A 40-Key Boutique Hotel: Working the Numbers From Rate to Return

An illustrative calculation for a small Saudi boutique hotel, taking room rate and occupancy through departmental costs and fees to earnings against the capital it consumed.

Boutique hotels attract owners because they look like a personal project with a commercial return. The arithmetic is unforgiving: a small hotel carries almost the same management, payroll and systems burden as a larger one across fewer rooms. This worked example follows a 40-key property from rate and occupancy to earnings and then to a return on the capital it took to build, using illustrative assumptions to demonstrate the method.

The situation

An overseas owner plans a 40-key boutique hotel with a small restaurant on land they already own in a Saudi city with mixed business and leisure demand. A third-party operator will run it on a management fee. The owner wants to see what the property must achieve and where the model is most fragile.

Assumptions (illustrative)

• Forty keys within a gross floor area of 3,400 square metres, including public areas, restaurant and back of house.
• Construction assumption of SAR 3,200 per square metre; design and supervision at 8 per cent of construction; contingency at 8 per cent of construction.
• Furniture, fittings and equipment assumed at SAR 95,000 per key; pre-opening and working capital assumed at SAR 900,000.
• Average daily rate assumed at SAR 620 with annual occupancy of 58 per cent.
• Food and beverage revenue assumed at 22 per cent of room revenue; other revenue at 3 per cent of room revenue.
• Room department costs at 24 per cent of room revenue, food and beverage costs at 70 per cent of food and beverage revenue, management fee at 3 per cent of total revenue and a replacement reserve at 4 per cent of total revenue.

Step 1: Build the capital cost

Construction is 3,400 multiplied by SAR 3,200, which is SAR 10,880,000. Design and supervision at 8 per cent adds SAR 870,400 and contingency at 8 per cent adds another SAR 870,400. Furniture, fittings and equipment at 40 multiplied by SAR 95,000 adds SAR 3,800,000. Pre-opening and working capital add SAR 900,000. Total capital excluding land is SAR 17,320,800.

That is SAR 433,020 per key excluding land. Cost per key is the number hotel operators and lenders use, and it is the fastest way to see whether a design has drifted beyond what the achievable rate can support.

Step 2: Calculate room revenue

Available room nights are 40 multiplied by 365, which is 14,600. At 58 per cent occupancy, sold nights are 8,468. Room revenue is 8,468 multiplied by SAR 620, which is SAR 5,250,160.

Rooms are the profitable department. Every other revenue line in a small hotel either breaks even or subsidises the guest experience, so the room number carries the project.

Step 3: Add food, beverage and other revenue

Food and beverage at 22 per cent of room revenue is SAR 1,155,035. Other revenue at 3 per cent is SAR 157,505. Total revenue is SAR 5,250,160 plus SAR 1,155,035 plus SAR 157,505, which is SAR 6,562,700.

Food and beverage adds nearly SAR 1.2 million of revenue and, at a 70 per cent cost ratio, only about SAR 346,500 of margin. It exists to make the hotel work, not to make it money.

Step 4: Apply departmental and revenue-linked costs

Room department costs at 24 per cent of room revenue are SAR 1,260,038. Food and beverage costs at 70 per cent of that revenue are SAR 808,525. The management fee at 3 per cent of total revenue is SAR 196,881 and the replacement reserve at 4 per cent is SAR 262,508. These four lines total SAR 2,527,952.

Nearly 39 per cent of total revenue is consumed by costs that rise and fall with revenue. That part of the model is at least self-correcting; the next part is not.

Step 5: Add the fixed costs and reach earnings

Assume administrative payroll at SAR 900,000, utilities at SAR 480,000, sales and marketing at SAR 320,000, repairs and maintenance at SAR 210,000 and insurance and licences at SAR 120,000, totalling SAR 2,030,000. Total costs are SAR 2,527,952 plus SAR 2,030,000, which is SAR 4,557,952. Earnings before interest, tax, depreciation and amortisation are SAR 6,562,700 less SAR 4,557,952, which is SAR 2,004,748.

SAR 2,030,000 of cost exists whether the hotel sells one room or all forty. That fixed block is why small hotels are more fragile than their revenue per key suggests.

Step 6: Express the return and test it against the capital

Earnings of SAR 2,004,748 against capital excluding land of SAR 17,320,800 is 11.6 per cent before land, finance and tax.

Add land value, interest and the tax treatment of your structure and the margin over a simpler income asset narrows sharply. The hotel has to be worth the additional operating risk, not merely show a higher gross figure.

What changes the answer

• Rate 10 per cent lower at SAR 558: room revenue falls to SAR 4,725,144 and total revenue to about SAR 5,906,400, while fixed costs stay, leaving earnings near SAR 1,601,300 and a return of about 9.2 per cent.
• Occupancy five points lower at 53 per cent: sold nights fall to 7,738, removing roughly SAR 452,000 of room revenue and around SAR 300,000 of earnings after variable costs.
• Cost per key 10 per cent higher through specification drift: capital rises to roughly SAR 19,053,000 and the same earnings yield about 10.5 per cent.
• Food and beverage cost ratio at 75 rather than 70 per cent: about SAR 57,750 of margin disappears, which is most of a small hotel marketing budget.

What the numbers tell you

• Track cost per key throughout design, because it is the discipline that keeps a boutique concept affordable.
• Rooms carry the profit; food and beverage supports the product and rarely funds it.
• The fixed cost block is what makes small hotels fragile, so test the model at a disappointing occupancy.
• State the return on total capital including land before comparing a hotel with a rental asset.
• Agree the replacement reserve with the operator in writing, because the refurbishment cycle arrives sooner than owners expect.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.