International capital has slowed its flow into the Canadian hotel market recently — but nobody’s particularly worried. After all, say those with an eye on the scene, the reduction in foreign deals doesn’t indicate a lack of interest in buying so much as it does a dearth of things to buy. And that’s good news.

“We haven’t seen a more profitable period for owners in the last 25 years — 2018 was a very strong year,” says Alam Pirani, executive managing director with Colliers International Hotels, referencing a Canadian scene that, with the exception of some pockets of Alberta, Saskatchewan and Newfoundland, is on fire.

But with no big deals in the offing, foreign investment accounted for just six per cent of the total. That’s because foreign capital typically limits its attraction to projects of significance and a thriving market means current owners of significant properties are holding tight. That explains the current crop of foreign-deal real-estate ledgers scattered with only secondary, tertiary and the odd single-asset major-market deals.

It was a different story in 2016, when foreign investment made up 67 per cent of total transaction volume — thanks to the changing of hands of one of Canada’s largest hotel portfolios. Bluesky Hotels and Resorts Inc. — a Canadian-based company backed by Hong Kong capital — paid $2.1 billion for Toronto-based InnVest. Bluesky — which is connected to China-based Anbang Insurance Group — purchased the REIT’s 109 hotels, representing some 14,500 guestrooms. A 50-per-cent share of franchisor Choice Hotels Canada and a 20-per-cent stake in Toronto’s iconic Fairmont Royal York Hotel also came with the package.

The following year saw another foreign-investment bump when British Columbia Investment Management Corp. sold its hotel assets — a portfolio of large Canadian hotels including SilverBirch Hotels & Resorts’ 26 hotel assets and management operations — to Hong Kong-based private investor group Leadon Investment Inc., for $1.1 billion. This Victoria-based pension-fund giant’s sale pushed foreign capital up to about 39 per cent of total transaction value that year.

The SilverBirch sale, say market watchers, was the last great hurrah of new money out of Asia; more restricted Chinese monetary policies now mean there’s less up for grabs. Still, says Pirani, anyone who already had money out of country can spend it at will. “For larger transactions, it’s the end of an era of big Asian investments, but for single-asset large-profile deals, there continues to be Asian capital.”

Foreign interest in Canadian hotels has a long history and investors from mainland China, Hong Kong, South Korea, Japan, Malaysia and the United States have consistently and abundantly extended monetary support to a range of developments here. Offshore investors like Canada for many reasons. For one, there’s the stability of the market — economically and politically. “The Canadian operating environment is very, very strong,” says Bill Stone, executive vice-president with CBRE Hotels. “Canada is seen as a very friendly, very secure place to do business.”

It’s also seen as attractive from a value perspective, says Pirani, and can hold its own against comparable real estate in more mature major markets, such as New York City and Singapore. The weak loonie and the potential it extends for an investor to enjoy exiting with a fatter dollar along with their market appreciation, is hard to get past.

Asian investors, says Pirani, are interested in gateway cities — first Vancouver, second Toronto and Montreal a close third. For their part, American investors are keen on value-add opportunities and will come sniffing over portfolios of assets in need of repositioning or sellers looking to unload large portfolios. Recently, says Stone, a number of American private-equity organizations — some old, some new — have been exploring the Canadian hotel landscape. One is the US$60-billion Starwood Capital Group, currently expanding its luxury eco-traveller hotel brand 1 Hotel into Toronto. Curiously, the U.S.-Canada dance of hotel investment has recently changed leaders, says Stone, with thriving Canadian owners with cash to deploy looking for hotels in the U.S. where cap rates and overall pricing on a per-room basis are conventionally a bit lower.

European investors are also dropping money in Canada. In January, Spain’s Riu Hotels & Resorts announced the 2021 opening of its first Canadian property, a $100-million-plus 350-room tower block in Toronto, part of its plan to expand its Plaza urban line into “the world’s greatest cities.” In March, Riu announced plans for a second Canadian property and the family-run company was said to be eyeing Vancouver.

Out-of-country investors’ focus on big opportunities, says Pirani, is partly because the demands they face are more rigorous than in-country investors. Deals have to be significant enough to warrant the required negotiation of not only the Canadian tax system (unique to every jurisdiction) but the American dollar and the hedging that needs to take place around its passage into Canadian coffers.

Up next? Another fruitful year for owners, says Pirani (“I wouldn’t be surprised if our 2019-volume mirrors what it was in 2018, which we finished at $1.5 billion”), but not a lot of large-scale portfolio fruit (unless the Westin hotels in Ottawa, Calgary and Edmonton fetch foreign money). “We’re going through a cycle where there continues to be a lot of stability.” It’s why he predicts a similarly scant showing of foreign play for this year, particularly in major markets, where owners are reluctant sellers. “If they’re going to be selling, they want the opportunity to replace their investment. Right now, there’s nothing available to let them do that.”

Still, says Stone, interest from foreign investors curious about more modest deals continues. His company is working with a number of groups in Vancouver, Toronto and Montreal that are looking at single-asset purchases in the $10- to $100-million range. “The interest is still there,” says Stone. “But the numbers are becoming a bit more normalized.”

Written by Laura Pratt


Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.