Hotel valuation and EBITDARM

Going concern versus bricks and mortar

There are two ways to think about what a hotel is worth. The going-concern value treats the hotel as an operating business: it reflects the income the hotel generates, the goodwill of an established trading business and the property combined. The bricks-and-mortar value is the bare building with no trade, which is usually lower for a well-trading hotel and may be relatively higher for a poorly trading one. Specialist valuers report both, and lenders watch the relationship between them because the wider the gap, the more of the value depends on the business continuing to trade well.

This is a guide to how a hotel is valued for buying, selling and lending. It is not about room rates charged to guests.

A specialist hotel valuer, a RICS valuer with hospitality experience, carries out the work, and the basis follows RICS guidance on trade-related property. Hotels are treated as trade-related because their value flows from the business conducted within them, alongside a general specialist body of evidence, so the valuer assesses a reasonably efficient operator running the hotel, not the actual owner's particular skill or neglect. That hypothetical-operator approach is why a tired hotel can still hold value, the potential is there, and why an exceptionally well-run hotel is not valued purely on one owner's results.

Fair maintainable trade and the level of trade

Central to a hotel valuation is the fair maintainable trade, the level of revenue and profit a reasonably efficient operator could expect to achieve, having regard to the local market and the physical hotel. The valuer does not simply take last year's figures. They strip out one-off items, adjust owner's drawings and non-market salaries to a market footing, and consider the trend across several years and the position of the local competitive set. The result is a sustainable, defensible profit, the fair maintainable EBITDARM, which then drives the value.

The valuer also states the level of trade assumed. A hotel valued as fully operational and trading, with its goodwill, bookings and reputation intact, is worth more than the same building assumed closed or with trade unproven. Lenders pay close attention to this, because a loan that relies on the fully operational figure is more exposed if the business stumbles. The gap between the trading value and the bare-building value is, in effect, a measure of how much of the value is at risk if the hotel stops trading well.

EBITDARM, the engine of the valuation

The starting point of a going-concern valuation is sustainable trading profit. For hotels the standard measure is EBITDARM: earnings before interest, tax, depreciation, amortisation, rent and management fees. Stripping out rent and management fees makes hotels comparable regardless of whether they are owner-occupied or leased and regardless of head-office structure. The valuer normalises the accounts to a maintainable, fair-maintainable level of trade, then applies a multiple or capitalises the profit at a yield.

EBITDARM sits below several headline performance numbers. Revenue is driven by occupancy and ADR, which together give RevPAR, revenue per available room. From total revenue the operator works down through gross operating profit, often expressed per room as GOPPAR, before arriving at EBITDARM. A valuer reads all of these to judge whether the profit is sustainable.

The multiple and the yield method

Two related methods turn EBITDARM into a value. The earnings-multiple method applies a multiple to maintainable EBITDARM. The capitalisation, or yield, method divides the maintainable profit by a market capitalisation rate; a lower yield means a higher value. Prime, well-located, strongly traded hotels attract higher multiples and lower yields than tired, secondary assets. As an indicator of pricing, Cushman and Wakefield put London prime hotel yields at around 5 to 6% in H1 2025. We treat all of these as indicative, because every hotel is different.

The discounted cash flow approach is also used, projecting future cash flows and discounting them to a present value. In practice valuers triangulate the income approach with comparable transactions and a price-per-room sense-check.

The choice of multiple or yield is where judgement matters most. It reflects the perceived security and growth of the income: a long-let, branded, prime-city hotel commands a keener yield and a higher multiple than a seasonal independent in a thin market, because an investor will pay more for income that looks dependable. The valuer draws the yield from comparable transactions and from the wider capital market, so when investment appetite is strong, as Savills's reported transaction volumes suggest it has been, yields tend to firm and values rise even before trading improves. This is the capital-market dimension of value that sits alongside the hotel's own trading.

The 15 5 rule and other rules of thumb

Buyers often ask about quick rules for valuing a hotel. Most are sense-checks, not methods. The so-called 15 5 reference some quote belongs to hotel guest service, the idea of acknowledging a guest at fifteen feet and greeting them at five, and has nothing to do with valuation. The genuine rules of thumb are the EBITDARM multiple and the price per room, both of which only work as cross-checks against the proper income-based valuation. A hotel changing hands at a sensible multiple of maintainable EBITDARM and a credible price per room for its market is priced about right; one that strays far from both warrants a hard look.

Treat any single rule with caution. A hotel can show an attractive price per room yet a poor multiple if its rooms are cheap to buy but barely profitable, or a tempting multiple on a single unusually strong year. The reliable answer always comes back to sustainable trading profit, the value drivers below, and how the income compares with what a buyer can verify.

Price per room as a sense-check

A quick rule of thumb in the sector is value per room, useful for sanity-checking but never a substitute for the trading-based methods. Knight Frank reported going-concern price per room in 2025 of around 315,000 pounds in London and around 129,000 pounds regionally, while Cushman and Wakefield put the UK average at around 142,000 pounds per room in H1 2025. A valuer uses these as cross-references against the income-based figure, not as the primary method.

The value drivers

• Trading performance: occupancy, ADR, RevPAR and the trend, with London RevPAR around 233 pounds versus regional around 98 pounds (Knight Frank and HotStats, Q3 2025)
• Location and market segment, and the local demand outlook
• Brand affiliation or franchise versus independent positioning
• Tenure, freehold versus leasehold, and lease strength where leased
• Condition and remaining capital expenditure on the building and FF&E
• Seasonality and the diversity of revenue beyond rooms

PwC forecasts London RevPAR up 1.8% and regional RevPAR up 1.5% for 2026, a backdrop that supports valuations where trading is on an improving trend.

Each driver pulls the value in a measurable way. Location sets the ceiling on achievable rate and demand, which is why London going-concern values per room sit so far above regional ones. Brand or independence shapes both the income and how secure it looks. Condition and outstanding capital expenditure are deducted, because a buyer must spend to bring a tired hotel up to standard, and that spend comes off the price. Seasonality and revenue diversity affect how risky the income is judged to be: a hotel earning steadily year-round from a mix of rooms, food, drink and events is valued more keenly than one wholly dependent on a short peak season. A valuer weighs all of these together rather than in isolation.

Why a lender's valuation can differ from the price

A common surprise for buyers is that the lender's valuation comes in below the agreed price. This happens because the valuer assesses fair maintainable trade in the hands of a reasonably efficient operator, not the optimistic forecast in a sale brochure, and because the valuer is cautious on behalf of the lender, who must be able to recover the loan if things go wrong. Where the valuation is lower than the price, the loan is sized against the valuation, so you either contribute more deposit or renegotiate the price. Understanding this in advance, and pricing your offer against sustainable profit rather than the asking figure, is the best protection against a shortfall at offer stage.

It also explains why the same hotel can attract different valuations from different valuers and lenders: judgements on maintainable trade, the appropriate multiple or yield, and the outstanding capital expenditure all involve a view. A specialist hotel valuer with strong sector evidence will produce a figure a lender trusts, which is one reason we steer cases to lenders whose valuers know the market the hotel sits in.

How the valuation feeds the loan

A lender instructs a specialist hotel valuer and lends a proportion of the going-concern value, typically up to around 65 to 70% on a stabilised asset. Where the gap between the trading value and the bricks-and-mortar value is wide, the lender treats the difference as risk and may lend more cautiously. The valuation also informs the affordability test, since the same maintainable EBITDARM that drives the value must cover the loan repayments.