the net income to equity for each projection year. The net
income of the 11th year is capitalised into a reversionary value.
After deducting the mortgage balance at the end of the tenth
year and the typical brokerage and legal costs, the equity residual
is discounted back to the date of value at the equity yield rate.
The net income to equity for each of the projection years is also
discounted to the present value. The sum of these discounted
values equates to the value of the equity component. Adding the
equity component to the initial mortgage balance yields the
overall property value.
4. Because the mortgage and the debt service amounts are

unknown but the loan-to-value ratio was determined in Step 1,
the preceding calculation can be solved through an iterative
process or by the use of a linear algebraic equation known as the
Simultaneous Valuation Formula, which computes the total
property value.
The value is proven by allocating the total property value between the
mortgage and equity components and verifying that the rates of return
set forth in Steps 1 and 2 can be met from the forecast net income.
Using a simultaneous valuation formula to perform the necessary

algebraic calculations results in the following estimate of value in
pounds sterling, before the deduction of purchaser’s costs.
Total Property Value as Indicated by

the Income Capitalisation
Approach (Say) = £25,200,000
Proof of Value The value is proven by calculating the yields to the mortgage and equity
components over the projection period. If the mortgage achieves its 7.5%
yield and the equity yield is 17.0%, then £25,200,000 prior to any
deduction for capital expenditure and purchaser’s costs is the correct
value by the income capitalisation approach.
Using the assumed financial structure set forth previously, market value
can be allocated between the debt and equity components as follows.
Mortgage Component (65%) £16,411,000

Equity Component (35%) 8,837,000
Total £25,248,000
The annual debt service is calculated by multiplying the mortgage

component by the mortgage constant.
Mortgage Component £16,411,000

Mortgage Constant 0.113287
Annual Debt Service £1,859,157
The cash flow to equity is calculated by deducting the debt service from
the projected net income before debt service.
Table 9-2 Forecast of Net Income to Equity (£)
Net Income
Available for Total Annual Net Income
Year Debt Service Debt Service to Equity
2001 2,222,000 - 1,859,000 = 363,000

2002 2,285,000 - 1,859,000 = 426,000
2003 2,489,000 - 1,859,000 = 630,000
2004 2,627,000 - 1,859,000 = 768,000
2005 2,693,000 - 1,859,000 = 834,000
2006 2,760,000 - 1,859,000 = 901,000
2007 2,829,000 - 1,859,000 = 970,000
2008 2,899,000 - 1,859,000 = 1,040,000
2009 2,972,000 - 1,859,000 = 1,113,000
2010 3,046,000 - 1,859,000 = 1,187,000
The equity residual value at the end of the tenth year is calculated as
follows.
Reversionary Value ( £ 3,122,000/0.090) £34,689,000

Less:
Brokerage and Legal Fees 520,000
Mortgage Balance 7,522,000
Net Sale Proceeds to Equity £26,647,000
The overall property yield (before debt service), the yield to the lender
and the yield to the equity position have been computed as follows.
Table 9-3 Overall Property Yields (£)
Projected Yield
(Internal Rate of Return)
Position Value Over 10-Year Holding
Total Property 25,247,000 12.3 %

Mortgage 16,411,000 7.5
Equity 8,837,000 17.0
The following tables demonstrate that the property receives its

anticipated yield, proving that the £25,200,000 value (before deductions
for purchaser’s costs) is correct based on the assumptions utilised in this
report.
Table 9-4 Mortgage Component Yield (£)
Total Annual Present Worth of £1 Discounted

Year Debt Service Factor @ 7.5% Cash Flow
2001 1,859,000 x 0.930239 = 1,729,000

2002 1,859,000 x 0.865345 = 1,609,000
2003 1,859,000 x 0.804977 = 1,496,000
2004 1,859,000 x 0.748821 = 1,392,000
2005 1,859,000 x 0.696583 = 1,295,000
2006 1,859,000 x 0.647988 = 1,205,000
2007 1,859,000 x 0.602784 = 1,121,000
2008 1,859,000 x 0.560733 = 1,042,000
2009 1,859,000 * x 0.521616 = 970,000
2010 9,381,000 * x 0.485228 = 4,552,000
Value of Mortgage Component 16,411,000
*10th year debt service of £1,859,000 plus outstanding mortgage balance of £7,522,000
Table 9-5 Equity Component Yield (£)
Net Income Present Worth of £1 Discounted

Year to Equity Factor @ 17.0% Cash Flow
2001 363,000 x 0.854695 = 310,000

2002 426,000 x 0.730504 = 311,000
2003 630,000 x 0.624358 = 393,000
2004 768,000 x 0.533636 = 410,000
2005 834,000 x 0.456096 = 380,000
2006 901,000 x 0.389823 = 351,000
2007 970,000 x 0.333180 = 323,000
2008 1,040,000 x 0.284767 = 296,000
2009 1,113,000 * x 0.243389 = 271,000
2010 27,834,000 * x 0.208023 = 5,790,000
Value of Equity Component 8,835,000
*10th year net income to equity of £1,187,000 plus sales proceeds of £26,647,000
Return Components In evaluating the risk associated with an investment, it is useful to

determine the portions of a property's value that are attributable to
annual cash flow and reversionary proceeds upon sale. The larger the
percentage of value attributable to reversionary proceeds, the greater the
risk, because a property's sale price and resultant appreciation are
uncertain.
Based on the previous discounted cash flow analysis, 57% of the Hotel's
estimated value is attributable to cash flow and 43% is attributable to
property appreciation. These percentages, which fall within the typical
range of 55% to 65% for cash flow and 35% to 45% for appreciation, are
considered reasonable for a hotel of this type.
Debt Coverage Ratio The projected net income before debt service, expressed as a percentage
of debt service, provides for a debt coverage ratio that ranges from 1.2 in
the first year of the forecast to 1.4 in the stabilised year of operation.
Lenders active in hotel financing generally require debt coverage ratios
of between 1.25 and 1.45 in the stabilised year of operation. The Hotel's
projected debt coverage ratio is above the required levels and provides a
sufficient margin of cash flow to cover annual debt service.
Discounted Cash Flow Using the total property yield of 12.3% results in the same value as
Analysis derived from the mortgage-equity discounted cash flow capitalisation
technique, as presented in the proof of value. Following is the
discounted cash flow analysis.
Table 9-6 Discounted Cash Flow Analysis: Total Unleveraged Property Yield (£)
Discount Factor Discounted

Year Net Income @ 12.3% Cash Flow
2001 2,222,000 0.89072 1,979,181

2002 2,285,000 0.79338 1,812,880
2003 2,489,000 0.70668 1,758,933
2004 2,627,000 0.62946 1,653,583
2005 2,693,000 0.56067 1,509,884
2006 2,760,000 0.49940 1,378,345
2007 2,829,000 0.44483 1,258,413
2008 2,899,000 0.39622 1,148,629
2009 2,972,000 0.35292 1,048,871
2010 37,215,000 * 0.31435 11,698,425
Estimated Income Capitalisation Value 25,247,143 ¹
(SAY) 25,200,000
*10th year net income of £3,046,000 plus sales proceeds of £34,169,000

¹ Before the deduction of capital expenditure and purchaser's costs
Deductions for Deductions have been made from the Hotel’s value for stamp duty (4%)
Purchase Costs and legal fees (0.5%), as these costs are typically borne by a purchaser
and result in a lower net transaction price. Thus the value determined
by the Income Capitalisation method is £24,000,000. This value equates
to approximately £96,000 per room for the 250-room Hotel.
COST APPROACH The cost approach is founded on the principle of substitution, which
implies that no prudent investor will pay more for a property than the
amount for which a site can be acquired and a building of equal
desirability and utility constructed without undue delay. The cost
approach estimates open market value by first calculating the current
cost of replacing the premises. Appropriate deductions are made for
depreciation resulting from physical deterioration and functional and/or
economic obsolescence. The value of the land is then added to the
depreciated replacement cost, in order to provide an estimate of market
value.
Replacement Cost is the cost of construction at current prices of a

building of the same utility as the structure being valued, but built with
modern materials and according to current construction standards and
design.
We have estimated the Hotel's replacement cost based on figures

derived through our research. HVS International maintains constant
contact with developers, lenders and investors and has been able to
compile a substantial list of construction cost budgets and actual costs
incurred for numerous types of hotel throughout Europe, the Middle
East, Africa and the USA.
By analysing both historic construction cost figures and current market

conditions, and by making adjustments for the specific characteristics
attributed to the Hotel such as location, size, facilities, class and so forth,
we are able to derive an appropriate construction cost estimate.
Table 9-7 Replacement Cost Estimates (£)
Number of Rooms 250

Total Constructed Area 10,200 m²
Site Area 5,000 m²
Total Cost Per Room Per m² % Total
Site Purchase Cost £2,500,000 10,000 500 ¹ 11 %

Building Cost 11,500,000 46,000 1,127 52
Furniture, Fixtures & Equipment 3,125,000 12,500 306 14
Professional Fees ² 1,150,000 4,600 113 5
Interest during Construction 3 1,314,250 5,257 129 6
Pre-Opening Cost 500,000 2,000 49 2
Developer's Profit (Say 10%) 4 1,827,500 7,310 179 8
Estimated Development Cost £21,916,750 87,667 2,149 100 %
Say £22,000,000 88,000 2,000
¹ Based on a site area of 5,000 m²

² 10% of Building Cost
3
7.0% interest charge on 70% of development cost over 2 years.
It should be noted that the preceding estimate of value using the cost
approach is one of the recognised valuation approaches to arrive at an
overall estimate of value. Although the data used to compile this
estimate are generally reliable, it provides only a rough indication of
what the redevelopment cost may be. Individuals who require an
accurate cost estimate should retain the services of an experienced
quantity surveyor.
SALES COMPARISON The sales comparison approach estimates the value of a property by
APPROACH comparing it to similar properties recently sold on the open market.
Through an analysis of the comparable sales data, the valuer can
develop an indication of value based upon the per room sales price paid
for similar hotels. This approach in valuing hotels is primarily used as a
check against the values indicated by the income capitalisation and cost
approaches.
Based upon our market research and information provided to us by

other hotel brokerage firms, the following list details all the recent hotel
transactions in the four- or five-star segment which exhibit some
measure of comparability with the Hotel.
The following sales, which appear to have some degree of comparability,

are discussed briefly overleaf.
Table 9-8 Comparable Hotel Transactions (£)
Number of Est. Price Local Price Per

Property/Group City Country Sale Date Rooms (£) Room
Slaley Hall Newcastle UK May 1998 140 16,300,000 116,000

Four Seasons Manchester UK Feburary 1999 148 17,600,000 119,000
Grand Hotel Eastbourne UK April 1999 164 14,500,000 88,000
Park International London UK April 1999 117 12,000,000 103,000
Bonnington Hotel London UK June 1999 215 20,000,000 93,000
Charles Dickens Hotel London UK July 1999 188 21,500,000 114,000
Palms Hotel Hornchurch UK August 1999 137 10,750,000 78,000
Mickleover Court Derby UK November 1999 81 10,700,000 132,000
St George's Hotel London UK January 2000 86 12,000,000 140,000
Rathbone London UK Feburary 2000 72 8,900,000 124,000
Stakis Hotels UK UK July 1999 8,465 1,500,000,000 177,000

Swallow Hotels UK UK July 1999 5,000 578,000,000 116,000
Minimum: 78,000
Maximum: 177,000
Conclusion - Sales The sales comparison approach has some limited use in providing a
Comparison Approach range of values. Differences in location, facilities, property rights
transferred and many other variables make a precise comparison
between the comparable sales and the Hotel difficult. Subjective
adjustments used to lessen these differences are highly speculative.
Moreover, there is no accurate way of determining whether the sales
prices actually paid represent open market values, because it is difficult
to determine the exact motivations of the buyers and sellers, or what
special conditions may have influenced the sale. We are of the opinion
that, although the sales comparison approach is generally unsuitable for
indicating a specific final estimate of value, it may serve to establish a
range that can test the reasonableness of the values indicated by the
income capitalisation and cost approaches.
Our analysis of comparable sales indicates a wide range of £78,000 to

£177,000 per room, or £19,500,000 to £44,250,000 for the 250-room Hotel.
RECONCILIATION OF Reconciliation is the last step in the valuation process in which the final
VALUE INDICATIONS value is estimated from the various indications developed by the income
capitalisation, cost and sales comparison approaches. The relative
significance, applicability and defensibility of each indicated value is
analysed, with the greatest weight given to that approach deemed most
appropriate for the property being valued. Based on the preceding data
and analysis set forth in this report, the following value indications were
developed.
Approach Valuation Indication
Income Capitalisation £24,000,000

Cost £22,000,000
Sales Comparison £19,500,00-£44,250,000
VALUE CONCLUSION Our international experience with numerous hotel buyers and sellers
indicates that the procedures used in estimating market value by the
income capitalisation approach are comparable to those employed by
the hotel investors who constitute the marketplace. For this reason, we
consider that the income capitalisation approach produces the most
supportable value estimate, and it is given the greatest weight in our
final estimate of the Hotel's open market value.
Based on the preceding analysis and our specialist experience in valuing

hotels, we have given primary weight to the income capitalisation
approach. It is our opinion that the open market value of the freehold
interest in the Hotel described in this report, as at 1 January 2001, is:
£24,000,000
TWENTY FOUR MILLION POUNDS STERLING
This value equates to approximately £96,000 per room for the 250-room
Hotel.
HVS International Investment Value 59
10. Investment Value
The bulk of this report, and of the foregoing analysis, has been
concerned with deriving the Open Market Value (OMV) for the Hotel.
OMV represents the valuer’s view of what a rational purchaser would
pay for a property in an open market situation. In arriving at the OMV,
a valuer assumes such valuation parameters and return criteria as he
deems to be representative of the market for such a property purchase.
It is often a factor, however, in commercial investment analysis and

appraisal, that investment or investor-specific parameters and return
requirements are used to evaluate various (potentially competitive)
investment options. Often potential purchasers or investors consider
investments in light of internal ‘hurdle rates’ or minimum internal rates
of return (IRR).
Sensitivity Analysis In the following paragraphs we consider the potential purchase of the
Wellington Hotel in the light of specific return requirements, such as, we
have been informed, are used by Venture Capital Trust in evaluating
various investment options. As such the resulting ‘value’ does not
represent HVS International’s opinion of OMV, but rather a specific
investment value, which is relevant to the particular return criteria
employed by Venture Capital Trust.
We have considered the potential purchase of the Wellington Hotel

under two investment valuation scenarios:
• A required unleveraged IRR of 15% per annum before tax;

• A leveraged finance structure involving 80% ‘low cost’ debt to
which the investor is assumed to have access, at Libor plus 25
basis points, and an equity return requirement of 20% per annum
before tax.
We have applied each of these capitalisation bases to the flow of net

income projected in Table 8-2 to HVS International’s sophisticated
computerised hotel valuation model. Table 10-1, below, summarises the
key valuation parameters, and the resultant investment values, which
are computed under each investment value scenario.
Table 10-1 Investment Value Scenarios
Unleveraged Finance Structure Leveraged Finance Structure

Stabilised Year: 4 Stabilised Year: 4
Inflation: 2.5 % Inflation: 2.5 %
Loan to Value: - % Loan to Value: 80 %
Amortisation: - Years Amortisation: 15 Years
Term: - Years Term: 10 Years
Interest Rate: - % Interest Rate: 6.25 %
Terminal Cap Rate: 9.0 % Terminal Cap Rate: 9.0 %
Transaction Costs: 1.5 % Transaction Costs: 1.5 %
Equity Yield: 20.0 %
Income Approach Value: 23,500,000 Income Approach Value: 29,200,000

Value per Room 94,000 Value per Room 116,800
Total Property Yield: 15.0% Total Property Yield: 11.4%

Weighted Average Cost of Capital 15.0% Weighted Average Cost of Capital 9.0%
Deflated Stabilised Yield 11.5% Deflated Stabilised Yield 9.2%
These investment values should be compared with the OMV before any
deductions for capital expenditure or purchaser’s costs, that is £29.2
million, or £116,800 per room. Clearly three quite different value
conclusions have been derived from three different sets of valuation
parameters or return requirements.
Conclusions If it is accepted that the OMV is based upon ‘market’ return

expectations, such as would be required by a rational investor typical of
the field of potential buyers for the Hotel, then the following conclusions
may be drawn from the two investment value scenarios considered in
this sensitivity analysis.
With respect to the unleveraged investment value scenario:
• The price which the investor can ‘afford’ to pay for the Hotel, in
order to earn an unleveraged 15% annual return on capital
employed is below OMV;
• The investor is, therefore, unlikely to purchase the Hotel in an
‘open market’ transaction, where other purchasers are in
competition;
• The investor may miss out on this opportunity to buy the Hotel;
• The investor’s return expectations are higher than ‘market’.

With respect to the leveraged investment value scenario:
• The price which the investor is willing to pay, given his access to
‘low cost’ debt and his Equity Return requirement of 20%, is
above OMV;
• The investor may, therefore, purchase the hotel at a price which is
greater than necessary to ‘win’ the hotel in an open market
transaction;
• The investor’s blended, or overall return expectations are lower
than ‘market.
Clearly these comparisons assume that the value parameters used in our
OMV analysis represent ‘market’ return requirements. It is assumed that
the investor and the rational purchaser envisaged in the OMV scenario
have identical expectations with regard to the Wellington Hotel’s
potential future income and expense performance, as set out in Table 8-
2.
It is said that ‘beauty is in the eye of the beholder’. Any purchaser who
expects to be able to achieve a better future performance, or who is
prepared to accept a lower return, is clearly likely to pay more for an
income earning asset than is a less optimistic, or a more conservative
purchase competitor.
HVS International Addendum 1 - Statement of Assumptions and Limiting Conditions 1
Addendum 1 – Statement of Assumptions and

Limiting Conditions
1. This report is to be used in whole and not in part.

2. No responsibility is assumed for matters of a legal nature, nor do
we render any opinion as to title, which is assumed to be
marketable and free of any deed restrictions and easements. The
property is valued as though free and clear unless otherwise
stated.
3. There are no hidden or unapparent conditions of the property,
subsoil or structures that would render it more or less valuable.
No responsibility is assumed for these conditions or any
engineering that may be required to discover them.
4. We have not considered the existence of potentially hazardous
materials used in the construction or maintenance of the
buildings, such as asbestos, urea formaldehyde foam insulation,
or PCBs, nor have we considered the presence of any form of
toxic waste. The valuers are not qualified to detect these
substances and urge the client to retain an expert in this field if
desired.
5. No survey of the property has been made by the valuers and no
responsibility is assumed in connection with such matters.
Sketches, pictures, maps and other exhibits are included to assist
the reader in visualising the property. It is assumed that the use
of the land and premises is within the boundaries of the property
described and that there is no encroachment or trespass unless
noted.
6. All information (including financial operating statements,
estimates, and opinions) obtained from parties not employed by
HVS International is assumed to be true and correct. No liability
resulting from misinformation can be assumed by the valuers.
7. Unless noted, it is assumed that there are no encroachments or
planning and building violations encumbering the Hotel.
8. It is assumed that the property is in full compliance with all
applicable city, local and private codes, laws, consents, licences
and regulations (including an alcohol licence where appropriate),
and that all licences, permits, certificates, franchises and so forth

can be freely renewed and/or transferred to a purchaser.
9. All mortgages, liens, encumbrances, leases and servitudes have
been disregarded unless specified otherwise.
10. No portions of this report may be reproduced in any form
without the permission of the valuers, nor shall the report be
distributed to the public through advertising, public relations,
news, sales, or other media without the prior written consent of
the valuers.
11. We are not required to give testimony or attendance in court by
reason of this valuation without previous arrangements and only
when our standard per diem fees and travel costs are paid prior
to the appearance.
12. If the reader is making a fiduciary or individual investment
decision and has any questions concerning the material
contained in this report it is recommended that the reader
contact the valuers.
13. The valuers take no responsibility for any events, conditions or
circumstances affecting the property's market value that take
place subsequent to either the date of value contained in this
report or the date of our field inspection, whichever occurs first.
14. The quality of a hotel facility's on-site management has a direct
effect on a property's economic viability and market value. The
financial forecasts presented in this valuation assume both
responsible ownership and competent management. Any
variance from this assumption may have a significant impact on
the forecast operating results and value estimate.
15. The estimated operating results presented in this report are
based on an evaluation of the current overall economy of the
area and neither take into account nor make provision for the
effect of any sharp rise or decline in local or economic conditions.
To the extent that wages and other operating expenses may
advance during the economic life of the property, it is expected
that the prices of rooms, food, beverages and services will be
adjusted to at least offset these advances. We do not warrant that
the estimates will be attained, but they have been prepared on
the basis of information obtained during the course of this study
and are intended to reflect the expectations of typical investors.
16. Many of the figures presented in this report were generated
using sophisticated computer models that make calculations
based upon numbers carried out to three or more decimal places.
In the interest of simplicity most numbers presented in this
report have been rounded to the nearest tenth. Thus, these
figures may be subject to small rounding errors in some cases.
17. Valuing real estate is both a science and an art. Although this
valuation employs various mathematical calculations to provide
value indications, the final estimate of value is subjective and
may be influenced by the valuers' experience and other factors
not specifically set forth in this report.
18. The freehold title to the Hotel would be readily marketable
without any undue restrictions, covenants or conditions except
where otherwise noted.
19. The relationship between pounds sterling and other major world
currencies remains constant as of the date of our fieldwork.
20. While the information contained herein is believed to be correct
it is subject to change. Nothing contained herein is to be
construed as a representation or warranty of any kind.
HVS International Photographs of the Wellington Hotel,Main Square, Newtown, UK 1
Addendum 2 Photographs of the Wellington

Hotel, Newtown, UK

Sha563 Wellington

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HVS International Wellington Hotel, Main Square, Newtown, UK

Economic Study and Valuation

Tel: +44 (20) 7878 7700

Re: Wellington Hotel

In accordance with your request, we herewith submit our Economic

TWENTY FOUR MILLION POUNDS STERLING

We hereby certify that we have no undisclosed interest in the property,

Charles Human, ARICS

1. Statement of Assumptions and Limiting Conditions

2. Photographs of the Wellington Hotel

Property: Wellington Hotel

Date of Value: 1 January 2001

Rooms Revenue (£000s) 4,989 5,000 4,951 5,085 5,356 5,565

House Profit (£000s) 3,685 3,580 3,310 3,402 3,670 3,857

Summary of Valuation Parameters

Open Market Value

Open Market Value

2. Nature of the Assignment

Open market value is defined as:

The valuation was calculated as follows:

3. Market Area Analysis

The macro-economic climate in which a hotel operates is an important

Table 3-1 Key Economic Indicators - UK

Source: Economist Intelligence Unit September 2000

The Economist Intelligence Unit (EIU) UK Country Forecast (September

Our assumptions and projections relating to hotel demand growth and

The Wellington Hotel is located in Newtown city centre at Main Square,

Newtown is ideally situated next to the intersection of the M4 and the

1991 1,142,734 - 344,551 - 798,183 - 30.2 % 69.8 %

Source: Airports Council International

As illustrated in the above table, Newtown International Airport has

Newtown International Airport is located some seven miles south-west

The major commercial demand generators are located in or around

Among the major organisations located in Newtown city centre and

supported by university research facilities, continues to grow. Many hi-

Table 3-3 Employment by Sector in Newtown - 2000

Manufacturing Industries 24,900 11.4 % 11.0 %

Total 218,400 100% 100%

Source: Newtown Economic Development Department, June 2000

There is only a moderate level of tourist visitation to Newtown city

Located to the north of Newtown near Tower Hill is the ‘Valley’

An attraction that is expected to generate both commercial and tourism-

Another major development project that is currently under construction

Table 3-4 Proposed Office and Business Park Developments in Newtown as at

Location Description Size m 2

Source: Newtown Economic Development Department, September 2000

We highlight overleaf the aspects of Newtown which we consider to

• The regeneration project at Main Square;

• The recently opened, £42 million terminal building at Newtown

4. Description of the Hotel

LOCATION A hotel’s location within a specific neighbourhood can have a direct

The Hotel is located near the Main Square development adjacent to

The Wellington Hotel is adjacent to the Main Square office

generators, whether these are commercial businesses or tourist

• Newtown city centre;

Table 4-1 Facilities Summary

Address: Main Square Opening Date: January 1994

Refurbishment History: 1997 - 80 Bedrooms, lobby, meeting rooms, IT and exterior

Guestrooms Approximate Area/m² Number

Food and Beverage Facilities Approximate Area/m² Approximate Number of Seats

5. Market for Transient Accommodation

The analysis of demand by the use of individual market segments is

Table 5-1 Accommodated Room Night Demand - Competitive Market 2000