It’s a hot market for foreign investment. Combine solid operating fundamentals, the low cost of capital, low interest rates and a great reputation for being a safe investment environment and it’s easy to understand why Canada’s hotel market experienced $4.1 billion in transaction volume in 2016, attracting investors from as far away as Japan. Of the $4.1 billion, “approximately 70 per cent of our volume last year was from foreign groups,” says Robin McLuskie, VP of Hotels at Toronto-based Colliers International Hotels, adding that approximately one-quarter of the volume was represented by the privatization of InnVest REIT by Hong Kong-backed Bluesky Hotels and Resorts Inc.
According to Colliers’ research, in 2016, foreign groups surpassed the combined total dollar volume for foreign investment between 2010 and 2015 by almost $1 billion. That surge is expected to continue into this year. “We are seeing a continuing amount of foreign interest,” says Bill Stone, EVP at CBRE Hotels. “And foreign is not just mainland Chinese — it can be China, Hong Kong, Japan, the U.S. and European groups. It’s an interesting time because we are seeing a lot of U.S. enquiries right now, more than we’ve ever seen before.”
“The stars are aligned for [foreign investment], given where our dollar is,” says McLuskie. “It’s interesting with the currency markets and the strength of the U.S. dollar against major currencies, so it makes buying in Canada a relative discount.” Plus, offshore investors are enticed by the lower taxes to invest in Canada, compared to Europe. “In my experience working particularly with Middle-Eastern investors, they see Canada as Utopic in terms of the tax situation,” says Monique Rosszell, managing director, Consulting and Valuation at HVS in Toronto.
Hotel performance has also been strong, partly because of the low loonie, which is generating demand from leisure markets, meetings, groups and corporate markets. “On the other side, on why they’re so attractive, it’s because our dollar is low, so hotels are cheap, and Canada is stable in comparison to what’s going on in Europe with Brexit,” says Rosszell. “We are also seeing a lot of Chinese money coming in because the Yen is expected to be devalued.”
“We are considered relatively good value in comparison to other investments in major cities worldwide,” says McLuskie, adding that Toronto and Vancouver are hot spots. While foreign buyers have flocked to the private real-estate markets in both cities, prompting Vancouver to enact a foreign-buyer tax, CBRE research shows foreign interest is extending to the commercial real-estate sector as well. (By Q3 2016, foreign investors were behind more than $5 billion in commercial real-estate transaction volume, on par with private Canadian investors.)
With regard to Canada’s hotel sector, it’s experiencing its own boom. Case in point: in early March, Vancouver’s Rosewood Hotel Georgia set a new record in Canada when Hong-Kong-based Able Shine Enterprises and Magnificent Hotel Investments Ltd. purchased the property from Delta Land Development Ltd. for $145 million. It surpassed the Four Seasons Hotel Toronto deal by nabbing the country’s highest recorded price per key at $929,000 per room. Another significant off-shore deal took place late last fall as APA Group of Japan finalized plans to buy Vancouver-based Coast Hotels for $210 million through a share purchase agreement with Okabe Co. Ltd. of Tokyo, bringing the brand’s 36 properties into its stable.
“Canada is a politically and economically stable country; public parks and tourism resources are abundant; business customers and tourists from abroad are expected to grow over the long term, so we can expect growth in hotel business,” says Katsumasa (Victor) Komoda, president of Coast Hotels Canada. “In addition, we believe the timing of the investment decision is right due to the appreciation of the Yen compared to the Canadian dollar.”
Komoda says APA’s initial target is to expand its new “urban-style hotel” through franchising to 10,000 rooms in North America. “It is currently difficult to change the specification of the hotel building in Canada, so we have launched a new brand called Coast Hotel by APA, which harmonizes the new urban-hotel concept by APA Hotel with the brand concept of Coast Hotels.” Amenities include Japanese-style electric bidets, 55-inch LCD TVs offering Japanese TV channels in all rooms — complete with a folded paper crane on the bed.
In January, Leadon Investment Inc., a private investor group with ties to Hong Kong, inked a deal to buy British Columbia Investment Management Corporation (bcIMC)’s hospitality arm for more than $1 billion, becoming the new owner of SilverBirch Hotels & Resorts.
“Last year was our peak of interest, because there were a few transactions where foreign groups wanted to buy bulk and have a platform for further expansion in North America, so they’re buying one-off portfolios,” explains McLuskie. They also don’t want to waste time on smaller assets. “The challenge is they don’t want to come here for a $10-million deal. It’s not worth it for such a small transaction, so they’re looking for larger deals where it makes sense to save money and they are looking for key markets and larger site sizes.”
Even though there are few obstacles compared to other developed countries, there are several challenges to investing in Canada. “When building a hotel network, it takes a lot of labour and cost compared with Japan,” adds Coast Hotels’ Komoda. “Since the land mass is huge, large cities are distributed and transportation between large cities is limited.”
But these challenges aren’t deterring the hordes of overseas investors. Stone predicts another strong year of investment activity totalling between $3 and $3.5 billion.
“As new supply continues to grow, we may see an impact on [hotel] performance, which may indirectly have impact, but I’m not sure that some of these investors are looking at performance — they just want bricks and mortar,” Rosszell asserts. McLuskie adds: “I do think the outlook is positive. There could be more capital coming in, but I don’t think we will see it as strong as 2016.”
Volume 29, Number 3
Written by Jackie Sloat-Spencer