Identifying individual hotels that are underpriced (expected abnormal or excess risk-adjusted returns) in an economic sense is difficult to achieve. Unless a hotel investor has access to information that is not widely known or is contemplating the purchase of a hotel where the information set differs significantly from that used for market valuations, it is unlikely that an investor will be able to consistently acquire underpriced hotels.
Without a formal framework of market equilibrium, it is doubtful whether investors can consistently identify underpriced hotels, other than by chance! Merely placing bets on hotels which are expected to rise in value in the future is no guarantee of abnormal returns. Hotels which are “expensive” or “cheap,” say nothing about whether they are underpriced or overpriced.
A good investment strategy, should, therefore, try to improve the probability of achieving abnormal returns in all phases of a market cycle. A hotel which is cheap does not necessarily imply that it is underpriced. This distinction is important as the terms “underpriced” and “cheap” may well be confused in the marketplace. Although a cheap hotel may well be worth buying, any subsequent increase in value may only offer compensation for its risk and not contribute to abnormal performance.
By using an Equilibrium Hotel Pricing Model hotel investors can identify underpriced hotel assets throughout the U.S. as illustrated in the example below. The model is a model of the capital market, not of the space market.