“Increasing a hotel’s Guest Experience Index™ by 10 points will lead to a 19% increase in the hotel’s real estate value.”
Determining the value of a hotel’s real estate is a complex challenge which involves evaluating various fundamental factors such as size and location. There are also a number of additional factors that are often more challenging to evaluate such as hotel quality. Investors and researchers struggle to fully capture the impact that hotel quality has on a hotel’s real estate value because of its difficulty to measure elusive components such as service and atmosphere.
Traditionally, hotel star classes – one to five stars – have been used as a general indicator of hotel quality. Even though this indicator is effective to a certain degree, the underlying system is flawed as it differs from country to country, and does not take into consideration the actual performance of the hotel and its staff.
To accommodate this flaw in the star classes system, Olery’s vast database of analysed online hotel reviews provides hotel insights into the quality of its services and staff from the guests perspective. This in turn enabled new research that can be used by both researchers and investors.
M.Sc. Benno Houben from the University of Amsterdam evaluated 180 hotel real estate transactions in his 2015 study The Effect of Online Hotel Reviews on Hotel Real Estate Pricing, and found that investors of hotel real estate should take hotel quality into account when acquiring new properties, and that there are opportunities for hotels to increase their real estate value.
The results imply that hotel quality is very important to both investors who are acquiring new properties, and hotel owners who can increase their real estate value through this process.
Olery’s Guest Experience Index™ (GEI), a weighted score combining ratings and other review data, is a unique system that significantly influences hotel real estate value by 19% in price if a hotel can get a 10 point increase on the GEI 100 point scale. In other words, if a hotel manager is able to increase the GEI from 70 to 80, this would lead to an increase of 19% of the hotel’s real estate value.
Stretching over eight tourist destination, 180 transactions from Houben’s study were statistically analyzed, along with location, hotel type and number of rooms, to determine how online reviews influence the value of hotel real estate. With hedonic regression analysis, the influence of the independent variables on the dependent variable was calculated.
Because location is considered as highly important by real estate investors, it could be possible that the significant effect of GEI on hotel real estate pricing is caused by the hotel’s location alone, and not other factors like cleanliness and service. To make sure this is not the case, a second regression model was calculated with separate indicators for quality purposes.
The second model took into consideration online guest ratings for location, cleanliness, room, value for money, service, and condition. Because of the high correlation between cleanliness and all the other indicators, only cleanliness was used in the model simultaneously with location. The model would determine whether cleanliness – as a representation for the other indicators too – shows a significant impact on hotel real estate value, and would have an effect on hotel real estate pricing.
The results of this model indicate that the online guest ratings of both location and cleanliness are statistically significant, and the influence of online guest reviews on hotel real estate pricing is therefore not only dependent on location, but also on hotel quality.
If you want to do your own analysis and want to have access to hotel data, check out our newest product, the Olery Review Data Exporter.
If you are interested in reading more about this study or how we can help you, get in touch with us.