Hotel valuation explained: the profits method and what really drives value
A hotel is valued as a trading business, not a building. This guide explains the profits method that lenders and valuers actually use, how it is built from fair maintainable trade, and what moves the number.
A hotel is valued mainly by the profits method, also called the going-concern or income approach: a valuer establishes the fair maintainable trade a competent operator could achieve, derives the fair maintainable operating profit, and capitalises it at a market yield to reach a value. This is used because a hotel is a trade-related property where the building and the business are one asset, so it cannot be valued per square foot. Two cross-checks sit alongside it: the cap rate or income-capitalisation approach on the profit, and the sales-comparison approach against similar sales. Value is driven by occupancy, average daily rate, RevPAR, the operating margin, location and the yield the market applies. Lenders lend against this going-concern valuation. We arrange the finance; we do not lend.
At a glance
- Main methodProfits, or going-concern, approach
- Built fromFair maintainable trade and operating profit
- ThenCapitalised at a market yield
- Cross-checksCap rate and sales comparison
- Value driversOccupancy, ADR, RevPAR, margin, yield
- Prime yieldLondon leased 4.5 percent (Knight Frank, Oct 2025)
Why hotels are valued on profit, not floor area
A hotel is a trade-related property: the value comes from what it earns as a trading business, not from its floor area. You cannot value it per square foot like an office, because two identical buildings can be worth very different amounts depending on how they trade. So valuers use the profits method, working from the income the property produces to a value, which is the same basis a specialist lender uses to size a loan. Understanding it is the difference between agreeing a sensible price and overpaying.
This is the going-concern approach, explained in general terms at /guides/going-concern-valuation/. It rests on fair maintainable trade, set out at /guides/fair-maintainable-trade-explained/, which is the concept everything else in a hotel valuation is built on.
How the profits method is built
The profits method runs in steps. The valuer first establishes the fair maintainable trade, the revenue a reasonably efficient operator could sustain, not the current owner's actual figures, which may be flattered or depressed. From that revenue the valuer deducts the maintainable operating costs to reach the fair maintainable operating profit, then capitalises that profit at a market yield to reach the value. A lower yield produces a higher value for the same profit, which is why prime, well-located hotels are worth more per pound of profit than secondary ones.
- Establish fair maintainable trade: the sustainable revenue a competent operator could achieve.
- Deduct maintainable operating costs to reach fair maintainable operating profit.
- Choose a market yield that reflects the asset, its location and the sector.
- Capitalise the operating profit at that yield to reach the going-concern value.
- Cross-check against comparable sales and, where relevant, the bricks-and-mortar value.
Knight Frank put prime London leased budget hotel net initial yields at 4.50 to 4.75 percent as at October 2025, with prime regional yields at 5.25 percent and above, which shows how the yield, and therefore the value, differs by location and asset quality.
The trading metrics that drive value
Because the value is built from the trade, the trading metrics are the value drivers. Occupancy is how full the hotel runs, the average daily rate is what it charges, and RevPAR combines the two into revenue per available room, the single best measure of top-line performance. Below that, the operating margin decides how much of the revenue becomes profit, and it is the profit that is capitalised into value. UK hotel occupancy ran at 76.1 percent year to date in 2025 (STR), with regional RevPAR closing at about 79 pounds and London near 82.5 percent occupancy (HotStats), a benchmark for testing a hotel's trade.
| Driver | Effect on value |
|---|---|
| Occupancy | Higher occupancy lifts revenue and profit |
| ADR | A higher rate lifts revenue at the same occupancy |
| RevPAR | The combined measure the market watches |
| Operating margin | Turns revenue into the profit that is capitalised |
| Yield | A lower yield raises the value of the same profit |
The cross-check methods
The profits method is the main event, but a valuer cross-checks it. The cap rate, or income-capitalisation, approach is essentially the same idea expressed as a rate: the operating profit divided by the capitalisation rate, where the cap rate is the yield US material often refers to. The sales-comparison approach tests the value against recent sales of similar hotels, often expressed per room or as a multiple of RevPAR. Where the trade is weak or absent, the valuer also considers the bricks-and-mortar value, what the building is worth without the business, which sets a floor for lending.
A specialist lender usually sees two figures: the going-concern value with the trade running, and the lower bricks-and-mortar value if the trade stopped. The gap between them is goodwill, and the wider it is, the more cautious the lender, because that value can evaporate if the hotel stops trading well. This is why a hotel with a big goodwill component needs a larger deposit, as covered at /guides/commercial-mortgage-deposit-requirements/.
How the valuation shapes the finance
The valuation is the number the loan is sized against, so it shapes the whole deal. A lender advances a proportion of the going-concern value, tests that the fair maintainable operating profit covers the debt service with headroom, and sets the deposit against how much of the value is goodwill. We build the case around the valuation, present the trade the way a valuer and a credit team read it, and place the finance with a lender who understands trade-related property. We are an arranger, not a lender. Start at /services/commercial-mortgages/ or, for the buying process, /guides/how-to-buy-a-hotel/.
Hotel valuation explained: the profits method and what really drives value: common questions
How do you calculate the value of a hotel?
Mainly by the profits method: establish the fair maintainable trade a competent operator could achieve, deduct maintainable costs to reach the fair maintainable operating profit, then capitalise that profit at a market yield. A lower yield gives a higher value for the same profit. Valuers cross-check against comparable sales and, where the trade is weak, the bricks-and-mortar value.
What is the 5 10 rule in hotels?
It is an informal rule of thumb rather than a valuation method. Professional hotel valuation uses the profits method built on fair maintainable trade and a market yield, and that is what a lender funds against. Quick rules of thumb can start a conversation but should never set your offer or your loan; use the profits method for that.
What is a good EBITDA for a hotel?
There is no universal figure, because it depends on the size, location, service level and cost base. What matters for valuation is the fair maintainable operating profit, a sustainable version of EBITDA that a competent operator could achieve, capitalised at a market yield. A strong margin on solid RevPAR is worth more than a high headline profit that a reasonably efficient operator could not maintain.
What are the 5 methods of valuation?
The classic five are the comparison method, the investment or income method, the profits method, the residual method and the cost or depreciated-replacement-cost method. Hotels are valued principally by the profits method, because they are trade-related property, with the comparison and investment methods used as cross-checks and the cost method as a floor for the bricks and mortar.
What is the difference between going-concern and bricks-and-mortar value?
Going-concern value is the hotel worth as a trading business, including goodwill, with the trade running. Bricks-and-mortar value is what the building alone is worth if the trade stopped. The difference is goodwill, and lenders watch it closely: a wide gap means more of the value could disappear if trading falters, so they lend more cautiously and expect a larger deposit.
How does RevPAR affect a hotel's value?
RevPAR, revenue per available room, is the top-line measure that feeds the fair maintainable trade, so higher sustainable RevPAR raises the maintainable operating profit and, capitalised at the yield, the value. It combines occupancy and average daily rate into one figure, which is why the market watches it. Regional UK RevPAR closed 2025 at about 79 pounds (HotStats).
Who values a hotel for a mortgage?
A RICS-registered valuer with trade-related property experience, instructed by the lender, prepares a going-concern valuation on the profits method. The loan is then sized against that figure. Because the valuation drives the deposit and the loan, presenting the trade clearly to support a fair maintainable trade assessment is one of the most valuable things a buyer can do.
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