No doubt about it, COVID-19 put the squeeze on foreign investment, not only in Canadian hotels, but in properties around the world. How tight was that squeeze? In its report, Hotel Investment Outlook 2021, real-estate-services firm Jones Lang LaSalle Inc. (JLL) noted global transaction volume ending 2020 was down more than 60-per cent from 2019.
Not surprisingly, outside investors tend to shy away from buying a property sight unseen (even with virtual inspections and local partners) and since travel restrictions mandate they couldn’t be on the ground to “check out the assets”, says Jeff Cury, senior director, Development for Hilton, “There just hasn’t been that much foreign investment [since the pandemic hit]. I don’t know of anyone who’s had any dealings with foreign investment. There’s been interest, especially from the U.S., but no one’s actually executed on anything.”
Investor confidence depends on occupancy, which, according to JLL’s Hotel Investor Sentiment Survey (HISS), needs to be within 60 to 70 per cent of 2019 levels. Gilda Perez-Alvarado, global CEO of hotels for JLL, says, “Performance overall in Canada was depressed, however, hotels situated in less dense and remote locations, such as resorts and small metro towns, saw RevPAR decline to a lesser extent, with decreases ranging from 40 to 50 per cent.” She notes the most densely populated regions – Toronto, Montreal and Vancouver – took the biggest hit, ranging from 69 to 74 per cent, while Edmonton, Ottawa and Calgary fared better.
Once the vast majority of people have been vaccinated and travel is on the rebound, hotels are expected to be one of the fastest commercial real-estate sectors to recover. In fact, JLL’s report predicts hotel investment around the world will increase 35 to 40 per cent over 2020.
“People see this as a stabilizing year and an uptick will start toward the end of the year and into next,” says Cury. “The sentiment I’m getting from the development community is that they’re positioning themselves to open up hotels in 2023, when most people believe the market will be back to a relatively new normal.”
A recent survey by Nanos Research, in conjunction with Beechwood Real Estate Advisors and Big Picture Conferences, also cautiously predicts it will take two years for occupancy – and three years for Average Daily Rates – to return to 2019 levels. Whenever the dust settles and certainty in the market returns, the landscape will look a bit different as hotels continue to adapt, adjust and re-focus in a post-pandemic world.
While the limited- and select-service categories were all the rage in 2019, recent interest has been focused on upscale and luxury assets, particularly in urban centres such as Vancouver, Toronto and Montreal – all of which are tightly held markets, says Perez-Alvarado. This, despite the substantially higher cost to develop luxury hotels compared to other chain scales, such as limited service, midscale, et cetera.
“Also, resorts with international demand continue to be a top target to global investors,” says Perez-Alvarado. “Resorts in general as an asset class are in growing demand around the world given investor expectation that transient leisure will be the demand segment that will recover the fastest.”
Sylvia Occhiuzzi, VP of Beechwood Real Estate Advisors, says those who vacationed last year, particularly during the summer, chose resort properties or hotels where it was easier to social distance. “This trend is expected to continue as guests favour properties that offer open-air amenities and facilities.”
Post-COVID-19, traditional investors, hedge funds and high-net worth individuals have also ear-marked dollars for the sole purpose of acquiring distressed hotel assets, which they expect to appreciate once the travel industry recovers.
Look Who’s Looking
Interested parties, pre-pandemic, will likely be the same post-pandemic, says Occhiuzzi. “It’s clear Canada continues to be a popular option for foreign investors. Many of the investment groups that were active in the space pre-COVID-19 will likely remain active as we navigate through the next 12 to 24 months, and will include investment groups from Hong Kong, India, Pakistan and South Korea.”
According to JLL’s Perez-Alvarado, Asian investors overall (with Singapore and Hong Kong at the forefront) have been the most active in Canada, purchasing more than $4-billion worth of hotel real estate from 2016 to 2020. Private-equity groups and institutional investors drove liquidity in the market and accounted for 54 per cent of total volume for the year.
But there continues to be emerging interest domestically, particularly from new Canadians or those looking to emigrate. “The focus from the federal government on growing immigration will encourage those looking to reside in Canada to consider hotels and other forms of commercial real-estate investment,” says Occhiuzzi.
Hilton’s Cury agrees. “There’s a very strong developer base in Canada that’s looking for those same opportunities. The industry has a lot of people who are well-capitalized today if a good opportunity presents itself. And while there’s certainly going to be some adjustment in price versus what it once was, people with money are willing to pay the right number to get these transactions.”
What’s the Attraction?
Canada is attractive to foreign investors in 2021 for the same reasons it was attractive in 1951: the country remains politically, economically and legally stable; the low dollar offers more bang for the buck; the relatively less expensive cost of debt; first-rate air, sea and road infrastructure; and a friendly and secure place to do business.
According to the Global Capital Markets 2021 Investor Outlook survey, from investment management firm Colliers International Group, 98 per cent of investors in general plan to expand their portfolios this year, with many in the
hospitality sector looking for the “COVID discount” of more than 20 per cent, which would offer a rare opportunity for them to acquire core and distressed assets for re-purposing initiatives.
So, while markets around the world have dipped, Canada remains ó and will remain, post-pandemic – on everyone’s radar. “Canada continues to be a very attractive market given its stability and transparency, as well as its appeal to international tourists,” says Perez-Alvarado.
BY ROBIN ROBERTS