The risk-adjusted performance of hotel investments in the Asia–Pacific

Hotels are an important real estate sector for institutional investors, having unique distinctive features and structural characteristics compared to the other commercial real estate sectors (Corgel, 2005; Hess and Liang, 2002; Mansley and Lizieri, 2015; Newell and McGreal, 2015; Newell and Seabrook, 2006). Hotel activities involve investment, as well as supporting tourism and business accommodation, and hotel investments are actively supported by institutional investors in their real estate portfolios (e.g. ADIA, GIC, QIA) (IPE, 2023b). In many cases, hotels are iconic buildings in major international cities (e.g. New York, London, Paris). This sees a range of real estate investment vehicles being available for investing in hotels by institutional investors; including direct investment, non-listed real estate funds, separate accounts and listed Real Estate Investment Trusts (REITs). As well as these institutional investors, major hotel chains/operators (e.g. Marriott, Hilton, Hyatt, Accor, Intercontinental) provide the necessary infrastructure for the effective operation and management of hotels. This sees hotel risk including hotel asset risk, hotel business operational risk and sensitivity to the global economy (Mansley and Lizieri, 2015).

As with the other real estate sectors, hotels were impacted substantially by the COVID-19 pandemic, seeing a significant reduction in global hotel transaction activity during this crisis (CBRE, 2023a; Newell and Marzuki, 2023), as well as encountering issues in the current uncertain economic environment. Some hotel markets are still in the post-COVID-19 recovery phase, with key hotel operational metrics (e.g. RevPAR, occupancy rate) still below those seen pre-COVID-19 in many cases (CBRE, 2023a). This issue will be explored more fully in a subsequent section of this paper.

Similarly, the Asia–Pacific region has important real estate markets and high-quality real estate assets that have attracted significant institutional investor interest. This includes both the developed real estate markets (e.g. Japan, Australia, Hong Kong, Singapore) and the emerging real estate markets (e.g. China, India, Vietnam). Much of this institutional investor interest has been driven by the increased sophistication, maturity and transparency of these Asia–Pacific real estate markets, as well as their strong economic growth. The JLL Global Real Estate Transparency Index (JLL, 2022) clearly shows the transparency of these Asia–Pacific real estate markets in a global context and their improvements in transparency in recent years. These developed real estate markets include Australia (#4 most transparent globally), Japan (#12), Singapore (#14) and Hong Kong (#16), with the emerging real estate markets including China (#30), India (#36) and Vietnam (#52). This has seen the major real estate investment managers establish significant real estate funds in the Asia–Pacific region for office, retail and industrial real estate; this includes CBRE, LaSalle, Brookfield, Nuveen, PGIM, GLP and CapitaLand. The hotel sector is a key part of the Asia–Pacific real estate markets; both as part of a global real estate strategy, a pan-Asia-Pacific real estate strategy and a market-specific real estate strategy.

As such, the purpose of this paper is to assess the significance, risk-adjusted performance and portfolio diversification benefits of Asia–Pacific hotels in an Asia–Pacific mixed-asset portfolio over 2006–2024. This sees three specific research questions (RQs) concerning Asia–Pacific hotels as the empirical focus of this research:

These three research questions enable considerable insights into the role of Asia–Pacific hotels in an Asia–Pacific mixed-asset portfolio, the robustness of Asia–Pacific hotels in difficult and uncertain environments, and the ongoing strategic implications for investors seeking to achieve effective Asia–Pacific hotel exposure. Pathways are also identified for the effective inclusion of Asia–Pacific hotels in institutional investor portfolios. The following section drills into more specific details concerning hotels at a global and Asia–Pacific level.

Drivers of hotel performance are different to those typically seen for the other real estate sectors. These drivers include the post-COVID-19 recovery, where “revenge” tourism saw an active response to lockdown fatigue and increased demand for both domestic and international tourism. Other drivers include increased investor appetite for the hotel sector, diversity of hotel investment vehicles, recovery of corporate travel, return of major cultural events and adoption of COVID-proof technology (e.g. contactless keys, contactless lights).

There are also significant risk factors for hotel performance. These risk factors often relate to the inclusion of business operating risk with hotel risk, and the susceptibility of hotels to economic, social and geopolitical factors. Other risk factors include slower than expected tourism take-up in some markets (e.g. Chinese tourism), skilled-staff labor shortages, support staff shortages, lack of availability of quality hotel stock, functional obsolescence, quality of hotel operators, local competition, increased financing costs, increased construction costs (seeing hotels delayed or deferred), natural disasters and other demand shocks and competition for investor interest across the other real estate sectors (CBRE, 2023a; Mansley and Lizieri, 2015; Newell and McGreal, 2015). In a post-COVID-19 context, hotel occupancy levels are improving, but generally still below pre-COVID-19 occupancy levels (CBRE, 2023a).

Importantly, the overall real estate sector (including the hotel sector) has moved on from a COVID-19 dominated risk environment to a post-COVID-19 environment, where interest rate policy, geopolitical issues, inflation, denominator effect and climate change are now seen as more critical risk factors than COVID-19 (ANREV, 2023; Newell and Marzuki, 2023). Fear of recession and weaker consumption are critical risk factors going forward (CBRE, 2023a).

Hotels are an important real estate sub-sector globally; being supported by institutional investors such as pension funds, sovereign wealth funds, insurance companies and private equity. The leading real estate investment managers with significant global hotel portfolios include CapitaLand, Starwood, Brookfield, Metlife, Oaktree, Union, Barings, Deka, AXA and Schroders; see Table 1 for their specific hotel portfolio details at December 2022. In several cases, hotels make up a significant component of their real estate portfolios, with these leading hotel investment managers adopting regional hotel strategies (e.g. Americas, Europe) and global hotel strategies. This sees the top 10 hotel real estate investment managers having over $118 B in hotel assets under management (AUM); being 11.2% of their overall real estate portfolio. Similarly, the top 150 real estate investment managers have over $189 B in hotel AUM; being 2.8% of their overall real estate portfolio (IPE, 2023a). Several countries also have significant hotel/lodging REIT markets (e.g. USA).

Over 2007–2022 (full 16-year timeframe of MSCI/RCA transaction database: $12.8 T AUM; 448,433 transactions), global hotel transactions accounted for $992 B (from 31,789 hotel transactions); being 7.7% of global real estate transactions. This contribution by hotels compares with the respective contributions to global transaction levels by the office (37.0%), retail (17.7%) and industrial (15.2%) sectors (MSCI/RCA, 2023).

More recently, to include the impact of COVID-19 on the hotel sector over 2019–2022, global hotel transactions accounted for $255 B (from 7,888 transactions); being 6.0% of global real estate transaction volumes; compared to the level of office transactions (30.3%), retail transactions (12.0%) and industrial transactions (21.1%) (MSCI/RCA, 2023).

Recent global hotel transactions reinforce the importance of the hotel real estate sector to real estate investors. These hotel transactions include the Ritz London (London; $897 M; 2020), Grosvenor House (London; $602 M; 2018), Westin Paris (Paris; $628 M; 2018), Doubletree Amsterdam (Amsterdam; $486 M; 2019), Grand Hotel Stockholm (Stockholm; $435 M; 2021), Hilton Vienna (Vienna; $420 M; 2019) and Hilton Berlin (Berlin; $368 M; 2018); being across many of the key European cities of London, Paris, Amsterdam, Stockholm, Vienna and Berlin. Several major international real estate players, including AXA, QIA, ADIA and GIC, were involved in these transactions (MSCI/RCA, 2023). Several Asia–Pacific hotel transactions also figured prominently in these global hotel transactions.

Overall, this sees an important contribution by hotels to global real estate transaction activity, as well as being an important real estate sector for institutional investors.

The Asia–Pacific hotels are an important sub-sector of the global hotel landscape; across both the developed markets and emerging markets in the Asia–Pacific. Figure 1 provides examples of major Asia–Pacific hotels (e.g. Raffles (Singapore: established 1887), Peninsula (Hong Kong: established 1928), E&O (Penang: established 1885)); several of which were amongst the leading hotel sales globally in recent years.

The leading real estate investment managers with significant Asia–Pacific hotel portfolios include CapitaLand, Gaw, IGIS, ESR, BGO, Mastern, Brookfield, EQT Exeter, APG and AXA; see Table 2 for hotel portfolio details at December 2022. These top 10 Asia–Pacific hotel portfolios account for $37.9 B. Importantly, these leading Asia–Pacific hotel investment managers include global players (e.g. Brookfield, APG, AXA) and Asia-Pacific-based players (e.g. CapitaLand, Gaw, IGIS, ESR, Mastern); reflecting the maturity and scale of the Asia–Pacific hotel market. Overall, this sees the Asia–Pacific hotel sector accounting for 21% of the global hotel sector for the top 150 real estate investment managers (IPE, 2023a). Table 3 provides details of some of the Asia–Pacific non-listed hotel funds that leading real estate investment managers have established (e.g. CapitaLand, Gaw). These include market-specific and pan-Asia hotel funds; also for different styles of fund (e.g. opportunity, distressed); with several of these hotel players having previous track-records with establishing successful hotel funds (e.g. third hotel fund).

Several Asia–Pacific countries have also established hotel REITs, as well as listed hotel companies. Table 4 provides details of these listed hotel players; with hotel REITs being established in several Asia–Pacific countries (e.g. Japan, Hong Kong, Singapore, Australia). Leading hotel chains/operators (e.g. Marriott, Hilton, Hyatt, Accor, Intercontinental) are also actively involved in the Asia–Pacific in delivering high-quality hotel operations/management services.

Over 2007–2022, Asia–Pacific hotel transactions accounted for $181 B (from 4,049 hotel transactions); being 18% of global hotel transactions; compared to the level of hotel transactions in the Americas ($489 B; 49%) and EMEA ($323 B; 33%). This saw Asia–Pacific hotel transactions accounting for 8.0% of all Asia–Pacific real estate transactions over this 17-year period; with this percentage contribution by hotels similar to that seen globally (7.7%), the Americas (8.0%) and EMEA (7.3%) (MSCI/RCA, 2023).

More recently, to include the impact of COVID-19 on the hotel sector over 2019–2022, Asia–Pacific hotel transactions accounted for $55 B (from 1,110 transactions); being 21% of global hotel transactions; compared to the level of hotel transactions in the Americas ($125 B; 49%) and EMEA ($76 B; 30%). This saw Asia–Pacific hotel transactions accounting for 7.6% of all Asia–Pacific real estate transactions over this 4-year period, with this percentage contribution by hotels above that seen globally (6.0%), the Americas (5.6%) and EMEA (5.8%) (MSCI/RCA, 2023). A fuller analysis of the impact of COVID-19 on the Asia–Pacific hotel sector (and globally) will be provided in a subsequent section of this paper (see RQ3).

Recent Asia–Pacific hotel transactions further reinforce the significance of the Asia–Pacific hotel sector; often being amongst the leading hotel transactions globally. This includes the Millennium Seoul Hilton (Seoul; $913 M; 2022), Tokyo Westin (Tokyo; $780 M; 2019), Sunworld Dynasty (Taipei; $909 M; 2020), Hyatt on the Bund (Shanghai; $707 M; 2022), Grand Hyatt Seoul (Seoul; $644 M; 2022), Le Meridien Seoul (Seoul; $626 M; 2021) and Marina Mandarin Singapore (Singapore; $562 M; 2019). Overall, this saw leading hotel transactions across the major Asia–Pacific cities, including Tokyo, Singapore, Shanghai, Hong Kong, Sydney, Taipei and Beijing. Leading hotel buyers included Mitsubishi Estate, Greystar, CapitaLand, IGIS, KKR, Gaw and BentallGreenOak (BGO), while leading hotel sellers included CDL, GIC, CapitaLand and PGIM; all being significant players in the international real estate investment space (MSCI/RCA, 2023).

The above hotel investor details and hotel transaction details provide a strong context for the importance of the Asia–Pacific hotel sector in a global hotel context. The following sections of this paper will carry out the empirical analysis to assess the risk-adjusted performance, portfolio diversification benefits and added value of Asia–Pacific hotels in a portfolio.

Hotel real estate research has been published in a wide range of journals including the real estate and hospitality/tourism journals; reflecting the diversity of research issues involved in the hotel sector.

A significant number of papers on hotel real estate have been published in the real estate journals in the areas of hotel investment and structural characteristics (e.g. Corgel, 2005, 2007; Corgel et al., 2015; Corgel and DeRoos, 1997; Das et al., 2021; Hess and Liang, 2002; Low et al., 2015; Mansley and Lizieri, 2015), hotel investment strategic decision-making (e.g. Newell and Seabrook, 2006), hotel market dynamics and segmentation (e.g. Beracha et al., 2018; Das et al., 2018; Gallagher and Mansour, 2000; Wheaton and Rossoff, 1998), hotel capital flows (e.g. Newell and Marzuki, 2023; Newell and McGreal, 2015), hotel REIT performance (e.g. Jackson, 2008), hotel brand affiliation (e.g. Aroul et al., 2023) and hotel time-to-delivery (e.g. Robert and O'Neill, 2021), with a review of hotel/lodging real estate research provided by Manning et al. (2015) and a review of recent hotel industry trends and innovations by Manning et al. (2018).

The primary focus of this hotel research was empirical analysis concerning the US hotel/lodging sector, in clearly articulating the role of the hotel sector as a real estate sub-sector, the performance analysis of the hotel sector and its contribution to a mixed-asset portfolio. In most cases, the contribution of the hotel sector was seen as adding value to the investment portfolio in a US context.

Hotel sector research has also been published in the various hospitality/tourism journals. This includes specific aspects of hotel performance, hotel asset management and the operational/management aspects of hotels, including hotel investment (e.g. DeRoos and Corgel, 1996; Peiró-Signes et al., 2015; Petersen et al., 2003; Quan et al., 2002; Worsley, 2015), hotel investment strategic decision-making (e.g. Johnson and Vanetti, 2005; Lee and Jang, 2013), hotel market dynamics and segmentation (e.g. Giannotti et al., 2011; Lee and Jang, 2007), hotel REIT performance (e.g. Gu and Kim, 2003; Jackson, 2009; Jang and Yu, 2002; Kim and Jang, 2012; Kim et al., 2002a, b; Tang and Jang, 2008), hotel mergers and acquisitions (e.g. Hsu and Jang, 2007; Kim and Canina, 2013; Lee and Jang, 2013), hotel asset management (e.g. Singh et al., 2012), hotel brand affiliation and performance (e.g. Almeida et al., 2020; O'Neill and Xiao, 2006; O'Neill et al., 2006; Nasution and Mavondo, 2008; Pedrini and DeBernardi, 2020), features of the hotel sector in developing markets (e.g. China, Egypt, UAE) (e.g. Lam and Han, 2005; Pine and Philips, 2005), green hotels (e.g. Bagheri et al., 2020; Hou and Wu, 2021; Merli et al., 2019; Wang et al., 2020), corporate reputation and strategy (e.g. Stavrinoudis and Chrysanthopoulou, 2017; Xiao et al., 2012), hotel marketing strategies (e.g. Ahmad and Saber, 2015; Lam and Han, 2005; Martin and Isozaki, 2013), brand extension and reputation (e.g. Mahasuweerachai and Qu, 2015), boutique hotels (e.g. Henderson, 2011), impact of COVID-19 (e.g. Chan et al., 2021), hotel selection (e.g. Jones and Chen, 2011; Roe and Repetti, 2014), Shariah-compliant hotels (e.g. Henderson, 2010) and the role of locational factors (e.g. Assaf et al., 2015; Johnson and Vanetti, 2005). Whilst providing major insights into the important operational dimensions of hotels, much of the hotel research in the hospitality and tourism journals was strategic delivery and hotel operations/management focused, with minimal empirical analysis. This empirical analysis mainly concerned the performance analysis of US hotel REITs, with no hotel performance analysis in an Asia–Pacific context.

This academic research has been strongly supported by a number of high-quality real estate industry reports concerning hotels across various markets by the leading international real estate advisory groups; with these players often establishing in-house professional teams in the hotel sector. These reports have articulated current hotel industry directions, industry-level information and up-to-date/future statistics, providing a strong industry context to the importance and environment for the future demand for hotel investment. In an Asia–Pacific hotel context, examples of these hotel sector reports include CBRE (2023a, b, c), JLL (2023) and Savills (2023), with these reports often being produced on a quarterly basis. In each case, these real estate industry reports have added a real richness and context to the empirical analysis in this paper by highlighting the significance, current stature and future expectations of the Asia–Pacific hotel sector.

Despite this extensive range of literature regarding hotel real estate, there has been a clear focus on US hotel/lodging performance analysis; often constrained to the US hotel REIT sector, as well as being constrained by the lack of data availability in many other hotel real estate markets. As such, there is a clear gap in the body of knowledge in the hotel space. In particular, this relates to the lack of empirical research concerning direct hotel real estate performance and non-US hotel markets (e.g. Asia–Pacific); with this being the focus of this paper. The scale and availability of US hotel performance information/metrics has also driven this research focus on the US hotel sector. The following sections will go beyond the US hotel space, and using Asia–Pacific direct hotel real estate performance data from MSCI, it will do an in-depth empirical analysis for the risk-adjusted performance analysis and diversification benefits of the hotel sector in the Asia–Pacific over 2006–2024, as well as highlighting the strategic significance of the Asia–Pacific hotel markets for institutional investors.

There is a large amount of research on the Asia–Pacific real estate markets; both at an Asia–Pacific level and market-specific level (e.g. Australia, China, Hong Kong, India, Japan, Malaysia, Singapore, Taiwan). This includes research into Asia–Pacific direct real estate markets and Asia–Pacific REIT markets, such as Gupta et al. (2020), Hoesli et al. (2022), Lee (2008), Liow (2000), Liow and Adair (2009), Liow and Huang (2006), Liow and Newell (2012), Newell et al. (2004, 2005, 2009a, b, 2010, 2015, 2023), Newell and Kamineni (2007), Newell and Lee (2012), Newell and Osmadi (2009), Ong et al. (2011), Ooi et al. (2011), Peng and Newell (2012), Quek and Ong (2008) and Wong et al. (2013). None of this previous research was focused on the Asia–Pacific hotel sector despite the major institutional capital now being directed towards real estate markets of the Asia–Pacific; this further adds to the research gap that this paper seeks to address.

Outside the Asia–Pacific market, hotel real estate research has focused mainly on the US market, with empirical studies largely concentrated on listed hotel/lodging REITs (Jackson, 2008, 2009; Kim et al., 2002a, b). For example, Jackson (2008, 2009) shows that hotel REITs generally record higher volatility and lower risk-adjusted performance than REITs investing in core real estate sectors, which may partly reflect their higher exposure to hotel operating conditions and fluctuations in travel demand. Although based on listed rather than direct real estate, this US evidence provides a useful indirect benchmark for the present study. By examining direct hotel real estate in the Asia–Pacific market, this paper addresses the limited empirical evidence concerning the performance characteristics and portfolio role of hotel real estate as a direct real estate investment.

In summary, the paper's contribution to the body of knowledge is twofold: (1) it addresses a data gap by providing an empirical investigation of investment performance characteristics for direct hotel real estate and (2) it addresses a geographic gap by providing a coverage of the Asia–Pacific context at both an Asia–Pacific level and a market-specific level for Japan and Hong Kong.

Total returns (in US$) were assessed annually over the 18-year period of 2006–2024 using the MSCI Asia–Pacific direct real estate indices, which are only available annually. These total return indices are available at the hotel sector level, with individual hotel-level returns, as well as for each of the office, retail and industrial real estate sectors in the Asia–Pacific. This Asia–Pacific hotel real estate series is part of the MSCI direct real estate indices, a widely used industry-standard performance benchmark for institutional investors assessing global real estate.

It is important to note that the MSCI direct real estate indices are constructed from the underlying asset-level performance of the institutional real estate portfolios contributed to MSCI. The annual total return combines both the income return and the capital growth components. In particular, the capital growth component is derived from independent asset valuations rather than actual transaction prices of real estate assets. The common issue of using these valuation-derived returns is valuation smoothing, which tends to lag and understate the volatility of the true underlying market. To improve the comparability of the direct (valuation-based) and listed (transaction-based) return series used in this paper, the direct real estate series were de-smoothed using the Geltner (1993) methodology before the statistical analysis was performed. Whilst the de-smoothing process may not fully provide the true underlying return series, it is widely accepted as a practical approach to reduce the effect of valuation smoothing. For this reason, the de-smoothed series are used across the empirical analysis presented in this paper.

At December 2024, the Asia–Pacific hotel portfolio comprised 510 hotels from 61 portfolios valued at $34.3 B. There is an extensive hotel coverage across eight (8) Asia–Pacific markets, including Japan, Hong Kong, Australia, Singapore, Malaysia, China, Thailand and South Korea. For the other Asia–Pacific real estate sector indices, they comprised office (1,674 properties; 202 portfolios; $211.3 B), retail (1,135, 152; $173.8 B), industrial (2,203; 142; $121.0 B), seeing hotels accounting for 7% of this Asia–Pacific real estate portfolio (MSCI, 2025).

For the specific Asia–Pacific markets, MSCI hotel performance indices (in local currency) were also available over the indicated timeframe for Japan (2006–2024) and Hong Kong (2009–2024). No other Asia–Pacific countries were included as a direct hotel real estate index was either unavailable or covered only a much shorter timeframe. As such, equivalent market-specific analyses were also conducted for these two Asia–Pacific markets over these respective timeframes. For the Japan hotel portfolio at December 2024, this comprised 384 hotels from 29 portfolios valued at $16.7 B. For the other Japan real estate sector indices, they comprised office (1,028 properties; 48 portfolios; $65.2 B), retail (447; 34; $23.9 B), industrial (634; 36; $48.1 B), with the hotel sector accounting for 12% of this Japan real estate portfolio. For the Hong Kong hotel portfolio at December 2024, this comprised 14 hotels from 4 portfolios valued at $8.2 B, with the other Hong Kong real estate sector indices comprising office (25 properties; 9 portfolios; $18.0 B), retail (101; 8; $46.0 B) and industrial (14; 6; $3.4 B), with the hotel sector accounting for 12% of this Hong Kong real estate portfolio (MSCI, 2025). Collectively, Japan and Hong Kong hotel real estate accounted for 72% of the total value of the Asia–Pacific hotel portfolio.

For the other main Asia–Pacific asset classes, the benchmark performance metrics used were stocks (MSCI Asia–Pacific stocks), listed real estate (S&P Asia–Pacific real estate stocks), bonds (Bloomberg Asia–Pacific Aggregate Government bonds (5–7 years)) and cash (Bloomberg US T-bills (3 months)). For Japan, these benchmark metrics comprised stocks (MSCI Japan stocks), listed real estate (FTSE/EPRA/NAREIT Japan real estate stocks), bonds (Japan 10-year bonds) and cash (Japan government benchmark 3-month T-bills). For Hong Kong, these comprised stocks (MSCI Hong Kong stocks), listed real estate (FTSE/EPRA/NAREIT Hong Kong real estate stocks), bonds (Refinitiv Hong Kong 10-year bonds) and cash (Hong Kong 3-month T-bills).

As explained previously, the Asia–Pacific hotel performance and direct real estate performance were also de-smoothed as per Geltner (1993) (smoothing parameter = 0.5) to account for the use of valuations (instead of transactions) in assessing performance. This saw the final time period for analysis being the 18-year period of 2007–2024, as one year of returns is lost in the de-smoothing process. For Asia–Pacific hotels (and the other Asia–Pacific real estate sectors and asset classes), risk-adjusted returns were assessed over 2007–2024; this being the full period for the establishment of these MSCI Asia–Pacific real estate indices. Average annual returns, annual risk as well as downside risk were calculated. Risk-adjusted returns were assessed using the Sortino and Sharpe ratios. Hotel real estate's portfolio diversification benefits were assessed using correlation analysis. Equivalent risk-adjusted returns analyses for the hotel sub-sectors in Japan (2007–2024) and Hong Kong (2010–2024) were also conducted (local currency).

To examine the role of Asia–Pacific hotels in mixed-asset portfolios, asset allocation diagrams were assessed under two scenarios. The first applied practical constraints, with the allocation to hotel and the other real estate sub-sectors are constrained to a maximum level of 10% in total, which reflects the institutional limits typically used on direct real estate exposure. The second was an unconstrained optimization, whereby no maximum allocation is imposed on the real estate sectors. This is utilized as a diagnostic check to determine whether any hotel allocation in the constrained portfolio reflects the sector's risk-return and diversification characteristics rather than just an effect of an imposed allocation. Equivalent constrained and unconstrained asset allocation analyses for the hotel sub-sectors in Japan and Hong Kong were also carried out.

In addition, since the Sharpe ratio and the optimal mixed-asset framework assume approximately normally distributed returns, the distributional characteristics of the de-smoothed return series were also examined. The skewness and kurtosis of each series were calculated and the Jarque–Bera test was used to test the null hypothesis of normality. The results presented in Table 5 indicate that the Asia–Pacific hotel return series did not reject normality at the 5% level (Jarque–Bera p = 0.07), with hotels in Japan (p = 0.94) and Hong Kong (p = 0.77) showing a higher level of consistency with normality. In contrast, other real estate sectors exhibited more significant non-normal distributions, for example office, retail and industrial real estate in Japan and industrial real estate in Asia–Pacific. Overall, the hotel series were among the few real estate series that did not reject normality across all of the markets examined, supporting the use of the mean-variance framework to assess the added value role of the hotel real estate sector in mixed-asset portfolios.

One limitation regarding the methodology of this paper is the inability to use more sophisticated statistical methodologies given that the MSCI Asia–Pacific direct indices are available only annually with 18 de-smoothed annual observations. This includes mean-VaR optimization, lower-partial moments and stochastic spanning approach. Therefore, the mean-variance framework supplemented by the downside risk analysis utilized in this paper is appropriate for the purpose of addressing the three RQs given the annual frequency and limited number of observations.

Table 6 presents the risk-adjusted performance analysis for Asia–Pacific hotels over 2007–2024. The hotel sector saw lower average annual returns (4.59% p.a.) than both industrial real estate (5.88% p.a.) and retail real estate (6.52% p.a.) but outperforming office real estate (4.30% p.a.), stocks (4.17% p.a.) and listed real estate (2.02% p.a.) over this 18-year period. Hotel real estate risk (9.49%) was higher than the risk for the other real estate sectors; with this being expected as hotel risk also includes the hotel business operating dimension, in addition to hotel asset risk. This higher risk for the Asia–Pacific hotel sector was expected (Mansley and Lizieri, 2015). Retail real estate was seen to have the lowest risk of the real estate sectors (6.46%).

Overall, on a risk-adjusted performance basis, the Asia–Pacific hotel sector was the fourth best performing sector (Sharpe ratio = 0.34), exceeded by retail (0.80), industrial (0.68) and office real estate (0.40). The Asia–Pacific hotel sector outperformed Asia–Pacific stocks and listed real estate on a risk-adjusted basis. The hotel sector maintained this performance on a downside-risk-adjusted basis as well (Sortino ratio = 0.53; downside risk = 6.12%), which is consistent with the negative skewness of the hotel return distribution.

Table 7 provides details of the portfolio diversification benefits of Asia–Pacific hotel real estate. The Asia–Pacific hotel sector provided limited diversification benefits with the office (r = 0.72) and retail real estate sectors (r = 0.84) but with noticeable stronger diversification potential with industrial real estate (r = 0.49) and listed real estate (r = 0.51). More significant diversification benefits can be seen with the broader asset classes, such as stocks (r = 0.28) and bonds (r = −0.10). This indicates that the diversification role of Asia–Pacific hotels exists primarily within a mixed-asset portfolio rather than within a real estate-only portfolio. Asia–Pacific listed real estate provided limited diversification benefit with stocks (r = 0.86).

To assess the role of Asia–Pacific hotels in an Asia–Pacific mixed-asset portfolio, Figure 2 presents the optimal portfolio analysis. Panel A constrains all real estate sectors to a maximum 10% allocation while Panel B presents the unconstrained portfolio analysis. In both cases, the optimal portfolio did not allocate to the Asia–Pacific hotel sector across the portfolio risk-return spectrum. In the constrained scenario (Panel A), the real estate allocation was populated by retail real estate alongside bonds in the lower-risk portfolios and stocks at higher risk levels. With the constraint removed (Panel B), retail and industrial real estate dominated the portfolio alongside bonds, with no allocation into hotel observed. This sees that whilst the Asia–Pacific hotel sector is a comparatively viable real estate investment, it is not preferred within a mixed-asset portfolio once the higher risk-adjusted returns of retail and industrial real estate and the high correlations among the direct real estate sectors are taken into consideration.

Table 8 presents the risk-adjusted performance analysis for the Japan hotel sector over 2007–2024. The hotel sector in Japan (5.90% p.a.) was the best performing among the real estate sectors and outperformed the other major asset classes. The risk for hotel real estate (10.36%) was higher than that seen for the other real estate sectors. This saw the hotel sector in Japan as the 3rd best-performing real estate sector on a risk-adjusted basis (Sharpe ratio = 0.54), exceeded by industrial real estate (0.75) and retail real estate (0.58). On a downside-risk-adjusted performance basis however, the Japan hotel sector performed more strongly (Sortino ratio = 1.38), outperformed only by industrial real estate (1.42) as the sector's upside-skewed return profile is not impacted by the downside-risk measure.

The portfolio diversification benefits of Japan hotels are shown in Table 9. The hotel sector showed limited diversification benefits with the other real estate sectors, with clearer portfolio diversification benefits for the hotel sector with the other major asset classes of stocks, listed real estate and bonds. Listed real estate in Japan showed limited portfolio diversification benefits with stocks (r = 0.77).

Figure 3 shows the results of the optimal mixed-asset portfolio analysis for hotel real estate in Japan. Panel A applies the practical 10% constraint to the real estate sectors (similar to previous Asia–Pacific analysis) while Panel B presents the unconstrained portfolio analysis. In the constrained portfolio (Panel A), hotel real estate in Japan figured prominently at its maximum 10% level across most of the portfolio risk-return spectrum, with stocks and bonds making up the remainder of the optimal portfolio. Importantly, the hotel sector continued to feature prominently in the unconstrained portfolio (Panel B), particularly in the higher-risk portfolios, with industrial real estate included in the low to medium risk portfolios. This confirms that the role of the Japan hotel sector in the optimal portfolio reflects its risk-return and diversification characteristics, rather than due to the imposed allocation limit. Overall, this sees the hotel sector in Japan making an important contribution to the optimal mixed-asset portfolio in Japan.

Table 10 presents the risk-adjusted performance analysis for the Hong Kong hotel real estate sector over 2010–2024. It is important to note that the analysis of Hong Kong hotel real estate covers a shorter timeframe than that of Asia–Pacific Japan as MSCI Hong Kong real estate indices are only available from 2010 onwards (after de-smoothing). Also, performance data for Hong Kong industrial real estate are not available from MSCI. The hotel sector in Hong Kong was the worst performing among the real estate sectors (3.90% p.a.), with the risk profile for the hotel sector in Hong Kong (11.54%) being less than that seen for the Hong Kong office real estate sector (13.38%) and retail real estate sector (14.61%). This reflects some of the local volatility issues seen in Hong Kong in recent years (e.g. fuller integration with China) that have impacted the Hong Kong real estate sectors and the future uncertain premium role of Hong Kong as a global financial center for international companies and investors. On a risk-adjusted basis, the Hong Kong hotel sector was the lowest performing of the real estate sectors (Sharpe ratio = 0.34). This low performance can also be seen in the downside-risk-adjusted return analysis (Sortino ratio = 0.44; downside risk = 6.67%), with the hotel sector the worst performing real estate sector and recording the highest downside risk amongst the Hong Kong real estate sectors.

Table 11 highlights the portfolio diversification benefits of the hotel sector in Hong Kong. Limited portfolio diversification benefits are seen for the Hong Kong hotel sector with office real estate (r = 0.61) and retail real estate (r = 0.79), with more diversification benefits seen for the Hong Kong hotel sector with Hong Kong stocks (r = 0.01), listed real estate (r = 0.21) and bonds (r = −0.01). Hong Kong stocks and listed real estate are also seen to be highly correlated (r = 0.85).

The resulting Hong Kong optimal mixed-asset portfolio is shown in Figure 4, with Panel A applying the 10% constraint to the real estate sectors and Panel B showing the unconstrained portfolio analysis. In both the constrained and unconstrained portfolios, the optimal allocation to the real estate sectors was dominated by retail real estate, with no allocation to the Hong Kong hotel sector across the portfolio risk spectrum. Hong Kong stocks and bonds made up the remainder of the constrained optimal portfolio (Panel A). The lack of a hotel allocation, even in the unconstrained scenario, indicates that the Hong Kong hotel sector is not favorable within a mixed-asset optimization. This reflects its characteristics as the worst performing real estate sector in Hong Kong on a risk-adjusted basis.

Overall, this analysis indicates that while the Hong Kong hotel sector offers some diversification benefits with that of stocks and bonds, it does not result in an allocation in the optimal Hong Kong mixed-asset portfolio, reflecting its low risk-adjusted performance relative to the other Hong Kong real estate sectors.

With the strong link between hotel investment/performance and tourism, it is expected that COVID-19 has had a deep impact on the hotel sector. This can be clearly seen in the global capital flows to the hotel sector during COVID-19, and specifically to the Asia–Pacific hotel sector (MSCI/RCA, 2023).

Using 2019 as the pre-COVID-19 base year, this saw global capital flows to hotel real estate drop from $82 B in 2019 to $31 B in 2020. This was a 62% decrease in global hotel transaction volume, being well above that seen for global office real estate volumes (29% decrease), retail real estate volumes (30% decrease) and industrial real estate volumes (3% increase). Similarly for the number of global transactions, the hotel sector dropped by 57%, compared to office (24% decrease), retail (46% decrease) and industrial (17% decrease). Clearly, the impact of COVID-19 was significant and more impactful in the hotel real estate sector than the other real estate sectors globally.

At an Asia–Pacific level over 2019–2020, the impact of COVID-19 on the hotel sector was even more evident. Capital flows to the Asia–Pacific hotel sector fell from $18 B in 2019 to $9 B in 2020; a decrease of 47%. This compares with the lesser decreases in capital flows seen for the Asia–Pacific office sector (12% decrease), retail (33% decrease) and industrial (36% increase). Similarly, the number of hotel transactions in the Asia–Pacific decreased by 33%, compared to the office sector (16% decrease), retail sector (12% decrease) and industrial sector (5% increase). Clearly, the impact of COVID-19 on Asia–Pacific capital flows to the hotel sector were more significant than that seen for the Asia–Pacific office, retail and industrial sectors. This has presented unique challenges for hotel real estate investors globally and in the Asia–Pacific region.

2021 saw a global recovery in global real estate transaction volumes as investors developed investment strategies to move-on from COVID-19; seeing global hotel transaction volumes increase by 134% over 2020–2021, being a larger increase in transaction volumes than that seen in the other real estate sectors (MSCI/RCA, 2023; Newell and Marzuki, 2023). But 2022 brought new risk factors into play, as institutional investors moved on from the impact of COVID-19 to a more uncertain economic environment dominated by risk factors concerning interest rate policy, geopolitical issues and inflation issues (ANREV, 2023). The impact of this economic uncertainty clearly impacted the Asia–Pacific real estate sectors; with 2021 used as the base year to assess this impact on the hotel sector.

Globally, over 2021–2022, this economic uncertainty saw hotel capital transaction volumes fall from $73 B in 2021 to $68 B in 2022, being a decrease of 6% in global hotel transaction activity. This compares with global office transactions (17% decrease), retail transactions (3% decrease) and industrial transactions (15% decrease).

At an Asia–Pacific level, hotel capital transaction volumes increased from $13 B in 2021 to $14 B in 2022; an increase of 4%, but still well below the Asia–Pacific hotel transaction volumes seen before COVID-19. This compares with the Asia–Pacific office sector (12% decrease), retail sector (31% decrease) and industrial sector (27% decrease). Whilst this reflects some degree of resilience by the Asia–Pacific hotel sector and the investors' view of being able to develop effective strategies to cope with this economic uncertainty, the full effect of this economic uncertainty had not been fully factored into the Asia–Pacific real estate markets in 2022, but was seen to be a longer-term scenario over 2023+.

Clearly, the Asia–Pacific real estate markets were affected to different degrees by COVID-19 and the current economic uncertainty, with the Asia–Pacific hotel sector seeing a significant impact in hotel transaction activity in this period of economic uncertainty.

Overall, this empirical analysis has addressed the three research questions, characterizing the risk-adjusted performance, diversification profile and mixed-asset portfolio role of Asia–Pacific hotels for institutional investors. The findings indicate that the investment case for direct hotel real estate is market-specific, with hotels featuring in the optimal portfolio in Japan but not at the Asia–Pacific aggregate level or in Hong Kong. The following sections address the key strategic issues that bear on how, and where, institutional investors might incorporate Asia–Pacific hotels into their real estate portfolios.

Hotels have been shown to be an important real estate sector; with Asia–Pacific hotels having the potential to be an important addition to an institutional investors' real estate portfolio. The real challenge for institutional investors is to determine the most effective manner to deliver this critical agenda. The options available are direct hotel investment, non-listed hotel funds, listed hotel exposure and using hotel fund-of-fund structures.

For the larger institutional investors with significant AUM, non-listed Asia–Pacific hotel funds will be the most effective investment pathway, in a similar manner to how they currently access high-quality real estate exposure in the other real estate sectors in their portfolios. Non-listed hotel funds already have an impressive track-record with hotel portfolios in the Americas, Europe or with global mandates. Importantly, major Asia–Pacific hotel investment managers have already established non-listed Asia–Pacific hotel funds; this includes CapitaLand and Gaw. More experienced hotel investment managers are expected to move into this Asia–Pacific hotel space going forward, as increased demands for high-quality Asia–Pacific hotel exposure are seen. This will see sufficient scale available for high-quality Asia–Pacific hotel funds to be established; funds at the market-specific level (e.g. Japan), regional level (Asia–Pacific) and global levels, where there are also Asia–Pacific hotels as part of these global hotel portfolios. This will add to the already-established high-quality Asia–Pacific real estate portfolios in the office, retail and industrial real estate sectors by leading real estate investment managers, including CBRE, LaSalle, Brookfield, Nuveen, PGIM, GLP and CapitaLand.

While non-listed funds have the disadvantage of a lack of liquidity and limited redemption windows being available, they are preferred by the larger institutional investors due to their access to high-quality hotel assets and experienced professional funds management/asset management teams. Other options for the larger institutional investors include direct hotel ownership (often in JV ownership arrangement with hotel operator) or separate accounts, which are widely used non-listed vehicles in the real estate investment space. In particular, separate accounts are preferred by sovereign wealth funds where they have sufficient scale and seek to ensure control over the hotel asset activities, rather than using a non-listed fund structure that involves multiple stakeholders.

For smaller institutional investors lacking significant AUM for non-listed Asia–Pacific hotel exposure, the most effective pathway to Asia–Pacific hotel exposure will be via the listed pathway. This can be achieved via Asia–Pacific hotel REITs, providing the added benefit of increased liquidity for these smaller institutional investors. Importantly, several countries in the Asia–Pacific region have well-established REIT markets, with a range of hotel REITs available; this includes Japan, Hong Kong and Singapore; see Table 4. Asia–Pacific hotel fund-of-funds will also be an option for the smaller institutional investors; providing opportunities for diversified Asia–Pacific hotel exposure across a range of non-listed Asia–Pacific hotel funds, that these smaller institutional investors would not be able to otherwise achieve unless via this pooled format.

So, overall, this sees distinct pathways for the full range of institutional investors to meet their strategic requirements to achieve effective exposure to high-quality Asia–Pacific hotel assets in both the developed and emerging Asia–Pacific markets. Risk factors are still present (e.g. fear of recession, weaker consumption), but these risk factors can be managed via experienced hotel asset management teams and diversified Asia–Pacific hotel portfolios.

A further advance required to facilitate evidence-based decision-making is the establishment of additional MSCI Asia–Pacific hotel real estate indices. Whilst currently available for Japan and Hong Kong, they are also required for the other Asia–Pacific hotel markets. Hotel sub-sector indices are also required, with the frequency of these Asia–Pacific indices needing to be quarterly instead of the current annual performance indices. This is important as future research will be able to apply more sophisticated methodologies and extend the analysis to a wider range of Asia–Pacific hotel markets and sub-sectors. This would support deeper, evidence-based decision-making for institutional investors in the Asia–Pacific hotel sector.

The major real estate investment managers have already established high-quality Asia–Pacific real estate funds in the office, retail and industrial spaces; this includes CBRE, LaSalle, Brookfield, Nuveen, PGIM, GLP and CapitaLand. Overall, these hotel activities should see positive pathways for the future development of Asia–Pacific hotels and their effective integration into institutional investor portfolios as an important real estate sector. Given the nature of the hotel real estate asset class amongst the real estate sectors, this is likely to see a priority given to hotel-specific funds rather than diversified real estate funds. The issue is then whether the Asia–Pacific hotel exposure should be most effectively achieved via market-specific hotel exposure or via regional Asia–Pacific exposure or as part of a global hotel investment mandate. It is expected that additional hotel investment products will be developed to address these hotel investment strategies by institutional investors.

The Asia–Pacific real estate sectors of office, retail and industrial real estate have well-established profiles among the leading real estate investment managers. This paper has provided the first assessment of the risk-adjusted performance, portfolio diversification profile and mixed-asset portfolio role of Asia–Pacific hotels, as part of an institutional investor's real estate portfolio, within the context of the Asia–Pacific as dynamic real estate markets. The impact of COVID-19 on the Asia–Pacific hotel sector was also articulated, with real estate markets having now moved into a post-COVID-19 environment. The overall findings indicate that hotel real estate is a higher risk, moderate return sector with diversification benefits being seen primarily with stocks and bonds. Further, hotel real estate's role in the optimal mixed-asset portfolio is market-specific, with its added value role observed in Japan but not at the aggregate Asia–Pacific level or in Hong Kong. Whilst past performance is no guarantee of future performance, this paper has identified where and on what basis, Asia–Pacific hotels may warrant inclusion in institutional real estate portfolios, together with the pathways available for investors seeking such exposure. Importantly, the tourism dynamics in the Asia–Pacific region are quite different to other major regions: e.g. United States and Europe; embracing both local and international tourism opportunities. This sees a diverse range of cultures, religions, environments and dynamic cities (e.g. Tokyo, Singapore, Hong Kong, Beijing, Shanghai, Kuala Lumpur and Bangkok) across both developed and emerging real estate markets. These tourism dynamics flow directly into the importance of hotels as a real estate sector in the tourism space. The expected continued growth of the Asia–Pacific markets and their increased tourism potential suggest that Asia–Pacific hotels will remain a sector of ongoing institutional investor interest, with a unique investment case across individual markets.