Hotel Revenue Glossary · Financial

Capitalization Rate (Cap Rate)

The ratio of a hotel's NOI to its market value or purchase price, expressed as a percentage. A hotel generating $2 million NOI valued at $25 million has an 8% cap rate. Cap rates reflect the market's assessment of the property's risk and growth potential.

Why it matters: Cap rate is one transaction and valuation input. Holding a selected cap rate constant, value equals NOI divided by that rate, but market yield, capital needs, risk, financing, growth, and buyer assumptions can change; incremental NOI does not guarantee a 10-15× value increase.

Worked example: Take NOI of A$2.8 million. Divide by a 7.5% cap rate and the implied value is A$37.3 million; divide by 8.5% and it is A$32.9 million. Same trading performance, A$4.4 million apart, and you moved nothing but the assumed yield. Run it the other way and A$100,000 of extra NOI is worth A$1.33 million at 7.5% — but only if the cap rate holds, which is a market judgement, not something the revenue desk controls.

Common mistake: Quoting an implied valuation uplift off a single strong quarter. Cap rate applies to stabilised, forward-looking NOI, not to one good March annualised four times. Present the NOI improvement itself and let the valuer choose the yield — the moment you name a value, you own every assumption behind it.

All glossary terms NOI (Net Operating Income) IRR (Internal Rate of Return) Asset Value Per Key