 2010 CORNELL UNIVERSITY
DOI: 10.1177/1938965509337576
Hotel Valuation in China
A Case Study of a State-Owned Hotel
by MING-HSIANG CHEN and WOO GON KIM
This study applies the seven hotel-valuation tech-
niques proposed by Rushmore to estimate the value
of a state-owned hotel in China. The dearth of
research on hotel real estate in China may be attrib-
uted to the fact that the historic data of hotel sales
transactions is not available or difficult to obtain.
Nevertheless, many international hotel investors are
interested in China’s hotels because of its booming
tourism business. This study analyzes the extent to
which the seven generally accepted hotel valuation
techniques might be appropriate for China, since
those approaches rely on certain types of data and
financial ratios that may not be readily available.
Using a single hotel as a case study, the study found
that each valuation technique has its own strengths
and weaknesses. On balance, the income capitaliza-
tion approach should work most reliably in China,
while a sales comparison approach may be the least
reliable technique.
Keywords: hotel valuation; appraisal; sensitivity
analysis; China
AUGUST 2010 Cornell Hospitality Quarterly   429
Volume 51, Issue 3   429-445
Q
ian Qichen, the former vice-premier of China,
stated that “international tourism as an indus-
try is the outcome of China’s economic
reform and open policy to the outside world initiated
in the late 1970s, and it has become one of the impor-
tant foreign exchange earners, playing an increas-
ingly significant role in the country’s national
economy” (Qian 1999). The China National Tourism
Administration (CNTA; 2007) reported that in 2006
the foreign tourist arrivals reached 49.6 million
(fourth worldwide) and the tourism receipts reached
US$33.9 billon (fifth in the world). The nations
­leading China in total international tourist arrivals,
according to World Tourism Organization (WTO;
2006), are France, at 79.1 million; Spain, at 58.5 mil-
lion; and the United States, 51.1 million.
We anticipate that China will move up this list,
with its world exposure from such major events as the
2008 Beijing Olympics and the 2010 Shanghai World
Expo. Furthermore, China’s long history and diverse
tourism resources will encourage both international
HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA
and local tourists to travel in China, which
will create large demand for hotels and
their services. According to Statistical
Report of China’s Tourism Industry in 2006
published by the China National Tourism
Administration (CNTA 2007), the number
of hotels increased from a mere one hun-
dred in 1979 to more than ten thousand
star-rated properties in 2002. This number
does not include the approximately three
hundred thousand accommodation proper-
ties outside the star-rating system.
However, China’s local hotel companies
are relatively small and immature as com-
pared to foreign multinational hotel compa-
nies, most of which have already declared
China a key market for future expansion
(Pine 2002). Since joining the WTO on
December 11, 2001, China has been gradu-
ally opening its hotel market to international
development and competition (Yu and
Huimin 2005). The performance of many
local hotels lags behind internationally man-
aged operations due to management ineffi-
ciency, a lack of corporate governance, and
inferior service quality (Yu and Huimin
2005). According to Tisdell (1990) and Qi
(2001), the slow growth of Chinese hotel
chains can mostly be attributed to the busi-
ness environment and the distinctive aspects
of the Chinese political, economic, and social
systems—in particular, the protectionist atti-
tudes of local authorities.
To open China’s hospitality market to
the world, it is necessary to reform the
management of state-owned hotels and to
provide modern hotel services to meet
international standards and foreign tourist
expectations. Furthermore, China’s WTO
entry implies that the gradual removal of
China’s governmental controls will expose
the local hotel industry to greater competi-
tion from foreign companies. We antici-
pate that management reform will take the
form of privatization. We believe that it is
critical for China’s hotel to privatize its
430   Cornell Hospitality Quarterly AUGUST 2010
ownership system, as suggested by Tang
et al. (2006). Eventually, domestic hotels
(state-owned hotels) will transfer state
ownership to nongovernmental business
enterprises or foreign-owned management
hotel groups. As properties change hands,
both buyers and sellers will benefit from
an accurate understanding of hotel valua-
tion in this market, which is the prerequi-
site for increasing the participation of
private sector hotel investors.
In valuing hotels, three approaches are
available from which to select: the income
capitalization approach, the sales compari-
son approach, and the cost approach. In
the income capitalization approach, inves-
tors and appraisers gauge the price of the
hotel based on the present value of future
cash flows generated from owning and
operating that hotel property. Essentially, a
capitalization rate is the rate of return on
investment, much like a dividend earned
on a stock. It is used by real estate inves-
tors as a benchmark for determining how
much they should pay for a hotel. As
stated by real estate consultant Propex
International, in appraisal practice capital-
ization rates are extracted from the sales of
similar investment properties and are
applied to the net income of a subject
property to determine its hotel value (www
.propex.com/C_g_inc.htm).
The second approach is the sales
­comparison approach. The Sun Nations
Mortgage Company (www.sunnations.
com) states that in evaluating a hotel,
appraisers and investors determine value
by comparing the hotel in question to area
hotels of a similar size, age, construction
quality, and reputation using the sale prices
of those properties. Essentially, the sales
comparison approach establishes market
value under the premise that a buyer will
not pay more for a hotel than what it
would cost to purchase another, similar
property in that area.

The third method, the cost approach, is
based on the principle of substitution,
which asserts that no cautious buyers or
investors will pay more for a hotel than the
amount for which the site could be
acquired, and they will only purchase it
then if they can make all desirable improve-
ments without undue delay. So, this is a
method of appraising a hotel based on the
depreciated reproduction or replacement
cost of improvements, plus the market
value of the site, as indicated by Propex
International.
Rushmore (1992a) specified seven tech-
niques to estimate the value of a hotel
within the above three approaches. In this
article, we applied these techniques to
estimate hotel values in China. The income
capitalization approach comprises tech-
nique 1 (one stabilized year), technique 2
(three-year buildup), technique 3 (ten-year
discounted cash flow [DCF]), and tech-
nique 4 (ten-year DCF with overall dis-
count rate). Technique 5 belongs to the
sales comparison approach. Technique 6
(the market-derived capitalization rate) is
a hybrid approach, which combines both
the income capitalization and the sales
comparison approaches. Finally, technique
7 (room-rate multiplier) is a well-known
rule of thumb in the lodging industry.
We suspect that none of these hotel
valuation techniques are used in China,
but little information is available on this
matter. In that regard, as the need arises to
set hotel values in China, we wanted to
analyze which of the seven current valua-
tion techniques is the most appropriate for
China’s hotels or, for that matter, which
approaches are used most commonly.
Mainly due to the lack of accumulated
hotel sales transaction data and relatively
low expertise in banking and real estate
finance in China, hotel valuation tends to
be based on nonscientific and unsophisti-
cated estimation techniques. We wanted to
AUGUST 2010 Cornell Hospitality Quarterly   431
HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT
determine whether the seven valuation
techniques widely used in developed coun-
tries would be applicable and relevant in
China, given limited information available
regarding transaction data, cap rates, and
the like.
By investigating the strengths and weak-
nesses of these seven valuation techniques
as they apply to China, we hope to provide
some useful guidelines for hotel valuation
in China. We suspect that appraisers, own-
ers, buyers, and institutional investors will
select the most appropriate techniques for
their own use, and we encourage applica-
tion of a variety of methods
Our analysis uses valuation models to
estimate the value of the state-owned
Huatian Hotel as a case study. After a dis-
cussion of China’s hotel industry, we
describe the hotel and related data. The
valuation techniques and results are shown
in the fourth section. The fifth section dis-
cusses the comparison of seven valuation
techniques. The sixth section provides
suggestions for lucrative hotel develop-
ment opportunities, although this discus-
sion does not relate directly to the analysis
of the valuation techniques. We conclude
with implications and suggestions for
future research.
Overview of Hotel Industry
in China
Before 1978, China offered few accom-
modation facilities at the level of interna-
tional standards. What existed was of
poor quality and insufficient to satisfy the
sudden influx of overseas tourists who
came to China under its Open Door Policy.
The top priority of the tourism sector at
that time was to build hotels that met
international standards (Pine 2002). Due
to the government’s investing in and
restructuring the hotel industry—coupled
with its encouragement of external invest-
ment and allowance of foreign-owned
HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA

Exhibit 1:
Year-To-Year Increases in Hotels, Rooms, and Tourist Volume

Hotel Rooms Travelers

Changed Changed Occupancy International Changed Domestic Changed

Year Number % Number % % (in million) % (in million) %

1990 1,987 11.1 293,827 9.8 59.4 27.5 12.1 280 16.6
1991 2,130 7.1 321,116 9.3 62.5 33.4 21.4 290 3.6
1992 2,354 10.5 351,044 9.3 67.0 38.1 14.3 330 13.8
1993 2,552 8.4 386,401 10.1 67.7 41.5 9.0 410 24.0
1994 2,995 17.4 406,280 5.1 62.2 43.7 5.2 520 27.8
1995 3,720 24.2 486,114 19.6 58.1 46.4 6.2 620 19.2
1996 4,418 18.8 594,196 22.3 55.3 51.1 10.2 640 3.0
1997 5,201 17.7 701,736 18.1 53.8 57.6 12.6 644 0.6
1998 5,782 11.2 764,797 8.9 51.7 63.5 10.2 694 7.8
1999 7,035 21.6 889,430 16.2 53.4 72.8 14.7 719 3.6
2000 10,481 49.0 948,185 6.6 55.9 83.4 14.6 744 3.4
… … … … … … … … … …
2004 10,888 11.7 1,237,900 24.7 60.6 109.0 18.9 1102 26.7
2005 11,828 7.8 1,332,100 7.6 61.0 120.3 10.4 1212 10.0
2006 12,751 6.5 1,459,800 9.6 61.0 124.9 3.9 1394 15.0
Source: Yearbooks of China Tourism Statistics (Beijing: China National Tourism Administration, China Travel and Tourism Press, 1990-2007).

hotel companies—the number of hotels in
China increased from 137 in 1978 to
12,751 in 2006, comprising nearly 1.5
million rooms (see Exhibit 1) (CNTA
2007). Comparing 2000 to 2006, the num-
ber of hotel rooms increased at an annual
compounded rate of 7.4 percent. At the
same time, overall occupancy improved
from 56 to 61 percent, which indicates
that the room inventory growth was sup-
ported by sufficient demand. The WTO
(2000-2002) forecasts that by the year
2020, China will be the world’s number-
one tourist destination, with approxi-
mately 130 million annual arrivals. Thus,
the nation’s hotel industry will need to
expand even further. Assuming the same
high growth pattern of around 7 percent
per annum, the number of hotel rooms in
2020 is projected to be 3.7 million. Even
applying a conservative growth rate of 5
percent, the nation would have 2.9 million
hotel rooms, second only to the United
States, which had around 4.6 million
rooms in 2008 (Smith Travel Research
2008).
According to the Statistical Report of
China's Tourism Industry in 2005 from the
CNTA (2006), the overall scale of China’s
star-rated hotels rose and the average occu-
pancy rate increased from the previous
year. By the end of 2005, there were a total
of 11,828 star-rated hotels in China, 940
more than in 2004, which is an increase of
8.6 percent over the previous year (see
Exhibit 2). The total number of rooms was
1,332,083, a total of 94,232 more than the
previous year, which is an increase of 7.6
percent. The total number of beds reached
approximately 2.57 million at a growth
rate of 8.7 percent.
China’s hotels operate under ten dif-
ferent ownership structures, as shown in
Exhibits 3 and 4, which describe hotel
ownership types and the give distribution
of star-ranked hotels in 2005. The state

432   Cornell Hospitality Quarterly AUGUST 2010

 HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT

Exhibit 2:
Number of Star-Rated Hotels and Rooms in China, 1992-2005

14000 1400000
1332803

1237851
12000 1200000
11828

992804
10888
10000 1000000
897206
9751
816260

8000 8880 800000

594678 7358

6000 524894 600000

450872 6029
403570
364059 3856
4000 308587 3248
400000
269106 2724
232003
2349
196513
1913
2000 1556 200000
1028 1186

0 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

HOTELS ROOMS

Source: China National Tourism Administration (2006).

owns hotels at all levels, comprising foreign-owned hotels is higher than in

5,528 hotels, or 46 percent of the coun-
try’s 2005 hotel inventory. The nongov-
ernmental collective economy owned 964
hotels, or 8 percent of the total hotel
count. Foreign investors accounted for
the development of 256 hotels (just over
2 percent), and investors from Hong
Kong, Macau, and Taiwan owned 314
hotels (2.65 percent). According to
Horwath Asia Pacific (2007), cited in a
report from InterContinental Hotels
Group in 2007, the RevPAR (revenue per
available room) premium of five interna-
tional branded hotels over unbranded
domestic hotels was 42 percent, while the
premium of five domestic branded hotels
over unbranded domestic hotels was only
1 percent. Moreover, occupancy in state-
owned hotels (60.15 percent) is below
that of foreign-invested hotels (66.74 per-
cent). Overall, management efficiency in
state-owned hotels.
Five-star hotels made up 2.38 percent
of the total star-ranked properties in 2005,
as compared to not quite 2 percent in
2002; 7.2 percent of star-ranked hotels
held four-star ratings in 2002, and that
figure increased to 9.69 percent in 2005.
The steady increase in the supply of
upscale hotels is indicative of travelers’
demand.
However, due to the lack of trading data
available in the Chinese hotel industry,
investors tend to have a tough time finding
reliable comparison values for hotel prop-
erties. It is important to build a database of
hotel sales transactions to derive more
accurate hotel values. Moreover, state own-
ership is still the dominant mode, account-
ing for nearly half of all hotels (see Exhibit
3). The main problem associated with state
ownership is the failure to ­separate hotel

AUGUST 2010 Cornell Hospitality Quarterly   433

HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA

Exhibit 3:
Hotel Ownership Distributions in China, 2005

Number of Number of Number of Revenue Occupancy

Ownership Hotels (%) Rooms (%) Beds (%) (Billion RMB) (%)

State-owned economy 5,528 (46.74) 626,700 (47.05) 1,249,500 (48.59) 56.815 60.15
Collective economy 964 (8.15) 89,800 (6.74) 175,800 (6.84) 7.120 59.10
Cooperative co. 309 (2.61) 29,500 (2.21) 56,400 (2.19) 2.222 59.89
Affiliated co. 72 (0.61) 8,800 (0.66) 16,400 (0.64) 0.755 60.20
Limited liability co. 1,928 (16.30) 231,600 (17.39) 439,800 (17.10) 24.065 61.74
Corporation 518 (4.38) 66,700 (5.01) 125,500 (4.88) 7.220 63.02
Proprietary co. 1,624 (13.73) 126,600 (9.50) 245,800 (9.56) 8.854 58.28
Other domestic 315 (2.66) 25,900 (1.94) 49,300 (1.92) 1.873 56.25
Hong Kong, Macau, 314 (2.65) 67400 (5.06) 114,100 (4.44) 13.234 67.40
  and Taiwan
Foreign-invested co. 256 (2.16) 59,000 (4.43) 98900 (3.85) 12.511 66.71
Total 11,828 (100) 1,332,100 (100) 2,571,700 (100) 134.669 60.96
Source: China National Tourism Administration (2006).

management and ownership from effective
monitoring of the state’s assets.
A Case Hotel Selection and Data
In this study, we use historic data from
the Huatian Hotel to estimate its value.
The major reasons we chose the Huatian
Hotel as a representative case are that the
firm has operated for more than thirteen
years, and it has more than ten years’
worth of reliable data, which is an impor-
tant condition for applying valuation tech-
nique 3 (ten-year DCF) and technique 4
(ten-year DCF with overall discount rate).
We also performed the same analysis on
another property, the Jinjiang hotel, with
substantially similar results. Thus, we
present only the case of the Huatian.
Though other hotels may have been oper-
ating for more than a decade, their data
can often be incomplete due to bankruptcy,
merger, or acquisition. Such issues would
render their data fragmentary, thus ham-
stringing the study.
For hotel investors, the major interest is
not only in learning the historical value of
a hotel but also in estimating the future
value of a hotel. Using the discount cash
flow valuation model, Rushmore (1992a,
1992b) applied seven hotel-valuation tech-
niques to examine a hypothetical hotel
with normal cash flow, as well as a hotel in
distress. For this study, we use historic
data for the hotel recorded in the database
of the Taiwan Economic Journal (TEJ) to
compare estimates of the value of the
Huatian Hotel.
Huatian Hotel
The Huatian Hotel is approximately a
half-hour drive from Huanghua International
Airport in Hunan province. This superlux-
ury five-star hotel with seven hundred stan-
dard and luxury guest rooms has been a
member of the International Golden Key
Organization and the Chinese Famous
Hotel Organization since 1995. With the
founding in 1995 of Huatian International
Hotel Management, the Huatian Hotel
became the first hotel with the ability to
export its brand management into southern
central China. Recently, the chain has been
able to expand from the southern cities to
the big central cities and beyond. This

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 HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT

Exhibit 4:
Hotel Star-Ranking Distributions in China, 2005

Star Revenue Occupancy

Ranking Hotels (%) Rooms (%) Beds (%) (Billion RMB) (%)

5 star 281 (2.38) 106,500 (8.00) 171,300 (6.66) 32.781 66.03

4 star 1,146 (9.69) 240,400 (18.05) 433,400 (16.85) 36.819 65.09
3 star 4,291 (36.28) 542,200 (40.71) 1,045,000 (40.64) 44.564 61.21
2 star 5,497 (46.47) 411,000 (30.86) 849,500 (33.03) 19.375 57.11
1 star 613 (5.18) 31,900 (2.39) 72,400 (2.82) 1.130 49.60
Total 11,828 (100) 1,332,100 (100) 2,571,700 (100) 134.669 60.96
Source: China National Tourism Administration (2006).

progress is another reason why we chose
the Huatian Hotel for our study.
Taken from the TEJ financial database,
yearly income presented here covers the
period from 1995 to 2005. In this article,
we assume the money to purchase this
hotel will come from a first mortgage, rep-
resenting 75 percent of the purchase price;
the balance will be raised from equity part-
ners. In addition, the current costs of vari-
ous financing sources are as follows:
Mortgage
Interest:1 8 percent
Amortization: 20 years
Mortgage constant: 0.10185
Loan-to-value ratio: 75 percent
Equity Capital
Cash-on-cash (equity dividend):2 16.35 percent
Equity yield:3 20 percent
Other Valuation Rates
Terminal capitalization rate:4 12 percent
Total property yield (discount rate): 14 percent
Selling expenses: 4 percent of (broker and
legal) sales price
Exhibit 5 presents the abbreviated finan-
cial statement of Huatian Hotel from 1995
to 2005. The net income before debt ser-
vice is defined as operating income after
undistributed and preopening expenses but
before interest, tax, and depreciation and
amortization. In this case, the net income is
equivalent to the cash flow before debt
service.
Valuation in Practice
Results of Technique 1 (Band of
Investment—One Stabilized Year)
This valuation technique, using one sta-
bilized year, takes the cost of capital used in
hotel investment and calculates a weighted
average of these costs based on the percent-
age relationship of each capital source to the
whole. The weighted average cost of capital
becomes the rate used to capitalize the sta-
bilized net income into a value estimate.

1. Interest rate equals the one-year loan rate plus risk premium by credit. The one-year loan average rate was
approximately 7.15 percent over the previous ten years. In this study, we assume that, when borrowing
money from a bank, the interest rate was 8 percent (source: Taiwan Economic Journal database).
2. In this study, we use average historical return on equity of the hotel as a proxy to measure cash on cash
(equity dividend).
3. Equity yield for institutional investors ranges from 18 to 22 percent (Rushmore 1991). In this article, we
assume the equity yield rate is 20 percent.
4. The terminal capitalization rate is close to the total cost to the investor and appraiser to purchase the hotel,
including the interest rate and equity costs, so it is assumed to be close to the weighted average cost of
capital (WACC).

AUGUST 2010 Cornell Hospitality Quarterly   435

HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA

Exhibit 5:
The Abbreviated Financial Statement of the Huatian Hotel (in Thousand RMB)

Net Income
Operating Business before Debt Net Income/ Net Income/
Year Asset Equity Revenue Expense Service Asset (%) Equity (%)

1994 136,127
1995 197,944 116,465 63,969 29,555 34,414 17.39 29.55
1996 481,352 281,948 143,923 62,494 81,429 16.92 28.88
1997 500,280 327,555 143,584 50,044 93,540 18.70 28.56
1998 636,331 435,907 113,204 52,401 60,803 9.56 13.95
1999 627,149 468,362 87,909 47,262 40,647 6.48 8.68
2000 702,992 502,940 110,569 71,661 38,908 5.53 7.74
2001 1,031,942 627,314 131,695 78,568 53,127 5.15 8.47
2002 1,028,477 645,241 189,643 119,038 70,605 6.87 10.94
2003 1,158,529 646,126 231,258 152,917 78,341 6.76 12.12
2004 1,179,382 480,169 266,062 187,782 78,280 6.64 16.30
2005 1,162,612 473,029 260,216 190,724 69,492 5.98 14.69
Average 791,545 455,005 158,367 94,768 63,599 9.63 16.35
Source: Taiwan Economic Journal database.

Mortgage (75 percent) × (0.1019) = 0.076387
Equity (25 percent) × (0.1635) = 0.040882
Overall rate 0.117269
V (in thousands) = 63,599/0.117269 = RMB 542,334.
Results of Technique 2 (Band of
Investment—Three-Year Buildup)
When we use the stabilized net income
of technique 1 to estimate the value of
Huatian Hotel, we can easily see that sub-
jectivity is involved when estimating the
reliable value due to the limitations of
the one-year time frame. Valuation tech-
nique 2 uses a longer period of stabilized
income in estimating the value of hotel, in
this case, a three-year projection of income.
In this technique, we take the third year’s
net income and capitalize it at the capital-
ization rate and then discount the future
value to the present value. The net incomes
of years one and two are also discounted
to the present value by the same rate.
These present values are added together to
produce the estimate of the hotel’s value.
Year 3 (1997): (93,540/0.1173) × (0.8011) = 638,831
Year 2 (1996): (81,429) × (0.8011) = 65,233
Year 1 (1995): (34,414) × (0.8950) = 30,801
V (in thousands) = RMB 734,865.
Results of Technique 3 (Hotel Valuation
Formula—Ten-Year DCF)
This technique uses a ten-year DCF
hotel-valuation formula. The total of the
mortgage component and the equity com-
ponent equal the value of the property. The
following symbols are used:
NI = net income available before debt service,
V = value,
M = loan-to-value ratio,
F = annual debt service constant,
n = number of years in projection,
De = annual equity dividend,
Dr = residual equity value,
b = brokerage and legal cost percentage,
P = fraction of loan paid off in projection period,
Fp = annual constant that would be required to
amortize the entire loan with the projec-
tion period,
Rr = overall “terminal capitalization” rate
applied to net income to calculated total
property reversion, and
1
= present worth of 1RMB at the equity-yield
Sn
rate.

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 HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT

These symbols are used in the following the amount of the initial loan, as follows:
factors to express components of the
­mortgage-equity-valuation calculation. (1 – P) × M × V = ending mortgage balance.

Debt service. The total value (V) multi- Equity residual value. The value to the
plied by the loan-to-value ratio (M); we equity is the reversionary value less the
then multiply the annual debt-service con- broker and legal costs and less the ending
stant (F) as follows: mortgage balance.
NI 11 NI 11
F × M × V = debt service. −b× − ð1 − PÞ × M × V = Dr.
Rr Rr

Net income to equity. The net income to Annual cash flow to equity. The annual
equity (Dε) is the hotel’s net income before cash flow to equity consists of the equity
debt service (NI) less the debt service, as dividend for each of ten projection years
follows: plus the equity residual value as follows:

NI – F × M × V = De. NI 1 − F × M × V = D1e
NI 2 − F × M × V = D2e . . .
Reversionary value. The value of the
NI 10 − F × M × V = D10
hotel to the reversionary value is calcu- e

lated by dividing the eleventh year’s net NI 11 NI 11

−b× − ð1 − PÞ × M × V = Dr
income before debt service (NI11) by the Rr Rr
terminal capitalization rate (Rr): Value of the equity. The hotel equity
NI 11
= reversionary value
value would be one minus the loan-to-
Rr value ratio times the property value:
Broker and legal costs. When investors
(1 – M) × V = value of the equity.
buy a hotel, some additional costs are
incurred when the transaction is com- Discounting the cash flow to equity to
pleted. So we assumed that for hotel trans- the present value. The cash flow to
actions, a broker is paid a commission and equity for each of the projection years is
attorneys collect legal fees, totaling 4 per- discounted to the present value at the
cent of the hotel value. equity-yield rate (1/Sn). The sum of all
NI 11 these cash flows is the value of the
b× = broker and legal costs
Rr equity:
Ending mortgage balance. At the end of
the tenth year, the balance of the mortgage NI 1 − F × M × V NI 2 − F × M × V
+
must be deducted from the total reversion- S1 S2
ary value, and the equity residual can then NI 3 − F × M × V
+ +  +
be determined. However, the fraction of S3
the loan is paid off: NI 10 − F × M × V NI 11 NI 11
 
1
+ − b × − ð1 − PÞ × M × V × 10 = ð1 − M Þ × V
F−i S10 Rr Rr S
= Pða percent of the 10  Þ 11
original loan balance
Fp − i NI − F × M × V NI 11

NI 1
+ −b× − ð1 − PÞ × M × V × 10 = ð1 − M Þ × V
S10 Rr Rr S
If the fraction of the loan paid off is P, then D1e D2 D3 D4 D5
the percentage of the loan remaining is 1 )
S 1
+ 2e + 3e + 4e + 5e +   
S S S S
– P. The ending mortgage balance is the D10e Dr
fraction of the loan paid off multiplied by + 10 + 10 = ð1 − MÞ × V
S S

AUGUST 2010 Cornell Hospitality Quarterly   437

HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA

Since only one variable, hotel value (V), is Results of Technique 5 (Sales-
not known, the equation can be easily Comparison Approach)
solved. Using this calculation, the value of
Huatian Hotel (V) is the solution of the The sales-comparison approach esti-
following equation: mates the value of a property by compar-
ð34; 414; 000 − 0:07639V Þ × ð0:83333Þ +
ing it to similar properties recently sold
(34,414,000
ð81; 429; 000– − 0:07639V×Þ ×
0.07639V) (0.83333)
ð0:69444+Þ +
on the open market. According to the
(81,429,000 – 0.07639V) × (0.69444) + report from the HVS international by van
ð93; 540; 000 − 0:07639V Þ × ð0:57870Þ +
(93,540,000 – 0.07639V) × (0.57870) + Keulen and Viriot (2002),5 the sales price
ð60; 803; 000 − 0:07639V Þ × ð0:48225Þ +
(60,803,000 – 0.07639V) × (0.48225) + per room of five-star upscale hotels in
ð40; 647; 000 − 0:07639V Þ × ð0:40188Þ +
(40,647,000 – 0.07639V) × (0.40188) + China was about US$140,000 in 1999 as
ð38; 908; 000– −
(38,908,000 0:07639V×Þ ×
0.07639V) ++
ð0:33490Þ
(0.33490) compared to US$166,000 in 1998. Based
ð53; 127; 000– −
(53,127,000 0:07639V×Þ ×
0.07639V) ð0:27908+Þ +
(0.27908) on a room count of seven hundred, we get
ð70; 605; 000– −
(70,605,000 0:07639V×Þ ×
0.07639V) ð0:23257+Þ +
(0.23257) the following value of the Huatian Hotel:
ð78; 341; 000
(78,341 − 0:07639V
– 0.07639V) Þ × ð0:19381
× (0.19381) + Þ+
(78,280,000
ð78; 280; 000– − 0:07639V×Þ ×
0.07639V) (0.16151)
ð0:16151+Þ + V = (hotel value per room) × (exchange rate US$/

69; 492; 000 69; 492; 000
 RMB) × (number of rooms) = (US$140,000)
− 0:04 × × (8) × (700)= RMB 784,000 (in thousands).
0:1200 0:1200
− ½ð1 − 0:3167Þ × 0:75 × V  × ð0:16151Þ
= ð1 − 0:75Þ × V Results of Technique 6 (Market-
Derived Capitalization Rate)
Therefore, we obtain V (in thousands) =
RMB 531,229. This technique is also a form of sales-
comparison. Considering the difficulty in
obtaining hotel sales data in China, about
Results of Technique 4 (Ten-Year DCF
the only option is to use the 7.5 percent
with Overall Discount Rate)
market-derived capitalization rate sug-
Due to large cash flow surpluses, the gested by Rushmore (1992). The net
large institutional investors often tend to income before debt service was RMB
purchase hotels without any debt. In this 63,559,000. Dividing that figure by the
case, the debt service should not be 7.5-percent market capitalization rate pro-
deducted from the net income. The total duces the following estimated value:
tenth-year net income is calculated by add- V (in thousands) = net income before debt service/
ing tenth-year net income plus estimated market capitalization rate
sales price, which is calculated by the = RMB 63,559/0.075
eleventh-year net income divided by termi- = RMB 847,453.
nal capitalization rate (12 percent), and
subtracting the broker and legal costs. Results of Technique 7 (Room-Rate
Accordingly, we obtain the value of RMB Multiplier)
471,968,000 (see Exhibit 6) by adopting
the discount rate of 14 percent used by Finally, the hotel industry has long used
Rushmore (1992). a rule of thumb that claims a hotel is worth

5. HVS International is a global consulting and services organization focused on the hotel, restaurant,
timeshare, gaming, and leisure industries (http://www.hvs.com/).

438   Cornell Hospitality Quarterly AUGUST 2010

 HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT

Exhibit 6:
Technique 4—Ten-Year Discounted Cash Flow (DCF) with Overall Discount Rate
(14 Percent)

Net income before

debt service Present Value of RMB DCF
Year (Thousand RMB) 1 at 14 Percent (Thousand RMB)

  1 34,414 0.877193 30,188

  2 81,429 0.769468 62,657
  3 93,540 0.674972 63,137
  4 60,803 0.592080 36,000
  5 40,647 0.519369 21,111
  6 38,908 0.455587 17,726
  7 53,127 0.399637 21,232
  8 70,605 0.350559 24,751
  9 78,341 0.307508 24,090
10 634,216a 0.269744 171,076
V (thousand RMB) = 471,968
*Sales RMB 69,492,000/0.12 = RMB 579,100,000
Less: Broker and legal 23,164,000
Plus: Tenth-year net income 78,280,000
Total 634,216,000

Exhibit 7:
The Sensitivity Analysis of Technique 3

NI 1 − F × M × V NI 2 − F × M × V NI 3 − F × M × V
+ + +  +
S1 S2 S3
NI 10 − F × M × V NI 11 NI 11
 
1
+ − b × − ð1 − PÞ × M × V × 10 = ð1 − M Þ × V
S10 Rr Rr S
Equity yield rate (Rr) 10% 12% 14% 16% 18%
V (in thousand RMB) = 649,465 624,412 599,941 576,187 553,257

one thousand times its average room rate.
For the Huatian Hotel, the average daily
room rate (ADR) is RMB 700; thus, the
hotel value can be estimated as follows:
V = (average daily room rate) × 1,000
× (number of rooms) = RMB (700) × (1,000)
× (700) = RMB 490,000 (in thousands).
Sensitivity Analysis
Although we applied statistics suggested
by Rushmore, hotels ownership in China is
different from that of hotels in the United
States and the rest of the Western world. In
this section, we use a sensitivity analysis to
show the possible range of the hotel’s
value by applying a range of possible
financial statistics and discount rates.
By using a range of net income from
RMB 34,414,000 to RMB 93,540,000, the
values of the Huatian Hotel estimated by
technique 1 are from RMB 293,462,000 to
RMB 797,653,000. Among factors used to
measure the value of the hotel, the equity-
yield rate is the most crucial one in technique
3. The sensitivity analysis with an equity-
yield rate from 10 percent to 18 percent,
shown in Exhibit 7, provides a range of hotel

AUGUST 2010 Cornell Hospitality Quarterly   439

HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA

Exhibit 8:
Results of the Sensitivity Analysis
Technique Rate Change Values (in Thousand RMB)
T1 Net income: RMB 34,414,000–RMB 93,540,000 RMB 293,462–RMB 797,653
T2 RMB 734,865
T3 Equity-yield rate: 18%–10% RMB 553,257–RMB 649,465
T4 Overall discounted rate: 16%–10% RMB 423,717–RMB 595,533
T5 Value per room: US$140,000–US$166,000 RMB 784,000–RMB 929,600
T6 The capitalization rate: 9.5%–5.5% RMB 669,042–RMB 1,155,618
T7 RMB 490,000

value of RMB 553,257,000 (18 percent) to
RMB 649,465,000 (10 percent).
Similarly, we use the overall discount
rate from 10 percent to 16 percent for
valuation in technique 4.6 The estimated
value ranges from RMB 423,717,000 (16
percent) to RMB 595,533,000 (10 per-
cent). The values obtained from technique
4 are close to the values derived from
­technique 3. We also observe that valuation
techniques using longer periods of income
estimation (e.g., techniques 3 and 4) tend
to generate more consistent values, as com-
pared to techniques using shorter estima-
tion periods (e.g., techniques 1 and 2).
For technique 5, we found an estimated
value range from RMB 784,000,000 to
RMB 929,600,000 by adjusting the value
per room from US$140,000 to US$166,000.
In addition, we apply a range of market
capitalization rates, 5.5 percent to 9.5 per-
cent, to technique 6.7 The hotel value, con-
sequently, falls in the range between RMB
669,042,000 (9.5 percent) and RMB
1,155,618,000 (5.5 percent). Apparently, the
estimated hotel values found in techniques 5
and 6 are larger than those generated from
the other techniques. In comparison, the
estimated value based on the room-rate-
based technique 7 is relatively smaller than
those values obtained from the other tech-
niques. The sensitivity analysis results are
summarized in Exhibit 8.
Comparing the Seven
Techniques
The results of valuation practices and
sensitivity analysis based on seven hotel
valuation techniques offer us a comparison
of the strengths and weaknesses of each
technique.
Technique 1 (band of investment—one
stabilized year) is a simple technique for
hotel valuation. The technique is suitable
for a hotel with a stabilized net income.
Nonetheless, with a range of net income
from RMB 34,414,000 to RMB 93,540,000
the estimated value fluctuates consider-
ably, from RMB 293,462,000 to RMB
797,653,000 (see Exhibit 9). This is con-
sistent with Rushmore’s (2002) argument
that it is difficult to establish an appropri-
ate stabilized net income for hotels that
have unpredictable occupancies.

6. In the absence of any real comparables, investors may apply a risk premium to any investments in the
sector and thereby use a higher discount rate in light of the uncertainty. We are in debt to one anonymous
referee for this suggestion.
7. As one anonymous referee noted, market capitalization rates, by their very nature, fluctuate as property
values rise and fall in a particular market. Furthermore, the cap rates will likely be different based on the
supply and demand in various submarkets and will not, therefore, act as a single cap rate for China as a
whole, depending on investors’ perception of the desirability of taking a particular location.

440   Cornell Hospitality Quarterly AUGUST 2010


Exhibit 9:
Summary of Valuation Results by Different Techniques
The Estimated Values of
Estimated Value (A) Sensitivity Analysis (B) (in
Technique (in Thousand RMB)
T1 542,334
T2 734,865
T3 531,229
T4 471,968
T5 784,000
T6 847,453
T7 490,000
Similar to technique 1, technique 2
(band of investment—three-year buildup)
is also simple to perform. The estimated
value RMB 734,865,000 is higher than
RMB 542,334,000 based on technique 1.
This result is largely due to the high earn-
ings volatility—in this case, the unstable
three-year (1995 to 1997) net incomes of
the Huatian Hotel (RMB 34,414,000 in
1995, RMB 81,429,000 in 1996, and RMB
93,540,000 in 1997).
Technique 3 (hotel valuation formula—
ten-year DCF) is relatively complicated
and needs eleven years of income data
to perform. The estimated value RMB
531,229,000 is close to the RMB
542,334,000 value estimated by technique
1. Compared to the values obtained from
technique 1, the variation range of esti-
mated values by applying sensitivity anal-
ysis is more stable (4 to 22 percent) than
that of technique 1 (–46 to 47 percent).
When using technique 4 (ten-year DCF
with overall discount rate) to appraise the
value of the Huatian Hotel, we obtain the
estimated value RMB 471,968,000. This
value is close to those estimated values
by techniques 1 and 3. However, the
estimated value is also responsive to
the overall discount rate and hence oscil-
lates from RMB 423,717,000 to RMB
595,533,000.
The sales comparison approach (tech-
nique 5) takes information from other
hotel sales and adjusts the data to arrive at
an estimated value of a given hotel. The
AUGUST 2010 Cornell Hospitality Quarterly   441
HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT
Thousand RMB) (B – A)/A × 100%
293,462–797,653 –45.89%–47.08%
734,865 0%
553,257–649,465 4.15%–22.26%
423,717–595,533 –10.22%–26.18%
784,000–929,600 0%–18.57%
669,042–1,155,618 –21.05%–36.36%
490,000 0%
estimated value based on this technique is
much higher than those from other tech-
niques. In fact, however, it is a daunting
task to collect reliable hotel transaction
data in a market where transparent trans-
action data is not available or is difficult to
obtain. The most fundamental approach is
to derive a sale price per room. Other
adjustments are made for the condition of
the relative market strength, brand affilia-
tion, below-market financing, and the mix
of offered facilities (e.g., size and number
of food and beverage and banquet facili-
ties). Thus, using the sales comparison
approach to estimate the value of the
Huatian Hotel provides only a reference
value to the appraiser, investor, or banker.
Technique 6 has problems similar to
technique 5. It is important but difficult to
develop consistent market-based capitaliza-
tion rates over time. These rates are based
on historic net incomes that do not neces-
sarily mirror the future path of expected
earnings. Therefore, these rates should be
adjusted if it is expected that future condi-
tions will make them higher or lower.
Finally, looking at technique 7, the
lodging industry’s “dollar per thousand”
approach based on average daily rates, this
technique cannot reflect the management
or reputation value of the hotel. Hotel
management firms want to attract more
travelers to stay in their hotels, and they
spend more money restructuring their
facilities and services to reach that goal.
So the rule of thumb seems too simple for
HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA
an accurate estimate, but it can provide a
ballpark figure before one applies more
scientific valuation techniques.
In summary, of the four valuation
approaches that we analyzed, we believe
that the income capitalization approach is
the most reliable valuation technique for
China’s hotels.
Suggestions for Lucrative Hotel
Developments
While the purpose of this article is to
present methods of valuing existing hotel
properties, we must make note of the pros-
pects for development of new properties,
especially since development of new sites is
an alternative to purchasing an existing prop-
erty. Due to China’s phenomenal economic
growth from 1996 through 2000, a period
with an annual GDP growth rate of 8.1 per-
cent, state-owned and private real estate
developers jumped on the bandwagon of
building new hotels to take advantage of the
approximately 20 percent return on hotel
investment (Ding 2008). Leo Yen, (Van
Keulen and Viriot 2002) director of Horwath
Consulting in Asia Pacific, mentioned that
many four-star and above hotels are now
managed by international hotel chains, while
most of the two-star and below hotels are
managed by local chains. At the 2007 China
Hotel and Tourism Development Seminar,
Yen also confirmed that the most promising
segment for growth in demand and ADR is
budget and upper midtier hotel develop-
ments. These are likely to be most lucrative
and provide higher ROIs for investors.
According to the China Economy Hotel
Survey, as reported in Chen and Fang (2008),
approximately $1 million or $7,500 per gue-
stroom was the average capital investment
for a newly constructed economy hotel in
2006. Home Inns, a domestic brand in
China, is the largest budget hotel chain and
is listed on the U.S. Nasdaq stock market.
Stimulated by the equity investment of the
442   Cornell Hospitality Quarterly AUGUST 2010
U.S.-based venture ­capital firm IDG
Ventures, Home Inns plans to have 1,000
hotels in the next few years and plans to
enter into other Asian countries as well.
Three top domestic brands—Home Inns,
Motel168, and Jinjiang Inn—constitute
approximately 44 percent of the total market
in the budget segment (Shen 2008). A cou-
ple of international economy-scale hotel
brands have already entered China’s hotel
market. Super 8, a Wyndham brand, was the
first international hotel brand to penetrate
this segment and had, by 2007, 110 proper-
ties either already operating or proposed in
fifty-eight cities across China (Chen and
Fang 2008). Another of Wyndham’s econ-
omy brands, Days Inn, also is present in
China, and Accor plans to have 120 of its
Ibis budget properties in China by 2010.
What seems absent is development in
the midscale and the limited-service mar-
ket, especially in the well-developed
coastal areas, where business travel is
booming, growth of foreign tourists has
continued, and the budget-conscious
domestic leisure market is growing at a
phenomenal rate of more than 12 percent.
The rapidly escalating increase in com-
mercial and leisure segments, which
explains the majority of hotel customers in
the budget and midscale hotels, is the pri-
mary reason for rapid development in
­limited-service hotels. Chen and Fang
(2008) reported that the initial capital
requirement relative to the United States is
extremely low, and investors’ average pay-
back period is short with generally three to
five years, which is a clear demonstration of
lucrative investment opportunities for U.S.
hotel developers, management companies,
and institutional and private investors.
Patrick Ford, the president of Lodging
Econometrix, claimed that the midpriced
market is the least-developed hotel seg-
ment in China, considering the large sup-
ply of more than one hundred thousand

units in the economy segment and more
than seven hundred thousand in the four-
and five-star properties. In the next few
years, the demand for midpriced hotels
will likely outweigh the supply. Upscale
properties and economy hotels will pre-
sumably reposition themselves into the
midscale market by adjusting prices to
appeal to target customers: business and
leisure travelers. In the near future, it will
not be surprising to witness Chinese trav-
elers, who will have more exposure to
international travel, being able to experi-
ence more diverse products, looking for
hotel brands in other segments such as
resorts, all-suites, boutique hotels, and
timeshares. In sum, current hotel owners,
investors, and management companies
should consider moving in to these poten-
tially lucrative development projects.
Conclusion and Future Research
Directions
Within the hospitality finance literature,
there is a dearth of research on the proper
valuation techniques for a fast-developing
country such as China. Limited research
on hotel real estate in China may be attrib-
uted to the fact that the historic data of
hotel sales transactions is not available or
is difficult to obtain. The international
brand hotels—such as Shangri-La hotels,
Marriott International, and Starwood
hotels—have been operating for only a
relatively short period of time. Many inter-
national hotel investors are interested in
hotel real estate in China, considering the
booming tourism business (especially after
China hosted the Olympic Games in sum-
mer 2008). Generally accepted hotel valu-
ation techniques in the West, which rely
on certain types of data such as interest
rates and other real estate market ratios,
may not be readily available in China,
making hotel valuation in China an over-
whelming task for many stakeholders.
AUGUST 2010 Cornell Hospitality Quarterly   443
HOTEL VALUATION IN CHINA HOTEL ASSET MANAGEMENT
Rushmore (1991) states that investing
in hotels is considered a high-risk use of
time and capital. Therefore, hotel investors
require an appropriate valuation approach
to ensure that their investments are profit-
able. In this study, we apply the seven
hotel-valuation techniques proposed by
Rushmore (1992a) to estimate the values
of a leading hotel in China. We used his-
torical financial data and room rates to test
the applicability of these techniques. The
ultimate objective of any hotel appraisal
assignment is to estimate the price at
which the seller will sell and the buyer
will buy (Rushmore 1997).
There are many factors affecting the
value of a hotel by the sales comparison
approach, such as the hotel brand and its
reputation and management efficiency. In
Asian hotel markets, especially China, it is
hard to compare two hotels by using sales
values, due to the lack of accumulated and
reliable sales transactions and of rapidly
escalating real estate value. Thus, tech-
niques 5 and 6, which rely heavily on sales
comparison approaches, may not be reli-
able techniques and would not be widely
accepted by buyers and sellers in China.
We believe that our historic data
approach provides useful information to
the appraisers and investors who want
to estimate a hotel’s value in China. Due to
limited data availability, however, we only
used one hotel as an example. In the
future, the sales data of hotels, particularly
the hotels managed by foreign firms,
should provide sufficient data (that is,
over eleven years of data) to allow future
researchers to revise the seven hotel-­
valuation techniques. A hotel sales trans-
action database is likely to be available to
owners, bankers, and acquiring companies
to estimate the value of hotels in China.
In summary, each valuation technique
has its own strengths and weaknesses. The
findings confirm that hotel investors would
HOTEL ASSET MANAGEMENT HOTEL VALUATION IN CHINA
do well to rely on the income capitalization
approach to reach their final conclusions
concerning investment. Sales comparison
approaches are best used as a means of
providing a range of values that bracket
and support the income capitalization
approach (Rushmore 1991). Technique 7
(room-rate multiplier) requires neither a
holding period assumption nor an assump-
tion regarding the future rate of inflation
(O’Neill 2003), but using this approach
requires adjustments that factor in both
occupancy and mortgage interest to further
enhance its accuracy (Rushmore 2003).
This study is limited by the many
assumptions and estimates we had to make
for discount rates, cap rates, and the like.
In addition, since this case study repre-
sents only one state-owned hotel, any gen-
eralization of the findings should be
cautiously applied toward other types of
hotels under different ownership structures
(e.g., joint venture, privately owned).
The choice of hotel valuation process
could depend on the purpose of the
appraisal and the quality of data available.
Future hospitality researchers may try to
develop other real estate valuation tech-
niques based on different financial ratios
that are designed specifically to suit devel-
oping countries. It will be more illuminat-
ing for future hospitality researchers to
show a valuation based on discounted pro-
jected future earnings, for instance, rather
than on historical earnings. In addition to
the seven valuation techniques used in this
study, future hospitality researchers may
adopt the leveraged internal rate of return
as the basis of a useful technique, and
compare the values thus derived with those
of the seven classic models.
In a market like China—with its recent,
rapid hotel development and its dearth of
historical data—a common practice is to
look to comparable properties or companies
at a similar stage of development. International
hotel investors and developers who plan to
444   Cornell Hospitality Quarterly AUGUST 2010
develop new properties or acquire existing
establishments in the Chinese market may
base their valuation decisions on comparable
transactions in other emerging countries
such as Thailand, Singapore, Indonesia,
Philippine, Hong Kong, and India.
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Ming-Hsiang Chen, PhD, is an associate profes-
sor of finance at National Chung Cheng University
(finmhc@ccu.edu.tw). Woo Gon Kim, PhD, is the
Robert H. Dedman Professor of Hospitality
Management and director of the International
Center for Hospitality Research at the Dedman
School of Hospitality at Florida State University
(wkim@cob.fsu.edu).