It is fairly obvious that one of the objectives of a feasibility study is to determine whether a project proposal is feasible! But you will rarely if ever see a negative feasibility study – a report which concludes that ‘this project does not work’. Except in excep-tional circumstances1, a report which says that is of no practical use. A feasibility study is not undertaken in isolation, but is prepared by a specialized consultant in conjunction with the
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1TRI was once requested by a developer to prepare a report which demonstrated that hotel use on a particular site he owned was not a viable proposition. He had bought a run-down hotel, on a prime piece of seafront real estate, and wanted to convert it into residential apartments, for which demand was high. Our study was required to submit to the planning authorities in support of a change of use application, to prove that hotel use was non-viable based on low levels of demand and the high cost of refurbishment. Our client was successful in achieving change of use.
architect, the client, the source(s) of funding, the management company and any other parties involved with the project. If dur-ing the preparation of the feasibility study it looks like the project proposal is likely to be not workable, then the consultant will work with the client and the other members of the team to derive a project that does work.
So therefore it can be deduced that a feasibility study is more than a report which says ‘yes, this is feasible’. The objectives of a feasibility study can be summarized as follows:
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To provide information to the project promoter regarding the environment in which the project will be operating. The pro-moter needs to understand where the proposed project fits into the market as a whole, in terms of supply and demand, gov-ernment policies towards the hospitality sector, and factors external and internal to the sector that will affect operations and therefore profitability and viability. The various risks to which the project will be exposed – political, commercial, environmental, construction-related etc. – will be identified and quantified, for the promoter to assess and more importantly understand. In some cases, the client will ask the consultant to assist in the definition of the concept for the project – what should I build that will take best advantage of the characteristics of the site and of the market opportunities? This may be within fairly tight parameters, such as the type of hotel that should be built, or a much wider brief, which then becomes a best-use study, to identify the use of the site which will gener-ate the best return to the developer. It is often the case, particu-larly where the promoter of a project is the investor (and perhaps also the operator) for the Board of Directors to require Feasibility25 ● ● ● ● ● Illustration 2.1
Orbiting Space Resort (Photography courtesy of Wimberley, Allison, Tong & Goo)
an independent verification of the internal sponsor’s recom-mendations prior to authorizing expenditure of further funds on the planning and development of the project.
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To provide a brief to the architect as to what the market requires from the project. The market research that is undertaken for the study will look at the current supply of facilities of relevance and competitive with the project, and will discover the strengths and weaknesses of the existing facilities. The design of the pro-ject should seek to exploit the weaknesses of the existing sup-ply, for example by having larger bedrooms in the case of a hotel, or the latest types of treatment in the case of a health and leisure centre. The research will also investigate demand char-acteristics – both for the existing facilities and for the proposed facility. This will include examining the market’s opinions of the existing supply, and how users’ needs might be changing, and therefore factors which the new project can exploit.•
To provide the information that a potential lender or investor in the project will require, in order to make an investment deci-sion. This investor may well, of course, be the project promoter, but there are few hospitality facilities of any size which do not require third party funding. The lender or investor will need to be informed about the risks inherent in the project, which will impact upon the equity returns or upon the ability to service debt. These will be the same risks as those which the promoter will be assessing, but the promoter will likely be taking a much more optimistic view of how well the project will do. A third party funder, especially a debt provider, will always look at the downside risk – the likelihood of political events negatively impacting on the projected income, indeed the potential impacts of unseen events such as terrorism and natural dis-asters. Put simply, third party investors and lenders want to know how quickly they will get their money back. The lender wants to know that the project can generate sufficient profits (and cash) to pay both interest and principal when it is due, and that if the projections of profit are not met, there is suffi-cient leeway to prevent default on these payments. The lender also wants to know that the various risks which the project will be subject to are removed or at least minimized. The investor will also want to know that there will be profit to distribute as dividends, and will look at how long it will take for the total of those dividends to equal the sum originally invested.•
To present the case to the planning authorities in support of planning applications. An analysis of the market may be required where change of use of a building or site is required, for example.•
To assist in negotiations with management companies. In the hotel sector, operators are often approached by promoters of● ● ● ● ●
new hotels seeking their services. The hotel companies are approached by many promoters in this way, and the existence of a professionally prepared study shows that the promoter is serious, and is funding the necessary studies to move the proj-ect forward. In addition, the projproj-ections of revenue and profit in the feasibility study can form a basis for negotiation of fees payable to the management company, and can be used to benchmark their performance once the hotel is operational.