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Selling Hotel Kinara: Valuing Commercial...

Das, Prashant

Case

Selling Hotel Kinara: Valuing Commercial Property During an Economic Crisis

Das, Prashant

IIMA-FA0563 | Published January 25, 2022 | 15 pages Case

Collection: Indian Institute of Management, Ahmedabad

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Learning Objectives

It is late 2019. Hotel Kinara is a newly built, well-functioning 4-star hotel in Ahmedabad. The hotel has 155 rooms and food and beverage facilities. But the hotel owners desire an exit from the market. A transaction advisory consultant values the hotel right before the COVID-19 pandemic. However, as happens with big-ticket transactions, the sale is delayed. The hotel is revalued after the first wave of COVID-19 subsides. The valuation is substantially below the original estimates. The consultant contemplates the valuation two years later. The case is centred around valuing a commercial property asset in different market conditions using the discounted cash flow method. Students develop a cash flow pro forma on the basis of market information. The case exposes students to several nuances of pro forma development. Students are sensitised to the idea that valuation is about not just cash flows but also the perceived risk in cash flows. The perceived risks may result from investors’ overreaction to market conditions and irrational sentiments. The discount rate, capitalisation rate, etc., must be revised carefully as the market cycles change.

The case uses the context of a hotel asset in achieving the pedagogical goals. Compared to the cash flow statements of other commercial property assets such as offices, hotel cash flow statements tend to be more complex and detailed. However, the underlying valuation principles remain the same. Therefore, most concepts from this case study could be generalised to all commercial property assets. 1. Time value of money: Valuation is sensitive to the timing of cash flows. 2. Cash flow projections: How to forecast various line items in a cash flow statement for a commercial property asset. 3. Estimating risk measures: Estimating capitalisation rate (income yield), growth rate and discount rate for valuing a commercial property asset. 4. Impact of economic cycles on valuation: How could the cash flow estimates and risk measures change during economic cycles?