STRATEGIC ASSET ALLOCATION (SAA) OF HOTEL INVESTMENTS : ASIA PACIFIC HOTEL LONG-TERM STRATEGIC PORTFOLIO INCORPORATING THE ANALYTIC HIERARCHY PROCESS (AHP)

Abstract

This research study aims to construct a Strategic Asset Allocation (SAA) portfolio model for long-term hotel investments in the Asia Pacific region. The SAA model is conceptualized under the Analytic Hierarchy Process (AHP) technique, thus forming the SAA-AHP Asia Pacific hotel portfolio. The hotel portfolio consists of six countries with well developed hotel markets: Hong Kong, Singapore, Japan, Taiwan, Malaysia and South Korea. As the conceptual SAA-AHP portfolio model is a distributional free model, it has the capability of incorporating both quantitative and qualitative investment factors essential for international hotel investment. Investment factors used to evaluate and construct the SAA-AHP hotel model comprise: the hotel risk-adjusted total returns, the wealth-relative level, currency stability, real estate transparency and the forecasted GDP per Capita of respective countries. The research design is constructed such that each investment factor is subject to a pair-wise evaluation process deploying the AHP linguistic scale, and augmented by consistency checks such that the consistency ratio is ≤ 0.10. Although the nature of a long-term SAA portfolio is “forward looking”, data limitation may well allow the AHP model to be defined in the light of ex post and existing data. Three resulting types of the SAA hotel portfolio models are conceptualized in accordance with the various types of long-term international hotel investment objectives: “Core SAA-AHP portfolio”, “Opportunistic SAA-AHP portfolio” and an “Intuitive (naively diversified) SAA portfolio”, which is solely based on the forecasted country’s GDP per capita. Empirical results reveal that the three portfolio allocation weights vary under different long-term investment objectives. The Pearson’s correlation test shows that there are inherent diversification benefits among the country’s hotel total returns. Using ex-post annualised 10-year hotel returns as a proxy, the three SAA portfolios show sustainable annualised hotel total returns.