Merchant banking serving the Italian hospitality industry

10/08/2017 - 31/12/2029

Asset value and the crisis of the balance-sheet model: why hotels are worth what they earn

 

The systemic crisis that has accompanied the global economy for more than a decade has not only changed the way business is conducted; it has fundamentally altered the criteria by which assets are valued, particularly corporate assets.

 

The key turning point has been the collapse of the balance-sheet illusion: value is not what is recorded in financial statements, but what the market is willing to recognise.

 

A paradigmatic example is the collapse of Lehman Brothers in 2008. In the weeks preceding the default, one of the most critical issues was the inability of shareholders and management to determine the real value of certain assets—both real estate and financial—still carried on the balance sheet at figures the market no longer accepted.

 

Those assets formally existed, yet they had become illiquid. As a result, they could no longer support the debt that had been contracted on the basis of those accounting values, which suddenly proved to be detached from reality.

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Uncertain assets, certain debt

Enrico Cuccia famously used to say: “debt is always certain.”
Today we can add that assets, by contrast, are often uncertain. When asset values collapse, debt instantly becomes unsustainable.

The Italian hotel sector—where indebtedness is almost entirely secured by real estate—is by no means immune to this dynamic. On the contrary, it is probably one of the most exposed sectors, despite the fact that this issue is rarely addressed clearly in public debate.

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The limits of asset-based valuation

When a property or an equity stake is recorded on the balance sheet, its value is never fully objective. It is the result of:

 

• an investment decision

• a specific market environment

• economic expectations valid at a given point in time

 

There is no guarantee that these conditions will remain unchanged. Macroeconomic factors, geopolitics, consumption trends and investor expectations evolve.

The problem becomes evident when an entrepreneur needs to liquidate an investment—to raise capital, reduce leverage or exit the business. At that point, the market may simply refuse to recognise the expected value.

In a country historically anchored to the perceived certainty of real estate, this realisation is particularly painful.

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The Italian hotel sector challenge

 

In the Italian hotel industry, this vulnerability is amplified by structural factors:

 

• excess supply

• extremely small average property size, often fewer than 30 rooms

• fixed costs that erode margins

• lack of economies of scale

 

Many hotels are unattractive both to banks and to equity investors.
The truth is as simple as it is uncomfortable: a hotel that does not generate EBITDA has no value for an investor, regardless of the real estate value shown on the balance sheet.

 

This leads to a rule that today applies more than ever:
👉 hotels are worth what they earn.

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From property value to earnings logic

The value of a hotel business is not defined by the building itself, but by its ability to generate cash flows.
EBITDA is not merely an operating metric; it represents the potential return on invested capital.

From this perspective, real estate loses its appeal as a standalone source of value and becomes instrumental to the business activity. If the sector were assessed purely on an earnings basis, many Italian hotels would be worth far less than their owners’ expectations or their book values.

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Why the hotel sector needs merchant banking

In the United States, during the 2008 crisis, several investment banks survived not only thanks to government intervention, but also because of a dynamic capital market that enabled mergers, consolidations and the entry of new investors.

In Italy, particularly in the hotel sector, this culture is largely absent. There is limited understanding of merchant and investment banking logic, understood as equity operations: acquisitions, mergers, minority or majority investments aimed at value creation.

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The only viable path: aggregation and capital

The future of the sector depends on:

• merger and acquisition transactions

• the creation of hotel clusters and groups

• shared strategic functions (marketing, sales, revenue management, procurement, administration)

• opening up to private capital as an alternative to bank debt

Only larger, structured and transparent entities can become investable—and therefore liquid.

The issue is not the lack of opportunities, but the lack of players capable of structuring these operations and bringing them to the attention of capital markets.

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The Italian hotel sector stands at a crossroads. Continuing to defend asset values that the market no longer recognises merely postpones the problem.
Reframing the model around earnings and financial logic, instead, means finally putting finance at the service of the business.

Time is limited, but opportunities exist for those capable of understanding and structuring them.

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👉 Investhotel Capital Partners  supports entrepreneurs, banks and investors in hotel valuation, restructuring, aggregation and development transactions, with an industrial approach focused on the creation of real, sustainable value.

 

🔗 https://www.investhotel.it/en/

 

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