Type of Submission

Refereed Article


This article considers the role of hotels in a mixed-real estate portfolio. Using hitherto unexamined IPD data for leased hotels in the U.S. and the U.K. between 2001 and 2013, it investigates whether hotels provide diversification benefits and seeks to critically reassess the view that hotels are uniformly high-risk assets. The study finds, by comparison to more “traditional” property types, that hotels have received little attention from property researchers and tend to be overlooked in the asset allocation process. This might be a result of the commonly held perception that hotels are “alternative” and “high-risk.” Based on results from a portfolio optimization analysis, it was found that hotels in the U.S. are more volatile than traditional property types but do not contribute to the efficient frontier for the time period reviewed. By contrast, the empirical results for the U.K. indicated that hotels are much less risky than expected and contribute to the efficient frontier at lower-risk levels. This was confirmed by the de-smoothed results using the individual correlation coefficient for each property type. Consequently, it was concluded that hotels are an attractive real estate subsector offering credible diversification benefits. Furthermore, it is suggested that hotels are not necessarily deserving of their reputation as uniformly high-risk. This has important practical implications for institutional investors seeking to diversify their portfolios.