EHL’s 3rd annual Hospitality Finance & Economics Research Conference brought together leading experts in finance and hospitality to discuss the challenges of creating reliable indices where these two sectors collide.
As a theme for EHL’s 3rd annual Hospitality Finance & Economics Research Conference, the topic of “Indices” doesn’t sound too risky. However, indices are a sensitive subject. On one side, the academic community seeks solid data to develop reliable methods to create benchmarks and forecast industry trends. On the other side, the stakeholders in the industry seek to protect confidential data and minimize the potential damages of unfavorable comparisons and reports.
Therein lies the challenge: How can we create and apply indices using data from an industry that is highly complex? And how can we overcome issues of confidentiality and competitivity? To tackle these challenges, the panel host, Thanos Papasavvas, CIO, Founder and CFA of APB Invest, UK, led our panel of industry experts on a lively exploration of the subject.
The Need for Transparency
Our host began with a question about the construction of indices, asking the panel to reflect on the data used to create indices. Dr. Roland Füss, Chair Prof. of the University of St. Gallen, pointed out that there are many issues with the data used to construct indices. He mentioned three things that, as a researcher, he would like to see for indices:
“Down to earth” comparable numbers, on measurable, tangible elements, such as the number of properties available in a given quarter.
More transparency about what is being measured, at what frequency, and how it was measured, so we can know what is really in the index.
Merged data: We could take well-researched, solid data from different sources to have a more valuable data set organized around the common value of geo point.
Clean Data, Consistent Data Sets
This response sparked discussion about data and the reliability and transparency of the data being used to create indices. Jane Lees, Executive Director, CBRE Hotels Limited and head of the EMEA Hotels Valuation Team explained why it’s so difficult to get data sets:
“It is difficult to collate data on an operating business, and this is what a hotel is, not just a piece of property but an asset whose revenue relies upon the success of the property’s business. We really see hotels becoming the 5th asset class in the property market. People have tried to create indices for hospitality real estate before, but the data was an amalgamation on different contracts, franchises, under leases, independently owned etc. And these are not the same thing, an independent hotel performs differently financially than a franchise, so the data sets will differ. Each time we carry out a valuation we use a completely different data set, so you have to be quite cautious as businesses are run very differently and will give very different results”, Jane Lees explained.
This brought us to the confidential problem: “The data around a hotel’s financial performance and buying price is commercially sensitive and clients don’t always see the advantage of having that data shared. When we receive data from our clients, we sign agreements saying we won’t share this with third parties,” Jane Lees said.
So, who could be trusted to collate and interpret data? What neutral, third party would people share their info with? Why not a university? However, even for the purpose of academic research, companies who have the data (such as banks and valuation agencies) can’t necessarily share it. Jane Lees pointed out:
“When it comes to sharing data, I think the owners of the data would say: what’s in it for me?” – Jane Lees Executive Director, CBRE Hotels Limited
The Providers of Data
Steve Hood, Senior VP of Research at STR, USA, is well placed to address the issue of data collection and he pointed out that “Our data is often used for indices. The challenge is the gap between industry and academia and the research possibilities are vast, our data is used for indices at property level, for benchmarking, and for comparisons beyond the property level. There are so many possibilities, so many questions and problems to be solved.”
This response suggests that the problem is not necessarily the lack of data, nor an unwillingness to provide it, but maybe that the resources for such work are lacking and that nobody seems to invest in this type of research.
Christophe Piffaretti, Fund Manager at Credit Suisse REF Hospitality, admitted that: “As a provider of data, we have lots of funds and we do share some data, but we don’t provide data that is sensitive or confidential like sales prices and acquisition prices,” which is exactly the types of data that would be useful to create real estate indices.
The Impacts of Indices
Christophe Piffaretti went on to explain that indices also have significant impacts, especially in a liquidity market:
“Switzerland is a small market, a very liquid market, the Swiss fund benchmark is about CHF43billion, and 1% is traded every month, about half a billion. Now, 20% of the market is held by passive investors and large pension funds. If one fund makes an increase by 200 million in one month, that means that 40 million has to be rebalanced by passive investors. It causes oversupply, pressure on the market, price drops. The indices and the passive investors are generating waves, in a liquid market it can be very challenging.”
New Trends to Index
Vanguelis Panayotis, COO of MKG Group, FR pointed out that indices need to keep up with the trends in the industry, especially in hospitality real estate:
“What we are observing is the industrialization of the hospitality industry, with a more integrated model and an externalization of real estate. We need indices that will reflect this phenomenon of real estate as a service, for hotels that have co-working space, mixed-use projects, hybrid projects, etc. How could an index reflect this new approach in the market?”
More Accurate Indices
The conversation veered back toward the issue of data reliability, and how data collection must evolve and be elevated to capture the latest trends.
Steve Hood said “Consistency: we need everybody to provide the same data consistently. Frequency: profit and loss data, for example, we used to do annually and now we’re doing monthly. As new types of data emerge, we must be consistent with guidelines respecting confidentiality.”
Vanguelis Panayotis, said “People value: We are unable to valuate people, and yet people are the real value of an organization. In two identical restaurants, it’s the cook and the staff who make the difference.”
This idea rings true, and people shortages are one of the major obstacles to collecting and using data. Dr. Füss pointed out that IT professionals are a key resource: “We have machine learning and the practitioners in the industry know about the people side, but they need the IT resources to generate reliable data.”
“AI, machine learning, etc. are all contributing to collecting data, so we need workers who can put it in place and use those tools.” Steve Hood, Senior VP of Research at STR, USA
Hospitality Indices for Emerging Markets
Anne-Marie Aurialt addressed the question of emerging markets based on her work as Managing Director of Pimlico Asset Management.
“In our work for private investors in Ethiopia, for example, we can’t find comparisons and data. We see some in South Africa and Namibia, but there are not comparable. So you have to go outside the country to benchmark, even against another currency.”
“We need experts to see what data and factors are worth considering and how to apply that knowledge. For example, in terms of geopolitical impacts, water shortage is a major concern In Capetown the water shortage is a huge issue, the government will add a tax that would have an impact on the utilities per occupied room. This could be a factor to index.”
Roadmaps for Indices
Dr. Miroslav Durana, Partner of DuraWealth, a private wealth management firm, spoke up to address the notion that value is not a hard science and shared his solution for evaluating intangible factors.
“We have to consider the underlying value of assets, the economic value and non-economic value, and the extra-financial values of what a company managing real estate infrastructures including hotels and related services offers and how it is different from the others. To do this, we have started to create roadmaps from the technology and sustainability & environmental standpoints to see where our society and the infrastructure are going. That tells you about the true value of a company. Where is the product or service going to be in 3-5 years? That’s the value of the company today. So, we make indices using roadmaps to track intangible factor trends.”
Our host asked where they got data to make such roadmaps, to which Dr. Durana replied:
“We source the info from academics, research, and patent databanks. Intellectual Property value tells you what will be in the market in 3-5 years.”
The Challenges and Solutions
In summary, the main challenges that undermine the creation of useful indices are:
A lack of data sharing and transparency
Difficulty comparing (apples to apples) different hotel businesses
Difficulty measuring new trends and new markets
Lack of resources to implement data collection and aggregation, interpretation
No interest from industry and private sector to do this research with academics
Overwhelming new amounts of data
The solutions proposed:
Create dedicated research projects to deconstruct different indices
Merge data from different sources
Give incentives for private sector and finance actors to share data
Increase resources for IT and data collection
Use alternative approaches to valuate (road mapping, cross-industry benchmarking)
Does your business need data?
EHL hosts these types of conferences to create a bridge between research and academia and the industry. The EHL Advisory Services branch connects businesses and institutions with academic and industry consultants who specialize in hotel valuation, index creation, and other applied research areas.