Economia del Mercato Mobiliare

1
Are portfolio diversification criteria useful for
hotel investments?Evidence from Italian market
Claudio Giannotti, University LUM
Casamassima giannotti_at_lum.it Gianluca
Mattarocci, University of Rome Tor Vergata
gianluca.mattarocci_at_uniroma2.it Luca Spinelli,
University of Rome Tor Vergataluca.spinelli_at_uni
roma2.it
Stockholm, June 26th, 2009
2
Agenda

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

3
Introduction (1/2)

• During the last years, the hotel sector has been
  interested by an important development mainly in
  certain Countries, such as Italy, demonstrating a
  growing ability in obtaining positive results
  (Jones Lang Lasalle Hotels, 2009).
• Basically, literature focuses on two aspects of
  this sector
• advantages related to the inclusion of hotels in
  a diversified multi-asset portfolio (Quan, Li and
  Sehgal, 2002)
• performance correlations (Jang e Yu, 2002).
• it lacks studies determining some guidelines
  for the investors to define the number of hotels
  and the criteria to build an optimal portfolio in
  the mean-variance approach.

4
Introduction (2/2)

• The research questions of the paper
• Is geographical and sectorial diversification
  useful for hotel investments?
• What is the impact of concentration constraints
  on the performance of an hotel portfolio?
• Are performances persistent over time for the
  hotel portfolios constructed with the Markowitz
  approach?
• Do concentration constraints increase the
  performance persistence of an optimal portfolio?

5
Agenda

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

6
Literature review (1/6)

• Sectorial and geographic segmentation represents
  a general principle to diversify an investment
  portfolio also in the property market (Byrne and
  Lee, 1999 McMahan, 1981).
• The following table identifies the main factors
  that explain the usefulness of the
  diversification in the hotel sector

Geographical diversification Sectorial diversification
Weather (Aall e Hoyer, 2005) Country (Poirer, 1997) Fashion trend (Crouch, 1995) Economic trend (Canina and Carvell, 2005) Seasonality (Butler, 2001) Quality of the service offered (Baum and Haveman, 1997) Typology of customers served (Baker and Collier, 1999)
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Literature review (2/6)
Geographical diversification

• The demand could be strongly influenced by
  climatic variable because the serviceability for
  the customer is partially linked to the coherence
  of weather conditions in respect of his
  expectations (Aall and Hoyer, 2005).
• Political instability and social problems can
  make more complex the investment management,
  increasing the randomness of profits and avoiding
  a clear estimation of external rules for the
  scenario where the manager has to work (Poirer,
  1997).

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Literature review (3/6)
The demand of hotels located in a specific area
may be influenced by irrational components
(fashion trend), causing anomalous and unexpected
variations in investment profitability (Crouch,
1995). The demand of service provided to
customer base is strictly related to the general
economic trend and to the trend of the specific
area in which the hotel is located. Profits
prospectives related to the hotel activity appear
susceptible to the contest conditions change.
In the same country, the relation depends on
the socio-economic characteristics belonging to
the population served by the hotel (Canina and
Carvell, 2005).
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Literature review (4/6)
The seasonality is mainly related to retail
customer for which the service demand, for
climatic or institutional matters, may vary in
times of year. The weather aspect depends,
above all, on atmospheric/meteorological
conditions (temperature degree, rains, snow,
etc) whereas the institutional component depends
on several social rules involving potential
clients and influencing the service demand
(religious festivals, holidays, etc) (Butler,
2001). The services supply for business
customer base may allow to reduce the seasonality
risk.
10
Literature review (5/6)
Sectorial diversification
The hotel market is characterized by a strong
segmentation of the demand in relation to
potential clients expectations (Baum and
Haveman, 1997) and, thereby, on equal geographic
area, an average expenses deemed suitable for a
potential user may change remarkably (Baum and
Metzias, 1992). The classification upon the
typology of served customers (business and retail
customers) is based on differences existing in
occupancy rate dynamics, in occupation period, in
pricing policies e in overbooking risk (Baker and
Collier, 1999).
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Literature review (6/6)
Performance measures
Liberatore (2001) Enz and Canina
(2002) Brown and Dev (1999)
Legend h number of occupied rooms in a given
period n total of available rooms Re venues it
Revenues from the occupation of i-th room during
the t-th period Costs it costs (fixed, semi
fixed and variable) referred to the i-th room
available in the t-th period
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Agenda

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

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Empirical analysis the sample (1/2)
- Sample composition -
Database members of the Italian Association of
Hotel Chains (AICA) (265 hotels) Frequency of
data monthly Time period 2004-2008
Sectorial classification
Geographic area classification
Source AICA data processed by authors
Source AICA data processed by authors
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Empirical analysis the sample (2/2)

• The main assumptions
• Data referred to mean daily revenue per available
  room and to mean daily occupation rate for each
  month have been provided by AICA.
• The costs of the service offered have been
  extrapolated by the consolidated balance sheet of
  AICA (the original database did not contain this
  type of information) and converted in daily
  values.
• Every cost item has been classified into fixed,
  semi fixed or variable category on the basis of
  their sensitivity to service demand (Graham and
  Harris, 1999).

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Empirical analysis methodology (1/4)

• The choice of the best opportunities in the hotel
  sector has been analyzed using a standard
  approach to evaluate financial investments the
  efficient frontier (Markowitz, 1952).
• On the basis of data available, monthly GOPPAR
  has been calculated using the formula
• For hotels of a certain category (i.e. four
  stars) in a specific area (i.e. Rome) the average
  GOPPAR, on a year time horizon, and the standard
  deviation of monthly GOPPAR have been calculated

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Empirical analysis methodology (2/4)

• Return and risk measures estimated for each year
  are used to construct efficient frontiers, using
  a standard maximizing procedure.
• A preliminary analysis considers the distance of
  each asset class (represented by all the hotels
  of the same category in the same geographical
  area) respect to the more efficient portfolios,
  in order to define if diversification allows to
  achieve better results.
• An analysis of the efficient portfolio
  composition is also released in order to evaluate
  the degree of concentration of the best
  portfolios identified.

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Empirical analysis methodology (3/4)

• The persistence of the performance over time has
  been studied, analyzing at t time, the distance
  of a portfolio, that was on the efficient
  frontier at t-i time, with the efficient
  portfolio at t time.
• It is important since the difficulty to modify
  the investment strategy in the property and hotel
  market during the brief period.

where
distance between frontier portfolios
identified at t and t-i time
average GOPPAR over t year of efficient
portfolios identified on time t-i with
standard deviation of GOPPAR over t year of
efficient portfolios identified on time t-i with

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Empirical analysis methodology (4/4)
Finally, the paper considers the impact of
diversification constrains on the optimal
portfolios risk-return trade-off. The analysis
of the effects of concentration constrains has
been realized considering efficient frontiers
with different concentration limits (from 0 to
50) and using integral calculus to measure the
area below the efficient frontier to evaluate the
reduction of the investment opportunities. In
formula In order to measure the impact of
concentration constraints on the persistence of
results, the paper considers the same distance
analysis proposed for unconstrained frontiers.
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Empirical analysis results (1/6)
Unconstrained efficient frontier of hotel
investments in the Italian hotel sector in 2008
Source AICA data processed by authors
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Empirical analysis results (2/6)
Composition of efficient portfolios for
unconstrained efficient frontier in 2008
Source AICA data processed by authors
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Empirical analysis results (3/6)
Distance measures of efficient portfolios
identified at time t-i respect to efficient ones
defined at time t
Year Mean distance Mean distance Mean distance Mean distance Year Standard deviation distance Standard deviation distance Standard deviation distance Standard deviation distance
Year 2005 2006 2007 2008 Year 2005 2006 2007 2008
2004 7.96 27.00 90.14 20.79 2004 15.75 33.28 97.72 25.86
2005 - 25.80 105.28 30.68 2005 - 31.04 94.24 26.05
2006 - - 79.64 13.34 2006 - - 76.84 12.98
2007 - - - 65.03 2007 - - - 59.10
Source AICA data processed by authors
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Empirical analysis results (4/6)
Impacts of concentration contraints on the
efficient frontier in the Italian hotel sector in
2008
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Empirical analysis results (5/6)
Statistics on the impact of concentration
constraints on the efficient frontier
Year Statistics No constrains Constrain 50 Constrain 5
2008 preferred inv. - 2.70 35.14
2008 St.dev. Min. 0.00 0.00 6.637106
2008 St.dev. Max 337.17 174.2243 37.79339
2008 Area 94674.19 28781.089 1882.157
Source AICA data processed by authors
Source AICA data processed by authors
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Empirical analysis results (6/6)
Concentration constraints and performance
persistence
Year Unconstrained Unconstrained Unconstrained Unconstrained Year Concentration constraint 50 Concentration constraint 50 Concentration constraint 50 Concentration constraint 50
Year 2005 2006 2007 2008 Year 2005 2006 2007 2008
2004 7.96 27.00 90.14 20.79 2004 2.89 19.87 55.20 16.56
2005 - 25.80 105.28 30.68 2005 - 19.22 64.52 22.81
2006 - - 79.64 13.34 2006 - - 43.58 10.90
2007 - - - 65.03 2007 - - - 29.51
Year Concentration constraint 25 Concentration constraint 25 Concentration constraint 25 Concentration constraint 25 Year Concentration constraint 5 Concentration constraint 5 Concentration constraint 5 Concentration constraint 5
Year 2005 2006 2007 2008 Year 2005 2006 2007 2008
2004 2.51 13.10 31.19 9.27 2004 1.85 5.47 9.11 6.62
2005 - 9.58 36.70 11.58 2005 - 4.68 8.85 6.74
2006 - - 26.21 7.42 2006 - - 5.81 9.24
2007 - - - 16.03 2007 - - - 5.91
Source AICA data processed by authors
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Agenda

• Introduction
• Literature review
• Empirical analysis
• Sample
• Methodology
• Results
• Conclusions

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Conclusions

• Geographical and sectorial diversification seems
  to be useful in order to create optimal
  portfolios, even if the best portfolios have
  inner investments with different characteristics,
  but a not to high diversification level.
• Concentration constraints for hotels of the same
  category located in the same area determine a
  lower portfolio efficiency (worsening of the
  riskreturn trade-off), even if the performances
  result more persistent over time.
• As in other research, the main limit of the paper
  is due to unavailability of detailed information
  about structure costs of each hotel. The
  availability of internal data about costs
  incurred by hotels will enable to obtain more
  objective evaluations of the benefits coming from
  the diversification.

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Contacts
Claudio Giannotti University LUM
Casamassima giannotti_at_lum.it Gianluca
Mattarocci University of Rome Tor Vergata
gianluca.mattarocci_at_uniroma2.it Luca
Spinelli University of Rome Tor
Vergataluca.spinelli_at_uniroma2.it