REVALUATION of property can have an huge impacton a balance sheet. The enormous sums that maybe at stake explain why so much attention has focused on valuers and the methods they use to make assessments.
The annual valuation of Queens Moat Houses (QMH) costs the company around £1m. Forte has said that its yearly bill for valuation of just a third of its assets is around £500,000.
But with so much of shareholders’ and financiers’ attention focused on the value of assets, it has become important for publicly-quoted hotel companies to ensure their balance sheets reflect the market.
Forte took a conservative line and devalued its assets by £412m.
QMH took the view that its previous valuation of £861m at 31 December 1992 was too cautious and upgraded the value of its UK hotels by 21% the following year.
The issue of how hotel valuations are calculated came to a head when it became known that two sets of valuers had produced figures almost £1b apart for QMH.
While a booklet of recommended practice published subsequently by the British Association of Hotel Accountants (BAHA) may have been seen as a response to the debate prompted by the QMH valuations, the booklet has been in preparation for two years.
Earlier this month the Royal Institution of Chartered Surveyors (RICS) issued a Valuation Guidance Note on the capital valuation of hotel, leisure and licensed properties. This too, according to the RICS, has been in preparation for some time, and was not issued as a response to recent publicity.
With the publication of both sets of guidelines a clear difference can now be seen between the two methods.
The BAHA Recommended Practice incorporates RICS statements of asset valuation, in particular one which states that hotels should be valued on the basis of market value by reference to both historic, current and future trading performance.
The RICS, however, is concerned that the BAHA has recommended the discounted cash flow (DCF) approach as best practice for all commercially operated hotels.
The RICS takes the view that the DCF approach may be appropriate in the valuation of certain hotels, such as those which have an international market. But the DCF method is designed to smooth out the peaks and troughs of the property market.
The RICS believes that any hotel valuation which does not take account of market evidence may not represent the true market value for the property.