Hotel investment hot in Canada

REM – Real Estate Magazine
23 February, 2011 7:59 AM
by Jim Adair

Hotel investment hot in Canada

The Canadian lodging investment sector came back with a vengeance in 2010 after bottoming out in the fall of the previous year, says a report by CB Richard Ellis.

“From a tenuous operating platform in 2009, evidence of the market’s resurgence became clear by the end of Q1 2010,” says Bill Stone, executive vice-president of CBRE Hotels. “We saw a meteoric rise in lodging stocks and a returned focus in the U.S. capital markets on the lodging sector. Several lodging REITs were created in the U.S. in mid- to late 2009. These events inspired several large-scale North American hotel transactions in 2010.

“This activity followed the bottoming of the market from the prior fall as sellers who chose to hold – and lenders that co-operated – began to re-evaluate their real estate strategies,” Stone says. “REITs and institutional owners started to strategically pare down non-core assets while acquiring others; private investors and private equity, which had previously been quiet, began to make their mark.”

The highly cyclical nature of the Canadian hotel market mirrors the rise and fall of the GDP and many other economic indices, he says. Following growth of only 0.5 per cent in 2008 and a contraction in 2009, the Conference Board of Canada is forecasting GDP growth of 3.6 per cent in 2010. “This economic momentum will be the impetus for increased travel and consumer spending, and ultimately improved profitability throughout the lodging sector,” says Stone.

Well over $1 billion of hotel assets are now or will shortly be on the market and are likely to be snatched up by high net worth, private investors, private equity and institutional buyers, he says.

Canadian hotel investment activity is sharply trending upwards with preliminary transaction volume in the $700 million range in 2010, representing a 70 per cent increase over 2009.

Per-room pricing strengthened 24 per cent year-over-year, increasing from an average of $69,000 to $86,000 due to more aggressive purchaser underwriting as well as the class of assets being brought to market, says CB Richard Ellis.

“The once-large bid/ask spread is narrowing for many asset tiers, indicating the market’s willingness to price on a per-key or future-earnings basis as fundamentals ramp up,” says Stone. “We saw bottom-feeding investors wait out the typical six to eight month lag between the emergence of widespread distress in U.S. trending and its arrival in Canada; however, the number and scope of truly distressed assets were far lower than expected. By Q3 it was clear the Canadian market was in a much safer place than most global industrial markets.”

The dominant seller group has been private investors during the past two years, representing between 60 per cent and 65 per cent of transaction volume. On the buy side, private investors accounted for over one-third of the volume in 2010, down from about two-thirds in 2009, with re-engaged hotel investment companies and real estate companies now representing 40 per cent and 21 per cent of volume, respectively.

“As we head into 2011, there are clear signs the quantum and variety of potential buyers is morphing monthly,” says Stone. “Unlike recent years in which private, domestic buyers clearly dominated the investment landscape, there have been an extraordinary number of international investors ready to make Canadian hotel acquisitions.” Non-domestic investors have been virtually absent from the buyer profile since 2006, when more than half of the volume was attributed to non-Canadian buyer groups, he says.

“Today, we are seeing a noticeable spike in interest by American investors as well as offshore groups, largely from Singapore, Malaysia and China. Groups are looking to spread international investment risk or are moving to Canada for personal, quality of life and business issues due to the growing profile of Canada as a ‘safe haven’ in an increasingly volatile world,” Stone says.

“We’re seeing that buyers are attracted to a variety of performance situations, from operations with substantial cash flow to redevelopment, rebranding and repurposing opportunities with little or no current income. This is an exciting turning point for the Canadian hotel investment market.”

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