Checking out CANADA'S HOTEL MARKET

By Warson, Albert | Mortgage Banking, July 2000 | Go to article overview

Checking out CANADA'S HOTEL MARKET


Warson, Albert, Mortgage Banking


Paradoxically, most hotel markets in Canada are strong--yet investor/lender interest plunged like a rock last year. Some observers say they've been spooked by overbuilding and the underwhelming financial performance of the U.S. hotel industry.

MUCH OF THE RECORD U.S. traffic to Canadian border cities is for same-day shopping and/or gambling excursions. Yet some Americans also are coming for a few days or weeks to sample the country's broader natural and cultural attractions. Small wonder, since they are getting a bargain 40 to 45 percent premium on their dollars.

More than 15 million visitors from the United States alone (roughly half the population of Canada) came across the border last year--up nearly 3 percent over 1998--and spent a record $2.5 billion (all dollar figures in this article are in Canadian funds).

Not all of them stayed overnight, and not all who did needed hotels or motels, but enough of them wanted accommodations to encourage the construction of 13,500 hotel rooms this year in Canada. But even those new rooms won't satisfy the demand (see Figure 1). Ironically, new supply is down somewhat from last year--because of investor unease, the prospects notwithstanding (see Figure 2).

William Stone, managing director/Canada, Colliers International Hotel Realty, Toronto, says, "The hotel market was off a bit in 1999, but more from the investment side than [the] operational side, [which was] running at record levels in many markets in Canada."

A burst of hotel investment activity began in June 1997 with the formation of CHIP (Canadian Hotel Investment Properties) REIT and ended a year later, according to Stone, "much of it driven by the availability of debt and equity capital, mainly out of Wall Street," he says. "Companies in Canada were formed and money was raised in Canada for trading in REITs. Then too many hotels were built in the United States, [and] RevPAR [occupancy multiplied by the average room rate] began to flatten, which made a lot of investors in Canada nervous--lenders in particular. They are laying low for the time being, watching for similar overbuilding and a decline in RevPAR, although that hasn't happened yet in most markets in Canada." (See Figure 3.)

Most hotels are also still trading below replacement costs, Stone says, which makes it less expensive to buy product than to develop it.

The winter 2000 issue of INNvestment, published by the Toronto office of Stone's company, notes that "the void of capital in the public sector and absence of Canadian REITs and public companies in the transaction market was partially filled by private investors responsible for approximately 95 percent of the total transaction volume in 1999."

Nonetheless, Stone says debt is available for development and that "hotels will get developed one way or another--it's just taking a bit of time." The recent volatility in the stock market bodes well in the longer term for real estate and hotels specifically, he says, because although the returns on investment in that sector are currently not as high as they are in other types of investments, they are still more stable than other stocks.

Stone says the hotel investment market is moving back to 1995 and 1996 levels, in the pre-REIT era. The average price per room (excluding top strategic trades) last year was about $52,000, compared with $56,700 in 1998, and cap rates have only inched ahead from 10 percent to 11.1 percent over the same period (see Figure 4).

Sam Damiani, analyst, real estate equities, Newcrest Capital Inc., Toronto, says, "Although Canadian hospitality stocks were very strong in 1999 [the Newcrest Canadian Hotel Index showed a performance of 51 percent versus only 31 percent for the TSE (Toronto Stock Exchange) 300, the cumulative performance since January 1998 has been comparatively poor--up only 11 percent versus 42 percent for the TSE 300]. This highlights the stock market's fascination with technology and other 'momentum' type sectors.

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