|NEW YORK, October 18, 2006 – Despite the avalanche of equity capital
chasing hotel deals around the country, there is significant pricing inefficiencies
across the lodging sector according to Hotel Investment Strategies, LLC,
a lodging investment advisory firm based in New York.
“While we believe the hotel sector as an asset class is priced correctly today, compared with other real estate asset classes, we find the hotel sector to be much more inefficient in an asset pricing sense compared with all the other real estate asset classes,” said Ross Woods, Principal of Hotel Investment Strategies.
Based on an equilibrium hotel pricing model developed by Hotel Investment
Strategies, the firm has found that about 28% of full-service hotel markets
are currently underpriced on a risk-adjusted basis and are likely to generate
excess risk-adjusted returns over the next five years.
“From an asset pricing perspective, the lodging industry is much more inefficient than previously thought and explains in large part why some investors have been able to consistently outperform the market and provide superior risk-adjusted returns.” “If the market were efficient, abnormal returns would be infrequent.”
“While hotel investors appear confident in forecasting the relative amount of risk in the hotel sector as a whole relative to other real estate asset classes, they appear unable to fine-tune their perceptions of relative risk to the level of specific hotel types and locations in any sort of way that is reliable or stable over time.” “As a consequence they do not require significantly or persistently different going-in IRRs across different hotel types and locations,” said Mr. Woods.
“It seems the reason hotel investors have not appropriately priced the hotel sector across markets is that they have consistently underestimated its risk in many markets and overestimated the risk in other markets.” This artefact has flowed through to underwriting assumptions, most notable, in required rates of returns. “This is borne out in survey after survey, where investors only ever require a 300 to 400 basis point spread in the going-in IRR between the riskiest and least riskiest hotel markets in the country.”
Mr. Woods said that most hotel investors believe, implicitly, if not
explicitly, that they are getting a higher expected return without assuming
greater risk. The consequences of overconfidence can be to take excessive
risks or to pass up attractive opportunities. Investors are more likely
to underestimate the risks rather than the opportunities because of another
habit of mind that lead them astray – eternal optimism.
Hotel Investment Strategies finds that most superior performance is attributable to an investor’s decision to overweight outperforming hotel markets relative to the market portfolio and consistently acquire underpriced assets in these markets.
About Hotel Investment Strategies, LLC
Hotel Investment Strategies, LLC is a lodging investment advisory firm that helps clients construct and manage hotel portfolios that provide the highest levels of return for any given level of risk. The firm is headed by Ross Woods who has over 25 years consulting, asset management and portfolio management experience in the U.S. and Southeast Asia with such firms as PricewaterhouseCoopers, Prudential Real Estate Investors and Horwath Asia Pacific. He is an industry leader in the development and implementation of hotel portfolio strategies and provides support for hotel owners and investors faced with making complex asset and portfolio decisions.
The firm’s services include the design and execution of hotel investment strategies, asset allocation, diversification, asset selection and execution, asset management and performance attribution. The firm also provides transactional and due diligence advisory services and assesses the portfolio implications of acquisitions and dispositions.
|Also See:||The Hotel Terminal Cap Rate Delimma / PKF / August 2005|
|Low Cap Rates Drive Gains in Hotel Values / Suzanne R. Mellen / Canadian Lodging Outlook - December 2005 Year-to-Date|