Analysis of the major renovation in maintainance of the hotel assets of Royal Pine Resort?
This report deals with the analysis of the major renovation in maintainance of the hotel assets. For the purpose of analysis the renovation project of hotel room of Royal Pine Resort is selected. This resort is situated on the Gold Coast which is considered to be a tourism hotspot of Australia. The report forecasts the need for renovation within the 1 guest room accommodation of the hotel. The financial viability as well as the economic and environmental viability of the project is judged in order to judge the success rate of the renovation project. From the report it has been clear that renovation is an essential part of asset management because frequent asset modification developes the value and quality of the asset and also adds more life to the asset. The report also focuses on effects of renovation on the stakeholders like the owners, the customers and the employees of the resort in accordance to the renovation. Apart from this the report also covers the technologies used for the site selection, the feasibility of the renovation project based on the financial analysis and the role of the different management executives within the resort.
Renovations of the hotel assets and spaces are an integral part of the hospitality asset management and maintenance (Kang, K. H., Lee, S., and Huh, C. 2010). This report focuses on the refurbishment plan that is to be undertaken by the Royal Pine Resorts in order to increase the life cycle of the hotel assets and in order to meet demands of the upper income level customers. The report focuses on the renovation plan of Royal Pine regarding refurbishment of the one master bedroom beach guest accommodation to transform the same to royal suite. Since the renovation will require entire change of the 100 hotel rooms and will involve renovating the concerned hotel area adding to the new image of the hotel, hence the renovation may be termed as a master renovation for the management of the hotel.
2.1 Space for renovation
On analyzing the changing preferences of the target tourists, management at Royal Pine identified the needs for the renovation project. The beach view master bedroom is the mostly booked room of Royal Pine because of its beach facing loaction. However, the room is small accommodating only two people. Moreover, the hotel provides internet facilities within the reception and the lobby areas and no internet service within the room. The growing demand for the beach view room by the tourist families have encouraged Royal Pine to undertake the process of renovation to increase the room size and facilities in order to accommodate more than two persons comfortably. Apart from the interiors renovation the hotel management also plans to make significant additions of attached lobbie to the room facing the beach to give the room an aesthetic feel as well as mark the rooms as royal suite (Jefferies, 2000).
The beach- view room of Royal Pine offers around 75% occupancy over the year. The renovation plan will firstly focus on the interior designing of the rooms. The interior designing plan includes:
The design plan has been incorporated keeping in mind the feasibility of its success. The change in the interiors is forecasted to be completed within 8 months from the time of commencement. Since the electricity, water facilities and the inbuilt construction is not changed or renovated, hence the interior decoration will take less time if more labor is employed. Furthermore the management of Royal Pine have also made financial forecasting in order to assess the financial viability of the project (Kirk, 2010).
The overall estimated reconstruction cost for one hotel room interior is around $ 25 million as projected by the local contractors taking into consideration the changes to be made in the furniture, fixtures, equipments, extensions. The management of Royal Pines plans to secure financial loans from the commercial banks in order to finance the renovation projects. The banks however in investment within the real construction sectors adopt a conservative approach analysis (Sturman, Corgel and Verma, 2011). The high growth of the tourism sector of Gold Coast producing around $ 4.7 billion per year shows that the economic conditions of the hotels in Gold Coast are favorable for investment. With the loss of revenue from the 1 room that will be renovated, Royal Pines estimates expenses of $ 21 million. Thus based on the following assumptions Royal Pines can apply for a 50% mortgage loans on a monthly payment terms for 15 years for the financial source (Koh, 2008). The management of Royal Pines has selected the summers as the best time period when the tourists are low in number and the loss will be less for the renovation.
Other competing hotels in Gold Coast are Hilton Surfers Paradise Hotel, Crown Plaza and InterContinental resorts. In order to enhance the quality of the room space, Royal Pines needs to set a benchmark while designing the interiors and planning for the renovations compared to the other competing hotels. For instance, InterContinental hotels provide rooms with club water views, attached breakfast gardens. Special king garden accommodated rooms which may attract the interest of the tourists. Keeping the aesthetic and scenic view standards, Royal Pine has planned to add the personalized beach facing lobby and 3D feel to the room structure. Moreover Hilton surfers Paradise is a completely wifi enabled hotel thereby meeting the needs of the overnight visitors (Kang and Cao, 2012).
The renovation project involves addition of extra space to the already existing rooms. Hence, the management of the renovation will rest with the original management team of Royal Pine. However, the company may appoint an expert company like Hotel renovations and maintenance P/L that is an Australian company engaged in practical constructions and interior designing of the hospitality sectors. The company plans to enter into a lump sum contract with the project construction company with view of making payments as per the completion of the renovation as the high qualities and designs set by Royal Pine (Koh, 2008).
The management at Royal Pine uses the concept of Stakeholder mapping in order to prioritize the stakeholders who will be affected by the renovations process and produce strategies to manage them. The enhancement of the interiors of the room and the additions of the lobby to the roo will develop a memorable accommodation experience for the visitors. Moreover, the renovation and reinvestment in these improvement constructions will increase the asset lif cycle of the hotels spaces and assets and thereby reduce the preventive maintenance cost of the hotels. This will be beneficial for the management since they will be able to attract more footfalls and increase the revenue generation (Lawson, 2012). However, Royal Pine needs to keep the commercial banks and tourism sector satisfied because these concerned parties will grant the legal and the financial permissions. Thus presentation of financial viability of the project and past revenue generation along with future revenue forecast will help Royal Pine to manage these stakeholders.
3.1 Site selection technology
The selection of the renovation project within Royal Pine will depend on certain factors. Walker and Walker (2012) commented that based on the data of historical occupancy and average rate data the portion of the hotel which provides considerable amount of revenue should be selected for renovation. The occupancy rate and the average revenue of the hotel room within Royal Pine will be presented and compared for the purpose of selection of the renovation site
Further Penner, Adams and Rutes (2013) suggested that Revenue per available room (RevPAR) is also an effective tool for the measurement of the high yielding rooms. Since interior renovations and additions are a part of the capital expenditure of the company, hence the calculation of the return is essential in this regard. The RevPAR, which is calculated by multiplying the average revenue of the hotel with the occupancy rate, shows that the beach- view rooms are the most important contributors of revenue to the hotel. Since these rooms have prime location facilities, hence the demand for these rooms during the peak seasons are high and hence investments in refurbishment of these rooms will enable Royal Pine to increase the charges of the room in order to secure more revenue (Tagliabue, Leonforte and Compostella, 2012).
Renovation will help in improving the environmental sustainability of the hotels. Royal Pine focuses on addition of lobby to the room, which will face the garden of the resort and the beaches of Gold Coast (Deroos, 2010). The use of the open space will help Royal Pine to highlight the environmental sustainability of the renovated project in future and thereby attract further tourists. Moreover, the use of ceramic tiles will ensure maintenance of sustainability within the luxury rooms. The optimal 3D orientation layout of the rooms will also help in providing space for the visitors and the presence of wide windows will ensure sunlight, breeze, and the feel of the Gold Coast beach within the accommodation facility. Moreover, the hotel management will also cover the windows with solar radiation blocking glass doors in order to create soothing climate within the interiors.
In order to check the financial viability of the renovation project that Royal Pine will undertake, the management of the company conducted an overall financial analysis of the percentage of occupancies that resulted in the renovated hotels compared to the non-renovated hotels (Kirk, 2010).
Figure 1: Changes in occupancy penetration rates for renovated and non-renovated hotels
( Source: Zhu, Franko, Pavelchak and DePersis, 2012, pp-170)
The above graph shows that the occupancy of the renovated hotels has increased in the recent years compared to the occupancies in the non-renovated hotels. The figure below shows the overall RevPAR penetration rate of the renovated hotels compared to the non-renovated hotels. From the figure below it is clear that in the initial stages the RevPAR increases in case of renovated hotels, however the trend tends to decrease after some time. This indicates that hotel assets renovation needs to be done every 2 years in order to maintain the financial gains. The financial analysis shows that the renovation of the room will be profitable for the management of the Royal Pine.
Figure 2: RevPAR penetration for renovated and non-renovated hotels
(Source: Zhu et al. 2012, pp-170)
|
Net present value of Renovated hotels (Assumed figures) |
|||
|
Year |
Net income ($) |
Discounting factor (12 %) |
Discounted cash flow |
|
2009 |
20,000,000 |
0.89286 |
17857200 |
|
2010 |
14,800,000 |
0.797 |
11795600 |
|
2011 |
18000000 |
0.711 |
12798000 |
|
2012 |
20409000 |
0.635 |
12959715 |
|
2013 |
24200000 |
0.567 |
13721400 |
|
Estimated value |
69131915 |
||
|
Total value |
190,000,000 |
||
|
NPV |
120,868,085 |
Table 2: Net present value of the renovated hotels
(Source: Deroos, 2010, pp-98)
Figure 3: Income projection
(Source: Deroos, 2010, pp-18)
The income projection is important in this aspect because depending on the projection the management of the hotel has decided to take up the renovation decision. The return on investment is calculated at 12%. Further the life cycle maintenance is also ascertained before taking the decision of engaging into renovation because if the maintenance does not result into increasing of the life cycle of the hotel then the renovation will not be productive.
The management of hotel Royal pine has estimated $ 10,000,000 and a payback period of 3 years. The determination of the payback period shows that the hotel is planning to regenerate the amount of investment within 3 years. The renovation maintenance is considered to be a capital expenditure; however it is undertaken by the hotel companies in order to add to the life cycle of the hotel.
The management of Royal Pine made a risk analysis o the project confirming that the renovation project that is to be undertaken for a period of 1 year might give rise to the following risks namely
The managers are concerned about the profits of that will arise out of the renovation project. The high NPV and the RevPAR penetration strengthens the decision of the managers as to make investments in the renovation project in order to derive the benefits of increased revenue growth and add to the quality image of the hotel. Further the major advantage of the mangers lie in the increase in the life value of the hotel assets, which is possible through renovation process (Walker and Walker, 2012).
4. Conclusion
The report focuses on the need for renovation of assets and spaces within hotel industry. It can be seen that the renovation of the beach- view rooms, which are the primary revenue earner of Royal Pine, is essential for making the resort gain competitive advantage over the other resort and hotels offering ample amount of luxury services. The major risk however, the resort will face will be the loss of revenue from 100 rooms for around 1 year until the renovation process is completed. Moreover, the increase in the price charges for the room in order to compensate for the financial losses may also reduce the footfalls of the tourists. However, renovations of hotel assets are required for the purpose of life cycle management and reduction of the preventive maintenance cost or breakdown of any hotel asset. The renovation process is undertaken in order to meet the changing needs of the customers.
Reference list
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