To dive into the subject of indices for hospitality real estate at EHL’s 3rd annual Hospitality Finance & Economics Research Conference we spoke with Jane Lees, Executive Director, CBRE Hotels Limited. As the head of a team that values hotels in Europe, Africa and the Middle East, Jane was happy to share how she interacts with indices in her line of work.
“I see indices more as a product of what we do than something we use, although we do consider them, when relevant. Hotels are difficult to value, regardless of indices. It’s interesting for us to know which areas and asset types are seeing an increase in property values, etc. That is where indices are useful to us.”
When asked what types of indices and reports Jane uses in her line of work to get a better picture of the market, she answered:
“We use tools such as our internal databases and purchase benchmarking reports such as STR, HotStats, MKG etc. to get a better understanding of performance trends that might influence valuations, but you can’t really use an index when valuing a hotel for several reasons,” she said.
Jane explained the challenges of getting comparable, reliable data for hospitality real estate - it’s difficult to obtain consistent information.
“It can be difficult to source consistent data sets for operating businesses, and that’s what hotels are, not just a piece of real estate. We see hotels as 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 of different operating models: franchises, leases, independently operated etc. And as these operating models differ they will not produce accurate data for indices. For example an independent hotel, which is heavily reliant on Food & Beverage revenue will perform differently compared to a limited service hotel. So you have to be quite cautious when analyzing data sets, as businesses are run differently and will give very different results,” Jane explained.
This brought us to the issue of confidentiality: “A hotel’s financial performance and transaction price is commercially sensitive information. When we receive data from our clients, we are quite often asked to sign non-disclosure agreements confirming we won’t share it with third parties.”
She concluded that the solution has to be more transparency and collaboration, maybe a neutral, third party indexing body that could prove it was neutral and reliable. This challenge daunts even the strongest academic researchers as they seek to establish the right system for collecting the data, making sure it’s making the right comparisons, and then finding the use for it in the markets. Already the first two steps are a huge challenge.
During the closing remarks of the conference, Jane took the opportunity to share her vision of the future for indices and hotel valuation.
“In terms of concepts, we are seeing lots of change; we still value a lot of standard hotel assets but we are seeing valuation instructions including co-living space and co-working space as these are the areas some hotel operators and investors are expanding into. We see hybrid hotel models entering the market which include a range of ‘living’ accommodation. It does make life interesting when benchmarking performance trends,” she admitted.
Jane pointed out that hotels, as a more established market with plenty of data and benchmarks being recorded, are now being used as a model for other industry sectors:
“Emerging concepts such as multiple use spaces are actually turning to hotel benchmarking as a base for comparison. Until these concepts trade, it’s difficult to evaluate what the cap rate might be or the value per room. New hotel concepts entering the market can offer a unique product when they are first launched. It can therefore be difficult for lenders to understand who an alternative operator might be. Some hotels offer small rooms but larger common areas bringing something new and fresh to the market, which others try to copy. But that’s how trends evolve; people adapt, we adapt, lenders adapt. Now the indices must adapt.”
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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.