Business Daily (Nairobi)
John Mburu Gachora
2 July 2008
opinion
The controversy surrounding the sale of the Grand Regency Hotel in downtown Nairobi has been emotive.
The process by which the Central Bank of Kenya came to own the hotel, the speed at which the sale was concluded, the manner in which bids, if any, were collected, and the conflicting statements from the Cabinet members have left many in the public confused and angry.
In the midst of all this, there are politicians who have seized this opportunity to score political points.
For his part, Finance Minister Amos Kimunya has insisted that the deal was above board, and that the price paid was Sh2.9 billion, in line with or higher than the professionally appraised value of the hotel. Mr Kimunya has chosen not to disclose who the valuation agents were, and how the valuation was done, an act that would certainly strengthen his position.
Know for certain
The current pedestrian valuation being bandied around is Sh7 billion. The surprising question, however is, where are our professionals to comment on this number, so that the mwananchi can know for certain what s/he gained or lost in the sale?
Let me from the onset say I was not party to the valuations quoted by Mr Kimunya. However, the official price of Sh2.9 billion makes absolutely good sense.
Hotel valuations are done on two fronts: one, by cap rate - the net operating income divided by the sales price or value of a property expressed as a percentage; and, two, comparable price per key rates.
I will attempt to explain why Kenyans must not be distracted by numbers being bandied around by politicians. I am aware that some reports have indicated that the hotel was sold for Sh1.8 billion. For purposes of my analysis, I will assume the official figure of Sh2.9 billion is what is in question.
The Grand Regency Hotel is a 226-guest-room hotel. In hotel sale jargon, a guest-room is referred to as a "key." At a sale price of Sh2.9 billion, and with 226 keys, the imputed price per key according to Mr Kimunya is Sh12.8 million ($203,000 as of Friday June 27, 2008).
According to the TransActions Recap 2008 report released by USA's largest brokerage organisation, the Hotel Brokers International ("HBI"), the most active year in the history of hotel sales was 2007. Upscale hotels accounted for nearly half of the industry's 2007 transactions with 356 hotels trading hands, up 25 per cent from the prior year.
The price per key averaged $133,000, with upper upscale properties averaging $186,000 per key. The Grand Regency Hotel, while considered a luxury hotel by Kenyan standards, would probably more aptly qualify as an upscale hotel. With a daily revenue per room (RevPar) of approximately $100, the hotel is on the lower-end of that spectrum. Thus, at $203,000 per key rate, Mr Kimunya may have, in fact, scored a home run (to use baseball jargon).
In 2007, the average overall cap rate for hotel sales in the United States was 9.21 per cent. The hotel cap rate tends to mirror the prevailing interest rates.
Thus, in Kenya, the cap rate cannot be lower than the market rate which was approximately 12 per cent. Assuming a cap rate of 12 per cent, and a price of Sh2.9 billion, the imputed operating income for the hotel would be Sh348 million.
This number is certainly way above the Sh143 million that the Receiver Manager Gichohi claimed to have made for 2007. If valued in accordance with Mr Gichohi's numbers, the hotel value would be Sh1.2 billion.
As a buyer, one would be insane to pay Sh7 billion for the Grand Regency Hotel. It would mean that the buyer expects an operating profit of Sh840 million per year, a figure that even the resort hotels in Mombasa would only dream of.
Some people would argue that the price of the hotel should be the price of the bare land and the replacement price of the fixtures. That valuation fails to recognise that the going concern price of a property is purely driven by the income statements.
Use of land
An asset-based valuation, must take into account the opportunity cost of the land. In a lot of cases, a bare piece of land is typically valued a lot higher than one on which a building rests.
The reason being, the buyer is restricted to the existing use of the land, (as opposed to the most profitable use of the land) and the cost to return it to bare land is enormous.
A minister recently stated that the hotel was sold for four billion shillings in 1994. I would like to ask this minister to share with the public the professional valuation that was done then.
While Mr Kimunya may have to explain to Kenyans the urgency and the secrecy of the sale process, Kenyans must not be derailed by un-researched claims being told by politicians. Mr Kimunya's numbers make absolute sense. At Sh2.9 billion, the PRICE IS RIGHT!
Mr Gachora is an investment banker based in the United States of America.
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