Why might portfolios of hotels be worth more than the sum of what each individual hotel in the portfolio is worth? For the purpose of this article, the author developed a hypothesis based on three advantages that a portfolio buyer is assumed to have:
Economies of Scale – Under the portfolio-sale scenario, a portfolio buyer may benefit from economies of scale associated with transaction costs and management fees due to increased negotiating power.
Geographic Diversification – Portfolio investors may perceive reduced risk for an investment based on cross-collateralization of multiple properties in various locations due to the geographic diversification of these properties. A negative economic trend or valuation factor occurring in one geographic location may not be repeated in all geographic locations represented by the portfolio.
Physical Condition Diversification – Portfolio investors may also perceive reduced risk for an investment based on a diverse range of properties that have different ages, brands, designs, and physical condition characteristics. Customer preferences can change and aspects of one property’s age, branding, design, or physical condition could represent physical or functional obsolescence; however, the subject portfolio of properties provides a degree of diversification to protect an investor against such risks.
If these assumptions prove true, portfolio-sale hotel buyers could afford to outbid individual hotel buyers, all else being equal. As a result, portfolio values should be higher than comparable individual-sale hotel values with similar performance. Therefore, our hypothesis can be summarized as the following:
Hypothesis: If RevPAR of Portfolio Sale = RevPAR of Individual Sale
Then Portfolio Sale Price > Individual Sale Price
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