Editor’s note: This is the first part of a two-part article that delves into the historical and contemporary rationale motivating hotel investments.
INVESTMENTS into hotels have been driven by a range of motives, from the generic to the specific, from purely economical to somewhat altruistic or even emotional on occasion.
Often viewed as a form of alternative investments, the improvements of fundamentals and values within the hotel industry have spurred renewed interest in hotel investments.
In continuation of our series on hotels, today we look at both historical and contemporary rationale motivating hotel investments.
Nature
Hotels at large transcend the physical confines of their brethren commercial real estate classes and is considered a hybrid of special-purpose real estate immutably intertwined with intricate operations, where the base product itself (rooms) are couple with services (hospitality), are sold and resold on a daily basis.
There have been differing schools of thought in regards whether hotels should be considered as part of core property portfolios, or to be adopted as an alternate asset class with elevated risk classification, particularly in light of the fragility exhibited by the industry in the wake of Covid-19.
Tangibility
The positive attributes of security inherent to traditional real estate investments carry over to hotels, offering a tangible tactile presence which arguably provides comfort in form of potential recourse to investors and lenders.
Coupling the baseline capital security of real estate, with potential upsides from business operations, makes hotels an attractive investment.
Hedging and diversification
Hotels are arguably a superior hedge against the influence of inflation, even more so than other commercial real estate classes are perceived to be, as hotels have the capability to adjust their room rates dynamically, whether to capitalise on high-demand periods or compensate for cost increases, within market tolerances, naturally.
In efforts to mitigate sectorial, industrial and geographical risks, hotels are increasingly popular as part of portfolio diversification within organisation’s adopted corporate strategy, as they continuously seek to derive new revenue streams and mitigate exposure while enhancing value for their stockholders.
For example, on December 5, 2024, Pavilion Real Estate Investment Trust (REIT) announced the proposed acquisitions of two prestigious hotels: Banyan Tree Kuala Lumpur at RM140 mil, and Pavilion Hotel Kuala Lumpur at RM340 mil.
These acquisitions are expected to enhance the REIT’s portfolio diversification, reducing its reliance on Pavilion Kuala Lumpur Mall, which currently accounts for 61.4% of the total asset value. Following the acquisitions, this contribution will decrease to 58.0%.
Furthermore, hotels are historically less volatile than equities within a capital markets retrospective. Hotels have been shown to buck the downturn trends in retail investment markets, making it a sensible if not secondary allocation for fund managers.
Scarcity
Like many other commercial real estate classes, hotels are increasingly popular due to perceived increases in demand and scarcity of supply.
This is however significantly market dependent and may not necessarily hold true for every location in the immediate future. From a systemic perspective though, we are currently seeing an oversupply in many markets across Malaysia.
Going beyond the physical nature of the asset, a hotel’s identity, often being its trade name and history are considered both rare and inimitable, thus carrying value in form of goodwill and reflective of trading stability.
While the passage of time physically deteriorates the property, corporeal conditions can be remedied readily, while history much less so.
Economic returns
The core concept is simple: individuals invest for purposes of wealth creation and retirement planning, while corporations aim to grow their business and create value for their stockholders.
On a fundamental level, like other commercial real estate, hotels are expected to provide both capital growth from ownership and income generation from operations.
Not just the volume of income, but the variety. From the operational aspects of the business, while the primary income stream is unreservedly the sale of room nights, other income streams appear in the form of F&B revenue, events, and from supportive facilities such as spas, business centres, and specialised services rendered.
On the ownership level, depending on the engagement structure, asset owners could potentially receive fixed rents if income security was a primary concern, or the bulk of operating profits as an ongoing business concern.
Therein lies the potential for greater profit. Studies have indicated that a large portion of a hotel’s operating expenses are fixed, meaning these expenses do not vary significantly with increased occupancy. Thus, the opportunity avails for performing hotels to profit remarkably upon surpassing breakeven occupancy.
Being a hybrid asset class, hotels undoubtedly carry more inherent risks over other assets rooted in traditional commercial real estate.
Having said that, studies have indicated that hotels enjoy higher than average risk adjusted total returns over their ilk, and benefiting greatly from adherence to systemic risk management strategies.
Efficiency arbitrage
Like other forms of real estate, hotel investments are characterised by unique, illiquid and non-commutable assets, and thus are not considered efficient, particularly when compared against other investment instruments in the capital markets, such as public traded equities, which enjoys real-time pricing updates.
This allows for efficiency arbitrages within hotel investments, and for lack of better terminology, potential value creation by the exploitation of market inefficiencies.
Value creation from arbitrage can take the form of intrinsic competitive advantages particular to an investor or firm, such as access to lower costs of capital, insights from their well-informed associates, or possession of complementary resources.
Other and often in tandem methods of capitalising of market inefficiencies are market driven. One may hypothesise outperforming the competitors’ occupancy and daily rates by building a hotel next to a popular demand generator such as a university or convention centre, while others may see potential in gaining first-mover advantages in developing resorts in speculating the next “it” tourist destination. – May 7, 2025
Dr Timmy Ho is a Certified Hotel Valuer, Chartered Manager, academic researcher and the Managing Director of the hotel asset management firm Pragmatique Sdn Bhd. Yap Kian Ann is a Registered Valuer, Estate Agent, Property Manager, International Certified Valuation Specialist and the Managing Director of Agility Valuers & Property Consultants Sdn Bhd (AVPC).
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
Main image: The Economic Times
