Hotels with brands sell faster, fetch higher price than other hotels: Study

In a murky hotel market, brand affiliation emerges as a beacon for investors, illuminating the path to higher returns and a smoother journey

Brand affiliation represents a signal about the future operating performance of a hotel that reduces information asymmetries between hotel buyers and sellers, says a study.

However, information asymmetries vary across property-level and locational characteristics of hotels. The research hypothesizes that hotel brand affiliation as a signal is most valuable to investors when information asymmetries are higher due to hotel characteristics such as a lower-tier hotel class, suburban location, or poorer building condition.

The study has been jointly conducted by Peng Liu, SC Johnson College of Business, Ithaca (USA), Julia Freybote from The School of Business, Portland State University and Prashant Das, Associate Professor, IIM (A).

Using a sample of 23,323 hotel transactions from 1986 to 2021, the study provides evidence that branded hotels with characteristics indicating higher information asymmetries achieve a higher transaction price and shorter marketing time than similar independent hotels. Transaction price and marketing time do not differ between branded and independent hotels with characteristics indicating lower information asymmetries. Talking to Bizz Buzz, Julia Freybote said, “Commercial real estate investors are not likely to have all the information for properties they are considering buying.”

The affiliation of a hotel with a hotel brand can help these buyers in their decision-making as it signals information about a hotel’s future operating performance, particularly for hotels of a lower class, suburban location or lower building condition, for which less information is usually available, she said.

The information asymmetry theory postulates that parties to a transaction have different levels of information resulting in power imbalances and inefficiencies. Information asymmetries represent a challenge to hotel investors as sellers have an informational advantage over buyers about operational, property-level, and locational characteristics of hotels that affect future cash flows for these assets. Compared to other property types, the absence of long-term leases in hotels makes information asymmetries between buyers and sellers even more pronounced. Signalling allows to reduce information asymmetries between transacting parties as it provides information to buyers about the quality of a product, service, or asset. Branding has been found to represent a valuable signal in the context of, amongst others, consumer goods, health care, investor relations, IPOs, and recruitment.

Das says, “So far, branding has mostly been a topic of operating cash flows in hotels. We relate branding to real estate markets.”

Our study also shows that high quality hotels can become their own brands whereas others go for franchises of brand parent companies, he added.

The study argues that brand affiliation represents a signal to investors about the future cash flows of a hotel considering that it has been found to positively impact hotel operational performance

Considering that hotel brand affiliation signals information about future operating performance, it is able to reduce information asymmetries between buyers and sellers. However, information asymmetries have been found to vary across property and location characteristics, and the study expects brand affiliation as a signal to be most important for hotels with characteristics indicating higher information asymmetries such as hotel class, location and building condition.

In the report’s empirical investigation, it assesses the importance of brand affiliation as a signal about future operating performance for hotel investors using two measures: transaction prices and marketing time. If hotel brand is a valuable signal to investors for assets with higher information asymmetries, it expects them to be willing to pay a premium for branded hotels of a lower class, suburban location, or poorer building condition compared to similar independent hotels.

Previous empirical studies on the relation between brand affiliation and transaction prices find that hotel brand is an essential predictor of hotel transaction prices, but the effects vary across hotel segments and brands. Dick investigates determinants for hotel transaction prices across branded and independent hotels in the luxury and upper-upscale segments. The author finds that RevPAR significantly predicts asset prices while other metrics such as ADR and occupancy or geographic location do not. A study by Das shows that most brands have an insignificant association with hotel asset prices. However, they still find instances where brands have a positive or negative association with hotel asset prices. One explanation for the ambiguous results of these previous studies, which we use as a starting point for our research, is that the importance of brand affiliation as a signal to investors varies across hotel characteristics implying different levels of information asymmetries.

Furthermore, branded hotels with location- and building- characteristics indicating higher information asymmetries are expected to have a shorter marketing time than similar independent hotels. Hereby, marketing time represents the duration in months, if not years, until a property is sold. Measured as time between the listing of a property and closing of the sale, marketing time represents a measure of liquidity risk and disequilibrium in real estate markets. It is affected by the desirability of an asset to investors, economic and real estate market conditions as well as other factors such as the time needed to conduct due diligence, contracting, and secure financing.

Hotel asset markets are highly segmented, informationally inefficient, and heterogeneous, which results in information asymmetries between hotel buyers and sellers. Signalling allows to reduce information asymmetries between parties, and branding represents a signalling strategy.