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The impact of foreign exchange volatility on the financial performance of hotel real estate private equity investments in Switzerland


Academic year: 2019

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Faculty of Business and Law





Doctoral Dissertation Submitted by

Casper Studer, BBA(Hons) & MAS REM

In Partial Fulfilment of the Award

Doctor of Business Administration



The shockwaves that hit financial markets amid the dawn of the global financial

crisis in late 2007 did not only send several equity markets into free-fall, but

simultaneously led to an increased level of volatility in global currency markets. One

of the main drivers of this volatility is believed to have been the product of the

so-called flight to safety, meaning that a large amount of capital was being shifted into

safe haven currencies. Given that the Swiss Franc belongs to the very inner circle of

these safe haven currencies, its value against several major international currencies

strengthened considerably. In fact, currencies such as the British Pound and the Euro

lost between 30-40% of their value against the Swiss Franc between 2007 and 2009.

As a natural consequence, Switzerland – although stable as an economy in itself –

was suddenly being exposed to severe economic pressures due to the mounting

strength of its currency versus several other currencies.

Given the structure, seasonality and dynamics of Switzerland’s hotel industry, the

risks of a strengthening currency and its potential negative implications for the

national hotel industry were soon conceived as a latent threat to its wellbeing. In fact,

it was not long until economic evidence came to suggest that a strong national

currency would not only lead to a reduction in demand for discretionary spending

among visiting guests, but naturally, also diminishing hotel revenue. Therefore, from

a hotel investor’s point of view, it became obvious that extraordinary measures

would be required in order to decrease, or at best, eliminate the vulnerability of hotel

investment(s) to negative economic exposure. Considering the vast heterogeneity of

Switzerland’s hotel industry, this study has found particular interest in identifying

whether the characteristics of an individual property or a set of properties reduce or

offset exposure to movements in certain currencies. More specifically, the study

focused on measuring to which extent Hotel Real Estate Private Equity (HREPE)

investors are able to reduce risk to Foreign Exchange (FX) exposure while at the

same time enhancing the Financial Performance (FP) of their investments.

The analysis and discussion that has taken place in this study has been subject to an

examination of financial and operational data from 76 resort properties located in 5

major tourism regions. Due to certain limitations with regards to data availability,

solely the performance of 3 and 4 star properties has been taken into consideration.

The timeframe in which the study takes place has been specified to be between

2007-2011 and the currency samples have been selected based on national tourism

demand: US Dollar, British Pound, Chinese Yuan, Russian Ruble, Indian Rupee,

Japanese Yen, Euro. Overall, one of the main aims of the study has been to measure

the relationship and impact movements in each of the above currencies have had on

the Financial Performance of the selected sample of properties between 2007-2011.

It has done so by applying a quantitative research approach.


even offset once active Financial Performance Management tools as well as Yield

and Revenue Management (YRM) systems have been put in place. It has also been

found that the exposure to certain currencies may be reduced according to the supply

structure of a property and the reduction in certain costs. Moreover, the study

suggests that Hotel Real Estate Private Equity investors have the ability to reduce

Foreign Exchange exposure by allocating their capital into distinct individual

properties or a portfolio of properties. Additionally, the study suggests that investors

have the ability to hedge their currency exposure and at the same time profit from the

upside potential a particular currency or set of currencies have to offer.


Certification of Dissertation

I declare that the work presented in the thesis is, to the best of my knowledge and

belief, original and my own work, except as acknowledged in the text, and that the

material has not been submitted, either in whole or in part, for a degree at this or any

other University.



Signature of Casper Studer





Signature of Dr. Peter Phillips




Signature of Dr. Max Gsell




I dedicate this work to my close circle of family members, especially to my parents,

Barbara and Andrew.

“Never give up on a dream just because of the time it will take to accomplish it. The

time will pass anyway.”



I would like to take this opportunity to express my infinite gratitude to my principal

supervisor, Dr. Peter Phillips, University of Southern Queensland, Australia, for

providing me with the best imaginable support, motivation and advice one could

wish for throughout the entire journey of this research project.

Special thanks also to my academic associate supervisors Dr. Taiji Watanabe,

University of Southern Queensland, and Dr. Max Gsell, for sharing their valuable

insight, experience and wisdom.

Further, I extend my praises to my employer, Dr. Hans Ueli Keller, for allowing me

to take on this challenge whilst being employed in his company. I am also greatly

indebted to Philippe Pasche and Pascal Leresche of the Swiss Society for Hotel

Credit, as well as Steve Hood and Duane Vinson of Smith Travel Research for their

trust and support.

I am especially grateful to my parents, Andrew and Barbara, for their constant love

and encouragement. Without them, this piece of work would have – by all means –

never come to life.

Zürich, 10 September 2013

Casper Studer



Table of Contents


1.1 Introduction ... 1

1.2 Overview of the Chapter ... 2

1.3 Background of the Research ... 2

1.4 Research Problem ... 2

1.4.1 Research Objective ... 2

1.4.2 Research Question ... 3

1.4.3 Hypotheses ... 3

1.5 Methodology ... 3

1.6 Outline of the Study ... 4

1.7 Definitions ... 4

1.7.1 Hotel Real Estate Private Equity ... 4

1.7.2 Financial Performance Management ... 4

1.7.3 Foreign Exchange Rates ... 4

1.8 Delimination and Scope of Key Assumptions ... 5

1.9 Justification and Contribution of the Research ... 5

1.10 Conclusions ... 5


2.1 Introduction ... 6

2.2 The History of Hotel Real Estate Private Equity ... 6

2.3 Terminology and Focus of Hotel Real Estate Private Equity Investing ... 7

2.4 Legal Structure of Hotel Real Estate Private Equity Investing ... 8

2.5 Characteristics of Hotel Real Estate Private Equity Investing ... 9

2.6 Hotel Real Estate Private Equity in Switzerland ... 12

2.7 Characteristics of Hotels ... 12

2.8 Overview of the Swiss Hotel Market ... 13

2.9 Hotels and External Impacts ... 14

2.10 Foreign Exchange ... 16

2.10.1 Theoretical and Practical Concepts of Foreign Exchange ... 17

2.10.2 Foreign Exchange Impacts on the Property/Company Level ... 18

2.10.3 Foreign Exchange Volatility vs. the Swiss Franc ... 19

2.10.4 Foreign Exchange Hedging ... 21

2.11 Financial Performance Management ... 21

2.11.1 Hotel Performance Management ... 24

2.11.2 Yield and Revenue Management ... 27

2.11.3 Information Technology and Financial Performance ... 27

2.11.4 Benchmarking ... 29

2.12 Conclusion ... 30


3.1 Introduction ... 31

3.2 Research Paradigm ... 31

3.3 Research Design ... 32

3.4 Research Methodology ... 33

3.5 Sampling Design, Data Collection ... 33

3.5.1 Sample Selection and Sample Size ... 33


3.5.3 Foreign Exchange ... 35

3.5.4 Hotels ... 36

3.6 Data Measurement Variables ... 37

3.6.1 GOP Beta Values ... 37

3.6.2 Data Measurement Codes ... 37

3.7 Data Measurement Process ... 40

3.7.1 Foreign Exchange ... 40

3.7.2 Financial Performance ... 42

3.8 Data Analysis Techniques ... 43

3.9 Data Validity and Reliability ... 44

3.9.1 Data Validity ... 44

3.9.2 Internal Validity ... 45

3.9.3 External Validity ... 46

3.9.4 Reliability ... 46

3.10 Limitations ... 47

3.10.1 Limitations of Dependent Variables ... 47

3.10.2 Limitations of Independent Variables ... 48

3.11 Conclusion ... 48


4.1 Introduction ... 49

4.2 Data Collection and Consolidation Process ... 49

4.2.1 Hotel Data ... 49

4.2.2 Currency Data ... 50

4.2.3 Description of Consolidated Data ... 51

4.3 Identification of Missing Values ... 52

4.4 Year on Year Operational Developments ... 52

4.4.1 Cost of Goods Sold ... 53

4.4.2 Personnel Expenditure ... 54

4.4.3 Marketing Costs ... 55

4.4.4 Maintenance Costs ... 56

4.4.5 Gross Profit Margin ... 57

4.4.6 Revenue Per Available Room ... 58

4.5 Model 1: Results of Gross Operating Profit to Foreign Exchange Volatility .... 59

4.5.1 Results 4 Star Hotels Canton Graubünden ... 60

4.5.2 Results 3 Star Hotels Canton Graubünden ... 60

4.5.3 Results 4 Star Hotels Canton Wallis ... 61

4.5.4 Results 3 Star Hotels Canton Wallis ... 62

4.5.5 Results 4 Star Hotels Canton Bern ... 63

4.5.6 Results 3 Star Hotels Canton Bern ... 64

4.5.7 Results 3 Star Hotels Canton Ticino ... 65

4.5.8 Results 4 Star Hotels Central Switzerland ... 65

4.5.9 Results 3 Star Hotels Central Switzerland ... 66

4.6 Model 2: Linear Regression Analysis of Output from Model 1 ... 68

4.6.1 Output Model 2: US Dollar ... 69

4.6.2 Output Model 2: Japanese Yen ... 73

4.6.3 Output Model 2: Indian Rupee ... 76

4.6.4 Output Model 2: Euro ... 79

4.6.5 Output Model 2: British Pound ... 82


4.6.7 Output Model 2: Chinese Yuan ... 87

4.7 Model 2: Analysis of Histograms/P-P Plots ... 89

4.7.1 Analysis Output Histograms ... 89

4.7.2 Analysis Output P-P Plots ... 90

4.8 Conclusion ... 90


5.1 Introduction ... 91

5.2 Practical Matrix Application of Model 1 ... 92

5.2.1 Practical Matrix Application of Model 2 ... 94

5.3 Linkages to Modern Portfolio Theory ... 97

5.3.1 Exposure Model JPY ... 99

5.3.2 Exposure Model INR ... 100

5.3.3 Exposure Model EUR ... 102

5.3.4 Exposure Model GBP ... 103

5.3.5 Exposure Model RUB ... 104

5.3.6 Exposure Model CNY ... 105

5.3.7 Exposure Model USD ... 107

5.4 Conclusion ... 108


6.1 Introduction ... 109

6.2 Summary of Main Literature and Discussion Points ... 109

6.3 Summary of Main Results ... 110

6.3.1 Summary of Main Results for Model 1 ... 111

6.3.2 Summary of Main Results for Model 2 ... 112

6.3.3 Summary of Practical Application ... 114

6.3.4 Validation of Main Hypotheses ... 114

6.4 Implications for Sector and Practice ... 115

6.4.1 Risk Reduction ... 115

6.4.2 Cost/Revenue Management ... 115

6.4.3 Implications for Hotel Real Estate Private Equity Investing ... 116

6.5 Limitations and Suggestions for Future Research ... 117

6.6 Conclusion ... 118



Appendix A Hotel Values Europe 2002-2011 ... 131

Appendix B

Currency Developments versus the Swiss Franc ... 132

Appendix C Balanced Scorecard Model ... 134

Appendix D Du Pont Model ... 134

Appendix E

Case Processing Summary ... 135

Appendix F

Regression Results Model 1 ... 136

Appendix G

Comparison of Average Daily Rates ... 151

Appendix H

Tourism Arrivals ... 152

Appendix I

Output Homo-/Heteroscedasticity ... 153

Appendix J

Output Histograms ... 155

Appendix K

Output P-P Plots ... 157


List of Figures and Tables


Figure 1 Sectoral Focus of Private Equity Investing ... 7

Figure 2 Limited Partnership Investment Structure ... 9

Figure 3 Private Equity Business Cycle ... 10

Figure 4 Manager Style Framework ... 11

Figure 5 Diamond of Competitive Advantage ... 13

Figure 6 The Impacts of Global Crises on Tourism ... 15

Figure 7 Hotel Demand Switzerland 1990-2014 ... 15

Figure 8 Influences on Price ... 17

Figure 9 External vs. Internal Forces ... 25

Figure 10 Typical Hotel PMS / POS System ... 28

Figure 11 Data Input / Output Flow ... 34

Figure 12 Selected Cantons ... 36

Figure 13 Static vs. Dynamic Variables ... 40

Figure 14 Cost of Goods Sold ... 52

Figure 15 Personnel Expenditure ... 54

Figure 16 Marketing Costs ... 55

Figure 17 Maintenance Costs ... 56

Figure 18 Gross Profit Margin ... 57

Figure 19 Revenue Per Available Room ... 58

Figure 20 Foreign Exchange Exposure Control Sheet/Matrix ... 93

Figure 21 Foreign Exchange Exposure on Variable Basis ... 96

Figure 22 Foreign Exchange Exposure Model Japanese Yen ... 99

Figure 23 Foreign Exchange Exposure Model Indian Rupee ... 100

Figure 24 Foreign Exchange Exposure Model Euro ... 102

Figure 25 Foreign Exchange Exposure Model British Pound ... 103

Figure 26 Foreign Exchange Exposure Model Russian Ruble ... 104

Figure 27 Foreign Exchange Exposure Model Chinese Yuan ... 105

Figure 28 Foreign Exchange Exposure Model US Dollar ... 107


Table 1 Geographic Origin of Hotel Guests ... 35

Table 2 Sample Data Measurement Variables ... 38

Table 3 Consolidated Dataset ... 51

Table 4 Results Model 1 ... 67

Table 5 Output Model 2: US Dollar ... 72

Table 6 Output Model 2: Japanese Yen ... 75

Table 7 Output Model 2: Indian Rupee ... 78

Table 8 Output Model 2: Euro ... 81

Table 9 Output Model 2: British Pound ... 83

Table 10 Output Model 2: Russian Ruble ... 86

Table 11 Output Model 2: Chinese Yuan ... 88

Table 12 Foreign Exchange Exposure Barometer ... 92

Table 13 Foreign Exchange Exposure Sample Matrix ... 95


List of Abbreviations


American Research and Development Corporation


Canton Bern


Swiss National Bureau of Statistics


Capitalisation Rate


Swiss Franc


Confidence Interval


Chinese Yuan


Cost of Goods Sold


Deutsche Mark


Days Open




Economic Value Added


Financial Performance


Financial Performance Management


Foreign Exchange


Generalized Autoregressive Conditional Heteroscedasticity


British Pound


Gross Domestic Product


Global Financial Crisis


Gross Operating Profit


Gross Operating Profit Per Available Room


General Partner


Gross Profit Margin


Canton Graubünden


Hotel Rating


Hotel Real Estate Private Equity


Indian Rupee


Internal Rate of Return


Information Technology


Swiss Capital Investment Act


Koenker-Basset Test


Key Performance Metrics


Law of One Price


Limited Partnership


Maintenance Costs


Marketing Costs


Macro Location


Modern Portfolio Theory


Net Profit Margin


Private Equity


Personnel Expenditure


Property Management Systems


Point of Sales Systems


Real Estate Private Equity


Revenue Per Available Customer


Revenue Per Available Room


Return on Assets



Return on Invested Capital


Russian Ruble


State Secretariat of Economic Affairs


Standard Deviation


Standard Error of Estimates


Swiss Society for Hotel Credit


Swiss Hotel Association


Swiss National Bank


Canton Ticino


US Dollar


Venture Capital


Variance Inflation Factor


Canton Wallis


1. Introduction

1.1 Introduction

Since the breakdown of the Bretton Woods system in the early 1970’s, the volatility

of currencies and its associated risks have become an increasingly important

component of financial management (Muller & Verschoor 2006). Foreign Exchange

(FX) volatility is known to have a strong effect on business sectors and firms with

national and international exposure. In the light of their often-complex operational

structures and broad international client base, hotels are considered to be particularly

vulnerable to movements in FX. Recent FX movements against the Swiss Franc have

not only impacted the demand for hotel bookings, but likewise the cost structure of a

hotel/investment. According to Choi & Prasad (1995) FX fluctuations can affect

operating cash flows and Financial Performance (FP) of a firm or investment


Whilst filled with opportunities, Hotel Real Estate Private Equity (HREPE) investing

also bears potential downside risks. Due to its late introduction into the Swiss market

in 2007, HREPE is still in its early infancy, especially in comparison to mature

HREPE markets like the U.S and U.K. This study aims to identify the FX and

operational/financial risks associated with HREPE investing in Switzerland. It shall

also provide insight into how FP can be managed on a property specific level during

times of significant exposure to certain currencies. As discussed in the subsequent

sections, there is a vast amount of literature to be found in the area of FX and

Financial Performance Management (FPM), HREPE on the other hand, is a topic

which has not yet been given as much academic attention, particularly not in the

German speaking parts of Europe.

This study aims to identify and analyse the most significant factors affecting the

financial success of the underlying assets of HREPE investments in Switzerland. It

therefore tracks (back) FX volatility of the 7 most influential currencies against the

Gross Operating Profit (GOP) of a selected set of hotel properties between

2007-2011. This process allows an in-depth investigation of the FX exposure of HREPE

investments. The data that is captured in this study is linked to a selected set of key

operational and financial features, therefore allowing for identification of the

relationship between movements in FX and the FP of the associated sample of hotel


1.2 Overview of the Chapter


1.3 Background of the Research

The surge in the Swiss Franc against most of its global peers is believed to be a result

of the financial turmoil, which erupted in late 2007. Whilst the relatively safe and

stable characteristics of the Swiss Franc (CHF) have benefited foreign investors

seeking currency refuge, its strength has become a burden for many national

industries. One strongly affected industry has been tourism. This study focuses on a

sub-sector of the tourism industry, the hotel sector. Rather than limiting the study to

measuring only the external effects of FX volatility on a hotel property or a portfolio

of hotel properties, the research also identifies and measures the consequences of FX

volatility on GOP. Additionally, the relationship between FP and FX exposure of

operational and financial variables of hotel assets are being identified. This approach

shall guarantee that internal as well as external forces affecting the financial success

of a hotel’s operation during times of significant currency exposure can be


Given the nature of financial volatility within the hospitality industry, hotel

investments generally have the reputation of being rather risky compared to other

asset classes within the Swiss investment market. According to Frehse (2007) hotel

investments are far more complex than ordinary real estate investments. The same

author argues that there is still a large gap between theoretical and practical

knowledge within the sector. The mixture between exposure to FX volatility and the

complexity of investing into hotels makes this niche market – albeit highly risky –

considerably lucrative for investors. It is this mixture between risk and opportunity

of HREPE investing that makes FX exposure play such a vital role in terms of capital


This is certainly also the case because the financial revenue of a hotel/investment is

often strongly dependent on the geographic background of the client base it is

exposed to as well as their spending behaviour. Furthermore, it is also the cost

structure of a hotel that is exposed to FX volatility (i.e. via imported products).

Given the economic environment and the financial forces that national hotel

investments are exposed to, this study will contribute timely information helping to

advance the understanding of the relationship between FX exposure and FP of

HREPE investments. Its aim is also to bring forward solutions that will assist hotel

investors to actively manage (hedge) exposure to movements in FX whilst at the

same time benefiting from certain upside potentials FX movements offer.

1.4 Research Problem

1.4.1 Research Objective


1.4.2 Research Question

As mentioned previously, hotels are known to have a particularly strong exposure to

economic events that are often and in a large part reflected in FX volatility. Since

HREPE investments are multi facetted, this study focuses solely on what are

believed to be the most significant factors affecting a hotel’s FP based on movements

in FX. While discussions among politicians, the Swiss National Bank, tourism

officials and hotel-/investment managers regarding the impact of the strong Swiss

Franc on the profitability and wellbeing of the national hotel industry have

intensified since late 2007, this leads us to the following research question:

“To what extent do Foreign Exchange movements affect the Financial

Performance of underlying assets of Hotel Real Estate Private Equity investments

in Switzerland?”

1.4.3 Hypotheses

The stated research question provides the basis of the main research hypotheses,

which are as follows:

Hypothesis 1

The FP of a hotel investment is largely dependent on exposure to movements in FX.

Hypothesis 2

The FX exposure of HREPE investments is determined by various factors such as:

property location, cost and profit structures of hotel assets.

Hypothesis 3

FX exposure of HREPE investments can be reduced or eliminated when putting

appropriate FPM systems in place.

1.5 Methodology


1.6 Outline of the Study

The structure of this dissertation is based on the nature of scientific inquiry, which

suggests the following five steps as being typical for its character (Ary et al. 2010):


Identification of a problem


Statement of the problem


Formulation of hypothesis


Prediction of consequences


Testing of hypothesis

In particular, this study aims to explain phenomena by collecting numerical data that

are analysed using mathematically based models such as described by Aliaga and

Gunderson (in Mujis 2011). The study is based on a six-chapter structure, which

covers all of the relevant topics of discussion.

1.7 Definitions

This section reveals the most frequently used definitions in the chapters to come. A

brief introduction and description of each definition is provided, aiming to facilitate a

smooth transition into the main chapters of this study.

1.7.1 Hotel Real Estate Private Equity

The practice of Private Equity (PE) focuses on creating value through the means of

strategic capital allocation and efficient operational and strategic management of a

single asset or a company (Roettke & Rebitzer 2006). HREPE investing targets the

identification and acquisition of underperforming hotel properties or portfolios with

the goal of turning them into more profitable assets (Frehse 2007).

1.7.2 Financial Performance Management


Performance is defined as the potential for future successful

implementation of actions in order to reach the objectives and targets and to avoid

unnecessary financial losses (Lebas 1995). Whether the activities of an enterprise are

financially efficient or not has direct influence on profitability, thereby potentially

threatening its survival (Feng & Wang 2000). There are several different approaches

towards measuring the FP of a business. The approaches used in the context of this

study will be defined in the subsequent sections.

1.7.3 Foreign Exchange Rates


significance of FX rates in relation to this study.

1.8 Delimination and Scope of Key Assumptions

This study dominantly focuses on resort hotels based in the German speaking part of

Switzerland. The core analysis and discussion that takes place in this dissertation is

built on the quantitative analysis of 76 individual properties based in 5 distinct

geographic regions and ranked within a 3-4 star hotel rating. FX rates have been

retrieved from the 7 most relevant and influential currencies based on national hotel

demand and extracted from the same source on a quarterly basis. All of the data

samples are based on the same time frame that has been specified to be 2007-2011.

The study does not take any political, social or environmental aspects into

consideration and although it makes reference to certain macroeconomic factors, it

does not measure for any such influences in relation to movements in FX and the FP

of HREPE investments.

Key assumptions of this study are that the national hotel market is highly

heterogeneous and that guest demand may be subject to qualitative (experience) as

well as quantitative (price) preferences. Geographic attributes are also believed to

influence guest demand. Consequently, the study presumes that both the income and

cost structure of a hotel is vastly dependent on overall global economic stability and

movements in FX. It also claims that a hotel’s operational and financial exposure to

undesirable movements in a particular currency may be reduced thanks to

operational hedging tactics. As such, the study assumes that an investor has the

possibility of building an optimal portfolio of hotel properties that provide a buffer

against movements in FX whilst increasing the profit potential of each property in

the presence of FX exposure.

1.9 Justification and Contribution of the Research

This study shall provide valuable insight into the effects that currency movements

are likely to have on hotel investments based in Switzerland. It shall give investors,

investment managers and operational decision makers a better understanding of how

they can manage their hotel investments more effectively during times of severe FX

pressures against the Swiss Franc (CHF). The study shall also assist in narrowing the

gap of academic literature in the field of HREPE and FX. Prior research has shown

that Switzerland has a vast amount of catching up to do in terms of HREPE

literature. The outcome of this study shall mainly benefit the academic as well as the

hotel investment and tourism community. Moreover, it shall reveal practical

solutions for reducing FX exposure while at the same time enhancing the FP of hotel


1.10 Conclusions


justification and academic contribution towards the practical field it focuses on.

Further, an overview of the methodology was provided, followed by an outline of the

study’s structure. Key definitions used in this dissertation were stated and a

delimination of the scope of the study took place. The following chapter is focused

on providing insight into the main areas of literature that the research topic is

affiliated with. It therefore offers insight into the history and background of Private

Equity and the overall structural features of HREPE investing. The chapter also

describes FX characteristics and their theoretical and practical concepts with respect

to this study. Additionally, FP related features are described and their qualities and

importance linked to hotel specific FP measurement tools/approaches discussed in

the subsequent chapters.

2. Literature Review & Scope

2.1 Introduction

While chapter one devoted itself to providing an overview of the scope, background

and theoretical foundations of the study, this chapter gives insight into relevant

previous research carried out within the chosen field of study. This chapter starts

with a brief history and an overview of the terminology and legal structure that

stands behind Hotel Real Estate Private Equity (HREPE). It then goes on to describe

the main characteristics of HREPE investing and aspects relating to the Swiss

HREPE market. Further, insight into the Swiss hotel market and potential internal

and external impacts affecting the success of a hotel property is provided. In a next

step, the chapter discusses Foreign Exchange (FX), along with its theoretical and

practical concepts and impacts on a company/property. Following this section, the

chapter gives insight into different aspects of Financial Performance Management

(FPM) within the hotel investment context, as well as Yield and Revenue

Management (YRM), benchmarking, and the influence of information technology on

the FP of HREPE investments. A summary of the key aspects covered in this study

takes place in the final section of this chapter.

2.2 The History of Hotel Real Estate Private Equity


favourable enough traits to allow for PE investing to attain broad acceptance among

investors. Succinctly, the initiation and promotion of PE investments proved to be

more challenging than anticipated.

According to several researchers such as Thum, Timmreck & Keul (2008) and

Davidson (2011), it wasn’t until the early 1970’s that, of what we know today as PE

investing, started gaining traction. In fact, the seeds of modern PE, Real Estate

Private Equity (REPE) and HREPE alike were planted by the inception of Limited

Partnership (LP) investment structures, which will be described in detail in the later

sections of this study. As Davidson (2011) suggests, it was the American real estate

market collapse of the late 1980’s and the debt financing shortages that led to a

significant increase in REPE investing. News about the benefits and success of

REPE investing soon reached the European continent. While the United Kingdom

can be counted as an early adopter of REPE investing, it yet took almost another

decade for other European countries to follow suit in what has become a multi

billion-dollar industry. In fact, PE investing in Switzerland has only been made

available in 2007 on the basis of a new investment law, which allows LP structure


2.3 Terminology and Focus of Hotel Real Estate Private Equity Investing

REPE is an expanded version of Private Equity. The practice of Private Equity

focuses on creating value through the means of strategic capital allocation and

efficient operational and financial management of a single asset or a company

(Roettke & Rebitzer 2006). As suggested by the term “Equity”, REPE focuses on

acquiring equity from financial sponsors with the goal of using this equity in order to

finance single real estate assets, real estate portfolios and/or real estate firms. HREPE

as such focuses solely on the financing of single hotel properties, a portfolio of hotel

properties or hotel companies. In summary, REPE and HREPE investing involves

the acquisition and management of actual physical properties, while PE follows a

less tangible investment approach (Garay 2009).


According to Thum, Timmreck & Keul (2008) the term REPE is associated with two

different types of investment strategies. One of the strategies focuses on the

financing of private – non market listed – businesses, the other focuses on the

financing of publicly listed companies through the means of private capital/equity.

Garay (2009) on the other hand, argues that PE exclusively involves investing into

non-market listed companies. In fact, this study will focus solely on non-market

listed businesses.

Essentially, REPE/HREPE seeks to implement successful operational and financial

strategies in businesses that are either (Rottke et al. 2006):


Being sold at a discount


Provide (re)development potential


Leave room for operational and/or financial performance management

The bedrock of HREPE investing as such is the identification and acquisition of

underperforming hotel properties or portfolios with the goal of turning them into

more profitable assets (Frehse 2007). During an envisaged holding period of 5 to 8

years, HREPE investors implement operational and financial measures that increase

the cash flow of the acquired hotels. In order to fund acquisitions, HREPE investors

often seek funding from the following sources:

• Insurance

• Pension Funds

• Trusts

• High Net-Worth Individuals

2.4 Legal Structure of Hotel Real Estate Private Equity Investing


alignment of interests that makes HREPE investing so unique and successful.

Figure 2: Limited Partnership Investment Structure

Source: Aigner et al. (2008)

2.5 Characteristics of Hotel Real Estate Private Equity Investing

Real estate has historically been – and still is – viewed as a local phenomenon

(Bardhan et al. 2008). Although, from a physical point of view, there are a number of

parallels between hotels and pure real estate assets, what separates REPE from

HREPE investment strategies is the nature of their underlying income streams and

the structure of their client base. The return generating function of a pure real estate

asset remains very much tied to the local economy (Hoesli & Lekander 2008).

While this is the case for real estate assets, the profitability of a hotel is dependent on

its demand for short-term accommodation. Beals (cited in Brotherton & Wood 2008,

p. 361) states that while an investor in an office complex or a multi family building

can obviate the danger of numerous disruptions by passing risks on to tenants, hotels’

short leases leave them vulnerable to weather, economic impacts, air and ground

transportation as well as various other factors.

On the other hand, ‘…hotels appear to be the most effective inflation hedge as

compared to other property sectors, as they can adjust their ‘leases’ on a daily basis

by altering their room rental rates to anticipate increases in inflation. As such, they

do not suffer from the ‘rental rate inertia’ which encumbers property sectors with

long-term leases (Petersen, Singh & Sheel 2004, p. 167).’ Frehse (2007) argues that

as opposed to most other real estate categories, hotels have some very unique

features and are thus more complex than ordinary real estate investments. He further

suggests that the potential risk of investing into specialised real estate such as hotels

is likely to be coupled with an expectation of returns well above market average. In

fact, according to Cline (2000, p. 1) ‘…the complex nature of hospitality

General Partner (Manager)

Limited Partnership

(Fund) Target


Limited Partner (Investor)

Investments Gross Distributions

Net Distributions


Management Fees

Carried Interest GP Commitment


organisations has tended to create hurdles for accessing capital.’ What HREPE does

is seek to eliminate these hurdles by raising capital/equity in order to turn

unprofitable hotels into profitable investments, thus generating value for an entire

business/economic sector.

Corgel (2008) argues that in a mature hotel industry it is not difficult to comprehend

that highly able HREPE investors/managers identify inefficiencies in hotels that were

overlooked by their ownership. ‘…The upside HREPE investors seek might be

realised through various exercises, including renovation, re-positioning, re-branding,

the installation of new management or cost containment (Beals 2006, p. 306).’ In the

best-case scenario a property acquisition will be made during a market downturn and

financial performance increased and stabilized before the hotel transactions market

reaches its next momentary peak. In the time between acquisition and sale HREPE

investments can produce hedge fund like levered total annual returns from 20-30 per

cent to ownership (Beals 2006).

With hotel management moving out of the real estate business, investment vehicles

are gaining increased importance (Bardhan et al. 2008). Among other factors,

changes in ownership structures offer new opportunities for HREPE investors

(O’Roarty 2009). Beals (2006) further argues that as hotel and real estate markets

become more transparent due to the increasing availability and sophistication of data,

investors will seek ways to participate in ownership. An enhanced market

transparency is believed to open new opportunities for private and institutional

investors to successfully allocate funds into the national hotel market. As such, hotel

investors would be able to diversify their investments based on property type,

geographic factors, investment manager/style and the business cycle of a particular

portfolio or individual property.


According to (Thum, Timmreck & Keul 2008) HREPE investments generate value in

one, a few or all of the following business phases:

Figure 3: Private Equity Business Cycle

Source: Adapted from Thum, Timmreck & Keul (2008)

Expansion Bridge Buyout Turnaround





y L






According to O’Roarty (2009) the application of professional asset management

expertise and financial management/restructuring allows to release latent value from

an asset in each of the illustrated life cycles. Beals (cited in Brotherton & Wood

2008, p. 362) argues that maximum returns from hotels are realised only by

unlocking their appreciated value. While the highest return will usually be generated

in the turnaround phase of a property or a portfolio, the other three business phases

may be just as attractive for an investor from a profit point of view. What makes

hotels so unique as an investment class is that their profits do not only depend on the

cyclicality of the tourism market but also on the cycles of the real estate market. The

lag between tourism demand signals and the building process is only one example of

how important it is to get the timing right within each of the different life cycles of

HREPE investing. Besides the consideration of investment cycles, HREPE investing

is also divided into different investment manager styles as depicted below in Figure

4. According to Raitio (cited in Roettke & Rebitzer 2006, p. 90) ‘… one of the most

important ways of differentiating between non-listed real estate investments is their

investment manager or style.’

Figure 4: Manager Style Framework

Source: Adapted from INREV (2011)

The main investment styles are divided into three categories. While so-called “Core”

investment strategies tend to follow a more risk-averse investment approach by using

less financial leverage and investing into relatively “safe” assets, “Value Added” and

particularly “Opportunity” investors seek to use a high amount of financial leverage

and invest into riskier assets. Naturally, these investors will seek to be compensated

for their risk by above average returns. The choice of investment style and strategy

strongly depends on the underlying market conditions and overall economic

situation. From an investor’s point of view, each investment style provides unique











Core Value Added Opportunity


























opportunities in changing market and business cycles.

2.6 Hotel Real Estate Private Equity in Switzerland

In terms of academically published literature, HREPE investing is non-existent in

Switzerland. Frehse (2007) underscores this statement by arguing that in the entire

HREPE field theory based models and defining approaches are lagging behind

considerably. Below the surface, however, HREPE investing is slowly but surely

gaining more interest among national investment professionals. This interest is in

part driven by the compressed cap rates that are leading to a shortage of entry

positions into high yielding real estate investments. Further, there is a general

sentiment that the strength of the national currency will impose long-term effects on

the wellbeing of the hotel industry, particularly in tourism resorts. Despite the

introduction of the amended Swiss Capital Investment Act (KAG) in 2007,

Switzerland has to this date still not witnessed the launch of HREPE investment

fund. In comparison to other countries, Switzerland is in its early infancy in terms of

available hotel investment vehicles. By lacking new and innovative ways to raise

capital, the national hotel industry is likely to lose its competitive advantage over

other major global tourism destinations and hotel players.

2.7 Characteristics of Hotels


Figure 5: Diamond of Competitive Advantage

Source: Adapted from Cardoso, Vaughan & Edwards (2010)

Porter’s diamond model suggests that the national business environment is

influenced by three distinctive external dimensions/perspectives. The incorporated

sub-levels define the proximity of each dimension in relation to the operational asset.

The further away each level is from the core (the operation), the less it can be

influenced by the owner and/or operator. From an investment point of view, hotels

hold a number of particularities, which are – even for investors with previous hotel

investment experience – at times cumbersome to comprehend. What makes hotels so

unique and risky as an investment is the perishability of their product (rooms, food &

beverage). Burgess (2010) further adds that hotels vary in size and may operate with

complex units, with many operating and support departments, making them even

more vulnerable to unforseen impacts. As well as being the most closely linked

property sector to economic conditions and external events, hotels tend to hold

several other characteristics that distinguish them from conventional real estate assets

(Newell & Seabrook 2006).

2.8 Overview of the Swiss Hotel Market

According to the latest information from the National Bureau of Statistics (BFS),

revenue from tourism accounts for approximately 2,9% of the annual Gross

Domestic Product (GDP) of Switzerland’s economy. In 2011, Switzerland counted a

Business Perspective




















Na tiona l E co nom y Natio

nal E nviro nmen t Tourism Sector Su pp lie rs, N

ew E

ntran ts, B

uy ers Hote

l Ind ustry

Env ironm


Industry Competitors, Substitute Products Oper

atio nal E

nviro nmen t Support Activities Pr im ary A

cti vities


total of 5,396 hotels and resorts (BFS). This amounts to approximately 1 hotel for

every 10 square kilometres. In 2011 a total of 35,5 million lodging nights were

counted in Switzerland. According to the Swiss Hotel Association (SHA) 46% of

these lodging nights were spent in hotels and resorts in mountain regions, 26,6% in

larger cities, 17,6% in smaller cities and 9,9% in rural areas.

The 2011 SHA market report, which took into consideration data of 2,174 (40% of

BFS total) properties, provides a valuable overview of the overall structure and

condition of the Swiss hotel market. According to this report, the 3 star property

category represents the largest market share (20,3%) in mountain regions, followed

by 4 star properties (7,9%). Although 1, 2 and 5 star properties are not subject to

further research, it is nevertheless valuable to mention that these categories represent

only 0,7%, respectively, 5,5% and 1,4% of the total market for mountain resorts in

Switzerland. Another aspect that deserves special mention is that 57% of properties

located in mountain regions are not classified, i.e., assigned to a particular lodging


For sampling purposes, SHA conducts a yearly survey of key operational and

financial figures of 160 properties. Whilst the output of this survey cannot be used as

a benchmark for this study, it is nevertheless worth mentioning a limited range of its

key figures. One of these figures is Revenue Per Available Room (REVPAR), which

according to the Swiss Society of Hotel Credit (SGH) survey stood at approx. 134.-

Swiss Francs for 3 star and approx. 179.- Swiss Francs for 4 star mountain resort

properties. Another noteworthy figure is the Gross Profit Margin (GPM), which

stood at 13,2% for 3 star, 15,8% for 4 star and 17,4% for 5 star resort hotels. Detailed

reference to key operational and financial figures will be made in the latter sections

of this study.

2.9 Hotels and External Impacts




Figure 6: The Impacts of Global Crises on Tourism

Source: Adapted from Arthur D Little (2009)

From a global perspective, the high-end business travel market was one of the first

hotel market segments to be hit during the early stages of the GFC. Soon after, both

high- and also low-end leisure travel started to slow down. This came to no surprise

since spending on leisure and hotels is naturally closely related to economic

wellbeing. During tough economic times, people may prefer to keep their cash for

the essentials of life rather than spend it for discretionary items (Papatheodorou,

Rosselló & Xiao 2010)

. As a part of discretionary spending, tourism tends to –

although somewhat lagged due to advanced bookings – be one of the most strongly

exposed sectors to global economic volatility (Dwyer, Forsyth & Dwyer 2010).

Figure 7: Hotel Demand Switzerland 1990-2014

Source: Swiss Department of Economics (2012)

0 100 200 300 400 500 600 700 800 900

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Asian Crisis 9/11 SARS


Financial Crisis

Oktober 2011 Prognosen für den Schweizer Tourismus

Prognosen Wintersaison 2011/12

Für den kommenden Winter (November 2011 bis April 2012) erwartet

BAKBASEL gegenüber der Vorjahresperiode einen kräftigen Rückgang der

Zahl der Hotelübernachtungen um rund 2.6 Prozent. Neben dem starken

Franken als Hauptursache für den Abschwung tritt als zusätzlicher

Belas-tungsfaktor die deutlich langsamere Gangart der weltweiten Konjunktur auf.

Die Aussichten für den privaten Konsum sind in etlichen wichtigen

Herkunfts-märkten aufgrund hoher Arbeitslosigkeit und privater Verschuldung weiterhin


Der Binnennachfrage wird in der anstehenden Wintersaison eine

stabilisie-rende Wirkung zukommen. Während die Auslandsnachfrage voraussichtlich

einen Rückgang um rund 4.2 Prozent verzeichnen wird, dürfte die

Binnen-nachfrage nur leicht zurückgehen (-0.4%). Schweizerinnen und Schweizer

bleiben ihrer Hotellerie treu, obwohl auch für sie Ferien im Ausland relativ

ge-sehen deutlich günstiger wären. Einen positiven Beitrag an die

Binnennach-frage leistet dabei nicht zuletzt die Zuwanderung.

Entwicklung der Hotelübernachtungen in der Wintersaison

85 90 95 100 105 110 115 120

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Inländer



Index, Winterhalbjahr 1989/90 = 100 Quelle: BFS, BAKBASEL

Bei der Auslandsnachfrage sind im kommenden Winter kaum Lichtblicke

aus-zumachen. Für alle wichtigen Herkunftsmärkte wird im kommenden Winter

eine negative Entwicklung erwartet. Besonders deutlich dürften die

Rückgän-ge bei der NachfraRückgän-ge aus Westeuropa ausfallen. Die Zahl der

Hotelübernach-tungen von Gästen aus Westeuropa wird voraussichtlich um rund 7 Prozent

zurückgehen. Kaum besser dürfte sich der US-Markt zeigen. Einziger

Hoff-nungsschimmer ist der asiatische Raum. Allerdings fällt im Winter die

stabili-sierende Wirkung dieser neuen Märkte aufgrund des geringeren Marktanteils

deutlich bescheidener aus als im Sommer.

Zwar werden im kommenden Winter fast alle Schweizer Tourismusregionen

von Nachfragerückgängen betroffen sein, in Bezug auf das Ausmass der

Be-troffenheit sind aber grosse Unterschiede auszumachen. Die noch günstigsten

Aussichten ergeben sich für die «Grossen Städte». Zwar ziehen auch beim

stark konjunkturabhängigen Geschäftstourismus als Folge der allgemeinen

konjunkturellen Abkühlung dunkle Wolken auf, dennoch beträgt der

prognosti-zierte Logiernächterückgang bei den «Grossen Städten» dank einer

dynami-Kräftiger Einbruch


Tourismusnach-frage in der





Nachfrage aus

Westeuropa und den

USA stark rückläufig


The trend towards reduced discretionary spending soon also became apparent in

Switzerland. Besides having to deal with the impacts of a highly volatile global

economy, Switzerland soon had another challenge, namely the increasing strength of

its national currency. According to the latest joint-study published by the Swiss

Society for Hotel Credit (SGH) and the SHA, the national hotel market is becoming

more and more challenged by the ever-increasing strength of the Swiss Franc against

most global currencies. Especially tourism demand from the Eurozone and England

has been affected by the recent strength of the Swiss Franc. Between 2007-2011 the

Swiss Franc strengthened by around 30% against the Euro and has gained almost

50% against the British pound. In fact, on the 9


of August 2011 the Swiss Franc and

the Euro were trading at parity. Enough reason to cause for extreme unease within

the national tourism community. Since the Gross Domestic Product (GDP) of

Switzerland is strongly dependent on exports, immediate action had to be taken by

the Swiss National Bank (SNB) to protect the Swiss export industry from the effects

of an ever-strengthening currency. To protect and stabilise the national economy

from a long lasting dilemma, the Swiss Franc was officially pegged against the Euro

on the 6


of September 2011.

Based on hotel values, Switzerland belongs to a minority of Continental European

markets to have witnessed an increase in the overall market prices of its hotel

properties. As can be viewed in

Appendix A,

hotel property values in Zürich, for

example, have increased by 6,4% in nominal and around 20% in real terms against

the Euro between 2007–2011. In Geneva, hotel market values have increased by

around 5% in nominal terms. This increase in property values, however, is mainly

reflected by the recent strength of the Swiss Franc, as well as low interest rates, and

does not mirror the individual operational performance of each hotel. From a hotel

investors point, it is hence important to differentiate between macroeconomic and

operational factors affecting the value of his asset(s). Although an investor may not

be able to directly influence macroeconomic forces, it is assumed that operational

and financial performance measures will allow one to anticipate financial risks and

hence manage investments more successfully.

2.10 Foreign Exchange

Since the abolition of the fixed exchange rate system of Bretton Woods in 1971, the

international economic environment has been characterised by substantial exchange

rate volatility (Williamson 2001; El-Masry & Abdel-Salam 2007). Muller &

Verschoor (2006) argue that the volatility of FX rates and its associated risks have

become an increasingly important component of international financial management.

‘…Given the globalization of many industries, FX fluctuations are a source of

uncertainty for many corporations (Söhnke, Brown & Minton 2010, p. 148).’

Although there are various theories that focus on identifying the origin and impact of

movements in FX rates, it is extremely hard to make clear sense of the behaviour and

dynamics of currencies. Various studies by Stockman (1980), Svensson (1985) and

Krugman (1987) focus on identifying the relationship between currencies, supply,

demand, interest rates and other factors.


generally accepted theory of exchange rate determination that gives precise guidance

for judging the economically appropriate values of exchange rates. What we do

know, however, is that FX movements have been and still are a major concern for

investors, managers and analysts alike (El-Masry & Abdel-Salam 2007).

‘…Volatility is definitely an important financial phenomenon which needs to be

addressed (Malik 2005, p. 188).’ Particularly because changes in exchange rates have

important implications for financial decision-making and the profitability of firms

(Dominguez & Tesar 2006). According to Choi & Prasad (1995) exchange rate

fluctuations affect a firm’s success and firm value through the translation, transaction

and economic effects of FX exposure.

2.10.1 Theoretical and Practical Concepts of Foreign Exchange


The theoretical FX exposure literature supports the common belief that exchange rate

changes should impact firms through various mechanisms (Doidge, Griffin &

Williamson 2006). Although FX volatility may be extremely difficult – if not almost

impossible – to anticipate, there are several theories which help to understand the

roots of FX fluctuations and hence to manage FX exposure in an attentive and

efficient manner. One of the most relevant theories in terms of assessing the impact

of FX volatility on hotel demand and revenue is the theory of Law of One Price

(LOP). The theoretical foundation of LOP states that sellers of a product or service

will seek to sell at the highest price, while buyers are eager to find the best product or

service at the lowest possible price. In today’s ever more transparent global hotel

market, clients possess the ability to seek for the best possible value for their money.

Hence, their wishes and needs will dictate the price they are willing to pay for a

service or product.

Figure 8: Influences on Price

Adapted from Iten et al. (2003)


Consumer Perspective Related Production Costs

(Labour, Food etc.) Competition Product & Service Characteristics




Value for Client Price Elasticity


This study assumes that for most travellers, their choice of destination will be

partially influenced by the strength of their national currency in relation to the

strength of the currency in the country they are planning to visit. Likewise, their

choice of hotel will be determined by their price sensitivity (Chang & Ma 2009). As

presented in the previous figure, the supply side of a hotel property and its effects on

price tends to be strongly influenced by the market competition it faces and the

services and products it is willing to sell in any given market environment. On the

other hand, the demand side is likely to be influenced by the perceived value of the

services and products that are being offered, as well as their price. This is one of the

reasons why pricing dynamics and revenue management systems have gained such a

vital importance within the global hotel industry over the past decade. One of the

main reasons why the theory of LOP relates so well to the hotel industry is because it

recognizes the nonlinearities created by information and transaction costs. Secondly,

it recognizes the importance of time for arbitrage Pippenger (2004).

Another important aspect to consider with regards to FX fluctuations is the exchange

rate pass-through. According to (Devereux, Engel & Storgaard 2003, P. 3) ‘…the

overall degree of exchange rate pass-through depends on various structural features

of the economy.’ An exchange rate pass-through analysis as such can help identify

the impact and the speed at which exchange rate movements can affect the price of a

purchased good or service. The level of exchange rate pass-through is in most cases

influenced by the supply and demand of money and products. Within the hotel

industry, impacts of pass-through are known to be product and price specific. This

automatically explains the rapid growth of online booking portals. Differences

between price and quality are becoming ever smaller, while the same seems to be

occurring in terms of hotel star ratings.

2.10.2 Foreign Exchange Impacts on the Property/Company Level

Hotel investment activity means that hotel investors must not only focus on cash

flow patterns – changes in rents (i.e. hotel room rates) – but also on the impact of

currency movements (Addae-Dapaah & Hwee 2008). According to Huang et al.

(2011) the degree of stability of an exchange rate has a high impact on firms’

expected revenues. Firms in the lodging industry face significant risks from

fluctuations in currency (Singh & Upneja 2007). Choi & Prasad (1995) state that the

exchange risk sensitivity of firms will depend on their operating profiles, financial

strategies, and other firm-specific variables. One way for a firm to anticipate FX

exposure is by adjusting its costs Williamson (2001). Another possible approach to

reduce FX exposure is based on price or product differentiation. While some hotels

will seek to gain advantage (i.e. reduce their exposure) over their main competitors

simply by cutting price, others will follow a strategy that will lead to increased

product offerings and/or special perks.


Figure 2: Limited Partnership Investment Structure
Figure 3: Private Equity Business Cycle
Figure 4: Manager Style Framework
Figure 5: Diamond of Competitive Advantage


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