Feasibility Study. Hotel Project Ayia Napa

Transcription

1 Feasibility Study for Hotel Project Ayia Napa Prepared by Soteris Georgiou Date 6 August

2 Contents 1. Executive summary 3 2. Corporate structure 2.1 Principle activity The structure Fund raising The Management Market analysis Market size Target market Market competition Barriers to entry Marketing strategy Financials 4.1 Capital investment Projected profit and loss account Price list Room revenue Other income Payroll analysis Risk analysis 5.1 Financial risk Commercial / market risk Exit strategy 18 2

3 1. EXECUTIVE SUMMARY The hotel and tourism industry is an economic driver in the Cyprus economy and welcomes over 2.6m tourists per annum contributing 2.1bn to the Cypriot economy during For the first five months of 2016 the number of tourists is up by 17%. There are a number of reasons as to why Cyprus is attracting more tourists year on year. This is covered in more detail in section 3 of this report. The higher demand has also attracted large funds and some exceptional hotels are currently under construction island-wide. The objective of the company is to purchase a pool of hotels in the district of Ayia Napa totalling 1,000 rooms. The number of tourists that stayed in Ayia Napa during 2015 total 470,000 which represents 18% of the total tourists that visit Cyprus. During the first five months of ,000 tourists have visited Ayia Napa (2015: 90,000), which represents a whopping growth of 30%. Ayia Napa has been a desirable holiday destination since the 1980's due to its very good weather, hospitality and luxurious beaches. The number of tourists visiting are increasing year on year as the supply of hotel rooms increase. The budget is for each hotel room to cost circa 40,000 and therefore the company is seeking to raise 40m over a 3-5 year period from a number of private investors. The financial model is to acquire old hotel apartments and convert and extend them into modern and contemporary hotels. The group will offer accommodation only to keep the running costs down. The management of the company have sourced the first hotel. It has a market value of 1m (valuation carried out by local bank in May 2016), and has secured a purchase price of 650,000. A further 1.85m is required to remodel the existing building, add an additional floor and furnish it, making a total investment of 2.5m. A total of 60 rooms may be erected. The company is offering 60% equity in the hotel in exchange for the full investment. With the high occupancy levels that are achieved in Ayia Napa along with the low operational costs of the financial model, the company can achieve net profit after tax between 506K and 835K. This is a ROCE of 20% and 33%. With 60% of the profits being distributed to the investor, this represents an ROI of 12% - 20% per annum and a payment period between 5-8 years. 3

4 2. CORPORATE STRUCTURE 2.1 Principle activity The purpose of the group is to manage self-owned hotels. The overall objective is for the group to own and manage 1,000 rooms in the district of Ayia Napa. The target is to acquire old hotel apartments that were built in the 1980's (irrespective if trading or not) that are in need of renovation works. Taking into consideration the high level of non-performing loans in Cyprus and the high level of bank repossessions, the ideal scenario would be to make such purchases from local banks. The primary reason the company aims to acquire old buildings is because the government has passed a law whereby hoteliers are able to increase the build density of their hotels and therefore create more rooms. The only hotels that are eligible for such allowances are exiting hotels with valid CTO (Cyprus Tourism Organisation) licences. Furthermore, if the dwellings are purchased by local banks, it is highly likely that the purchase price would be lower than today's replacement cost. All of the hotels acquired by the group will carry the same brand. 2.2 The structure Each hotel will be owned by a separate entity, a Cyprus limited company. The reason for this is because each hotel will be offered to different investors (it is unlikely for a single investor to fund the full 1,000 units. The management is responsible for sourcing below market value hotels, raising funds from private investors, secure planning permission for their expansion (no. of units), manage the remodelling and refurbishment works and the appointment of the staff of each hotel. In return for this expertise, the management will retain 40% of each company / hotel. The shareholding offered to investors will be lower as more hotels are added to the group. The reason for this is because as time passes and the group purchases, remodels and trades the first 4-5 hotels it will have a good track record and therefore the management will retain a higher percentage as a value of expertise and goodwill. Depending on the source of funds from each investor, a mini-structure may be formed for each hotel acquisition. This will however, be assessed on a case-by-case basis. The structure will be formed in such way to offer maximum tax optimisation for each investor in the likelihood the exit strategy will be to sell the group in the future. 4

5 Management Co 40% 40% 40% 50% 60% Hotel 1 Hotel 2 Hotel 3 Hotel 4 Hotel 5 60% 60% 60% 50% 40% Investor 1 Investor 2 Investor 3 Investor 4 Investor Fund raising The company aims to acquire 1,000 rooms over a 3-5 year period (sooner if the funds are readily available). The budget is for the rooms to cost circa 40,000 per unit. This includes the purchase, renovation, restoration and furnishing. Therefore the overall fund size will be in the region of 40m. The company is not necessarily seeking an investor with any real estate or tourism background. An ideal candidate would be private investor who is seeking to invest funds in a real-estate backed project (for capital protection) and is satisfied with an annual return of 12% - 18% per annum. If the size of the investment is a minimum of 2.5m then it qualifies for the Cyprus Citizenship program. Therefore the investor (and his immediate family) will be eligible to apply for a Cyprus (EU) passport, which will be issued within 12 weeks of the application date. 2.4 Management The project will be overseen by Soteris Georgiou. Soteris is a Chartered Accountant and has practiced in the UK and the Republic of Cyprus since Soteris specialises in assisting small and medium-sized companies to grow via mergers, acquisitions and management buyouts. Soteris has a 5

6 wealth of experience in international tax optimisation and offshore banking, assisting many companies and high net worth individuals to mitigate their current and future tax exposure. Soteris also set up and managed a group of property developing companies from 2005 to Under Soteris leadership, the property development business organically built and sold hundreds of residential homes and apartments, achieving an impressive turnover in the process. Today, Soteris continues to oversee the company s business strategy and growth objectives. Each hotel will employ a General manager and a Reservations manager. As more hotels are added to the group, there will be economies of scale with the upper management. For example, an experience Reservations manager could manage 4-5 hotels ( rooms) with ease. And due to the size and location of each hotel ( rooms per hotel), it is highly likely that a General manager could in fact manage 2-3 hotels (depending on the proximity to each-other) 3. MARKET ANALYSIS Over the past two years there has been a lot of investment in the Cyprus hotel industry. There are various reason as to why Cyprus and why now: Due to the unrest in other holiday destinations such as Egypt, Tunisia, Turkey and Greek islands, Cyprus by default is considered one of the three safest destinations to visit and has the lowest threat for a terrorist attack. British, Russian and German tour operators have so much confidence n Cyprus they are purchasing hotel rooms 3-5 years in advance. In some cases the tour operators are funding the renovation of some of the older hotels and/or their expansion. The Cyprus Government approved the extra build density for hotels with current CTO licences. This enables hoteliers to create more rooms without having to acquire additional land. Many hotels have taken advantage of this build allowance. The Cyprus citizenship program was introduced in 2013, whereby investors are required to invest a minimum of 2.5m to obtain a Cyprus (EU) passport. Investors have generally had a huge appetite to place their investments in hotels (as opposed to residential units) 6

7 because there is capital protection and it also creates a very good annual return. There have been a number of large hotel investments across the island as follows: La Meridien hotel (Limassol). Acquired by a Russian investor. Project size 150m. Under construction. Radisson Blu (Larnaca). Funded by a Chinese fund. Project under construction. The Castle Hotel (Larnaca). Acquired by a Lebanese investor (2nd investment in Cyprus). Project size: 70m. Under construction. 7

8 Finikoudes Hotel. Acquired by a Russian investor. It will be the first 33 storey hotel in Cyprus. Project due to commence construction in Q Ayia Napa Marina. Acquired by Egyptian investor. Project size 220m. Construction due to start in Q This project will consist of residential units, retail units and a hotel. This is a very unique project to the area and is expected to attract wealthy visitors and in turn increasing the value of real estate in the area. 8

9 3.1 Market size Hotel and tourism is considered to be one of the key economic drivers in Cyprus with 2.6m tourists visiting Cyprus in 2015 (2014: 2.26m). The number of visitors that stayed in Ayia Napa during 2015 was 470,000 (18%age of total visitors), of which 57% stayed in hotel accommodation. The number of tourists that visited Cyprus for the first five months of 2016 is 17% higher than During the first five months of 2015, 90,000 stayed in Ayia Napa, whereby for the same period in 2016 the number is 131,000 - a whopping 31% increase from last year. This increase is a direct result of additional rooms being made available. At the time of writing this report, all hotels in Ayia Napa have been running at 100% occupancy from mid July until the end of August. The revenue generated in Cyprus tourism in 2015 was 2.1bn (2014: 1.96bn). The first five months of 2016 is 11% up in comparison to last year. 3.2 Target market The target market are British (40% of total tourism), Russian (20% of total tourism) and from Scandinavian states (8% of total tourism). Cypriots are also considered to be a target market. The concept of the hotel is that of accommodation only. The financial model is to provide good quality location with all basic necessities in a convenient location. All hotels within the group will be 3-4 star rated. The reason for this strategy is simply due to the fact that Ayia Napa is considered to be a beach resort and therefore the majority of the tourist spend most of the day at the luxury beaches. Furthermore, Ayia Napa has a large selection of restaurants and bars. Many tourists prefer to explore the town in the evenings and do not tend to dine at their hotels. Many new franchises have opened restaurants during the summer of 2016 including Wagamama and Hard Rock Cafe. 3.3 Market competition There are many hotels and hotel apartments in Ayia Napa, the majority of which were built in the 1980's. Some of these have been refurbished, but there is still a large selection of hotels that are in need of renovation. The business model of the company is not to compete with the large 5 star resorts that are located near Nissi Beach. The company will be competing with other similar size hotels that are located a walking distance to the centre of Ayia Napa. 9

10 3.4 Barriers to entry The hotel industry is a capital intense industry and therefore barriers to entry are relatively high for local investors. Cyprus does not attract large hotel chains due to the relatively small number of tourists that visit the island on an annual basis The current level of tourism does not justify for example a 300m - 500m investment from Marriott. Further barriers to entry are that of prime location. The location of a hotel is the key indicator for the selection criteria for guests. Easy access to the beach and amenities are very high in level of importance and Cyprus being a small island has limited access to sea-front hotels. Any hotel in Ayia Napa satisfies this requirment. 3.5 Marketing strategy Taking into consideration the desirability of Ayia Napa and the small number of rooms of the hotels within the group ( rooms per hotel), the business model that the company will be adopting is that of "Business-to- Client". It is therefore not considered necessary to allocate rooms to tour operators ("Business-to-Business"). The company will accept online bookings via and These are considered to be the most reputable and most used sites and are considered to achieve high occupancy levels. 10

11 4. FINANCIALS The remaining of this report refers to the first hotel that the management have sourced and is currently seeking to raise capital for. This would be a typical example of the type of dwelling that well be acquired and added to the group. The dwelling is currently known as NapaView - mainly because it is located at the highest point of Ayia Nape and there are stunning views of the whole of Ayia Napa, including the Mediterranean sea and the location of the Ayia Napa marina. 4.1 Capital Investment The dwelling is currently owned by a Cypriot family. The original owner passed away two years and his heirs were not interested in running the hotel and therefore the hotel ceased to trade. The current owners inherited debts with a local bank which are not being serviced and therefore the bank is in the process of repossessing the property. The dwelling was valued by the bank in May 2016 for 1m. A price of 650,000 has been agreed with the bank for its acquisition. The total level of investment is 2.5m and 60 rooms can be erected. The investment is broken down thus: Purchase price 650,000 Market value 1m (May 2016) - bank repossession Transfer fees and stamp duty 22,700 Discounted by government incentive - 50% Demolition & renovation of ground and 1st floor 650,000 1,300 sqm (650sqm per sqm Construction of 2nd floor 650,000 1,000 per sqm Roof terrace and swimming pool 100,000 Fixtures and fittings ,000 per room Communal areas and contingency 247,300 Total Investment required 2,500,000 The company is seeking to raise 2.5m from a private investor and in return is offering 60% equity in the company. 11

12 4.2 Projected profit & loss account - sensitivity analysis LOW HIGH REVENUE Accommodation table ,360 1,358,700 Vending and bar table , ,364 1,028,496 1,541,064 SELLING EXPENSES Agent commission - 15% 142, ,805 Marketing 20,000 30, , ,805 GROSS PROFIT 865,792 1,307,259 OPERATIONAL COSTS Salaries table , ,700 Electricity 60,000 90,000 Water 15,000 20,000 Telephone & internet 5,000 5,000 Licensing 5,000 5,000 Repairs & maintenance 15,000 15,000 Cleaning & laundry 30,000 40, , ,700 Net profit before tax 578, ,559 Corporation tax % -72, ,320 NET PROFIT AFTER TAX 506, ,239 Distributable to investor - 60% 303, ,143 KEY RATIO ANALYSIS Capital outlay 2,500,000 2,500,000 ROI 12.15% 20.05% Payback period (years)

13 4.3 Price list LOW The below table assumes that the hotel will only operate from April - October. The daily rates will vary from 60 per room and increase to a maximum of 130 per room in the peak of the summer season. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Daily rates No of Units Daily revenue ,600 4,800 6,000 7,800 7,800 4,800 3, HIGH The below table is the most likely outcome for such hotel. It will operate for 9 months of the year and achieve rates of up to 150 per room in the peak of the summer. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Daily rates No of Units Daily revenue 0 0 3,600 4,800 4,800 7,800 9,000 9,000 4,800 4,800 3,600 0 The above price lists is for accommodation only. 13

14 The following table outlines the rates of several hotels similar to that NapaView. The season in Ayia Napa tends to run from March - October. Albeit, over the past few years there have been more flights into Cyprus in November, and therefore extending the season by a further days. Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec NapaView - High NapaView - Low River Rock Faros Hotel Tarsia Maris Oasis Napa Plaza Hotel Limanaki

15 4.4 Room revenue - sensitivity analysis For the purpose of carrying out a sensitivity analysis, the revenue generated from accommodation may vary depending on the rates achieved and the occupancy levels. LOW Month Daily No of Monthly Occupancy Monthly Revenue Table 4.3 Days Revenue LOW Income Jan % 0 Feb % 0 Mar % 0 Apr 3, ,000 50% 54,000 May 4, ,800 70% 104,160 Jun 6, ,000 85% 153,000 Jul 7, , % 241,800 Aug 7, , % 241,800 Sep 4, ,000 70% 100,800 Oct 3, ,600 50% 55,800 Nov % 0 Dec % 0 38, ,176, ,360 HIGH Month Daily No of Monthly Occupancy Monthly Revenue Table 4.3 Days Revenue HIGH Income Jan % 0 Feb % 0 Mar 3, ,600 40% 44,640 Apr 4, ,000 70% 100,800 May 4, ,800 85% 126,480 Jun 7, ,000 95% 222,300 Jul 9, , % 279,000 Aug 9, , % 279,000 Sep 4, ,000 95% 136,800 Oct 4, ,800 85% 126,480 Nov 3, ,000 40% 43,200 Dec % 0 52, ,597,200 1,358,700 15

16 4.5 Other income - Vending and bar The hotels within the group will not provide hot food. Therefore there is no requirement to allocate hotel space for a kitchen, nor have to purchase kitchen equipment. More importantly there will be no need to employ a Food and Beverage manager, chefs and waiters. The hotel will however offer cold food (fresh wraps, sandwiches, pastries etc), snacks, drinks and alcohol through vending machine, mini-bars in the rooms and from the pool bar. LOW Month No of persons Occupancy No of persons GP on daily spend No of days Monthly per day levels per day per person per month revenue (full occupancy) Jan 120 0% Feb 120 0% Mar 120 0% Apr % ,200 May % ,416 Jun % ,240 Jul % ,880 Aug % ,880 Sep % ,080 Oct % ,440 Nov 120 0% Dec 120 0% , ,136 HIGH Month No of persons Occupancy No of persons GP on daily spend per day levels per day per person (full occupancy) No of days per month Monthly revenue Jan 120 0% Feb 120 0% Mar % ,416 Apr % ,640 May % ,134 Jun % ,940 Jul % ,040 Aug % ,040 Sep % ,940 Oct % ,134 Nov % ,080 Dec 120 0% , ,364 16

17 4.6 Payroll analysis MANAGEMENT LOW 7 months HIGH 9 months General manager 30,000 30,000 Reservations 25,000 25,000 Bookkeeper 12,000 12,000 Reception ( 900 x 3) 18,900 24,300 CLEANING AND MAINTENANCE General maintenance 18,000 18,000 Cleaners ( 800 x 6) 33,600 43,200 FOOD & BEVERAGE Barman 1 (9:00-17:00) 7,000 9,000 Barman 2 (17:00-23:00) 7,000 9,000 Waitress (9:00-17:00) 5,600 7, , ,700 As additional hotels are added to the group there will be economies of scale on the upper management. There is no requirement for each hotel to have a General Manager, Reservations manager and bookkeeper. 17

18 5. RISK ANALYSIS 5.1 Financial risk The financial risk is considered to be low. The investor is investing in realestate backed company which can achieve a ROCE of 20% - 33% of funds invested. If 60% of the shares are allocated to the investor, then the ROI will vary between 12% and 20% per annum, with a payback period of 5-8 years. The company is seeking to run a smooth operation of accommodation only with very low running costs, which is a proven financial model in other cities within Europe. The only financial risk there is to consider is a price war on the said dwelling (due to large demand for hotel investment). Timing is also a time constraint if the hotel needs to be fully operational by April Planning permission needs to be secured and builders on site by the end of September 2016 at the very latest. 5.2 Commercial / market risk The attraction of good weather, clean beaches and low crime rate have contributed towards the tourism industry in Cyprus being a main economic driver for the past 35 years. There is no sign of this changing. The target market is not over-reliant on one source of tourism. Cyprus currently attracts 2.6m tourists from 33 different countries. 60% of these tourists arrive from the UK and Russia and the other 40% from 31 different countries. Ayia Napa is a proven destination and most desirable. The demand of good quality hotel rooms in convenient locations most certainly exceed the supply, therefore a price-war is not expected amongst the local hotels. 6. EXIT STRATEGY Taking into consideration that the business model will be implemented over a period of 3-5 years, there are no short term plans to offer an exit strategy to any investors. The aim is to reach the target of 1,000 rooms with an efficient and effective upper management team. If the company hits its target as stated in the ratio analysis in the profit and loss account, the group will most certainly become a target for acquisition from a larger international hotel chain. 18