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This dissertation, The Performance and Inflation-hedging Characteristics of Hotel Investment in Hong Kong by 吳美玲, Mei-ling, Ng, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: Abstract of the thesis entitled The Performance and Inflation-Hedging Characteristics of Hotel Investment in Hong Kong Submitted by Ng Mei Ling for the degree of Doctor of Philosophy at the University of Hong Kong in March 2003 Hotels are income-producing, investment properties that are rarely traded on the market. With the limited transaction data available in the hotel sector, appraisers generally find it difficult to produce a reliable hotel asset price index, which is essential for assessing the performance of direct hotel investment. The most common valuation techniques used by appraisers for hotel valuation is the income capitalization approach. Recently, there have been various valuation-based hotel asset price indices available in the U.S. However, the time series of these indices are too short to reveal the performance of hotel investments. The reliability of these indices is also questionable due to the lack of hotel transaction data. Neither is this type of index available in Hong Kong. One of the objectives of this dissertation is to construct a hotel asset price index which is reliable and sufficiently long for the assessment of the performance of hotel investments in Hong Kong. Previous studies suggest that there are linkages between direct and indirect property investment. This provides the basis for the method of hotel asset price index construction adopted in this study. This method involves extracting information from indirect hotel investment and other publicly available financial data to construct a hotel asset price index. In very simple terms, the hotel asset price is constructed by stripping off the stock market effect from the de-geared indirect hotel investment returns. The reliability of this index is tested by examining whether it reflects changes in hotel market fundamentals. The results of this study suggest that the hotel market demand and supply variables are found to have a significant impact on the Hotel Asset Price Index, which provides evidence for the reliability of the index in reflecting the performance of hotel investments. Analysis based on the Hotel Asset Price Index constructed in this study suggests that during the period of observation (1980-2000), direct hotel investment had the lowest average return, but a relatively high volatility amongst all property types. The risk-adjusted return is the lowest among direct property and stock. However, returns on direct hotel investment show very little correlation with other property returns and returns on the stock market. This means that there is a potential diversification benefit by including direct hotel investment in the portfolio. Hotels are often considered an effective inflation-hedging investment among all property assets as room rates can be adjusted on a daily basis. Since hotel leases are very short (typically a few days) compared with other property types, a hotel investment is considered to be especially good for hedging against unexpected inflation. On the other hand, hotel assets are illiquid, which makes it difficult for hotel asset prices to respond to changes in inflation expectations. Fama and Schwert's framework is employed, together with co-integration tests and error correction models, to investigate the ability of direct hotel investment, as well as other property investments, to hedge against expected and unexpected inflation in both short and long

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