Are Portfolio Diversification Criteria Useful for Hotel Investments?

Studies about hotel real estate market consider, prevalently, investment characteristics, managerial problems and macro-economics trends. Articles about real estate investment vehicles are scarce and generally concerning Anglo-Saxon countries. Authors stress the differences in the performance achieved respect to other real estate sectors and do not pay close attention to the portfolio construction strategies. In the Italian market the attention given to hotels is increasing over time and, in the last years, some data providers started to collect information about the sector dynamics. The first real estate vehicle specialized in the tourism sector is issued in the 2006 and, even if the Italian market is one of the main international tourism & leisure market, until now there are six specialized real estate funds. The paper proposed tries to evaluate the benefits related to a Markowitzís diversification approach for the construction of a real estate portfolio specialized in the hotel real estate market. The aim of the work is to study if a geo-sectorial diversification allows to reduce significantly the risk exposure of a real estate vehicle. Literature review proposed analyses the specific risk characteristics of hotel investments and presents the main performance measures available, looking also at advantages and limits of each approach. The last section considers a database collected by AICA, Italian Association Hotel Companies, in order to evaluate revenue dynamics in the hotel real estate market. On the basis of Markowitzís theory, the analysis proposed tries to define the best diversification strategy for the portfolioís construction in the hotel real estate market. Results achieved demonstrate that the standard geo-sectorial diversification allows to achieve good results only if some concentration constraints are established because there are some cities and/or hotel categories that are outperforming for all the time period analysed.