Foreign investors are increasingly snapping up stakes in Canadian hotels, attracted in part by a relatively stable economy and an increase in buying opportunities.
About 24 per cent of the $794-million that was invested in Canadian hotels during the first six months of this year was foreign money, compared to about 7 per cent of the $650-million worth of hotel deals done during the first half of 2012, according to real estate service firm CBRE.
"Historically Canadian investors bought Canadian hotels, by and large, and this is one of the first substantive breakout years," said Bill Stone, an executive vice-president at CBRE who worked on the pending sale of an interest in Toronto's King Edward Hotel to Texas-based Omni Hotels & Resorts. "We've seen a real spike, in the last eight to 12 weeks specifically, of activity."
A number of Canadian real estate investment trusts are selling hotel properties, while traditional hotel investment companies (those that specialize in owning hotels) are the largest buyer this year.
"We're experiencing a tremendous amount of hotel investment activity, and this will probably be the biggest year on record in terms of single-asset or small-porfolio transactions," Mr. Stone said. "Unlike 2006 and 2007, where there were the big M&A deals, this is a very, very active year for one-off hotels or small portfolios."
Ivanhoé Cambridge, the real estate arm of the Caisse de dépôt et placement du Québec, is in the midst of selling off its hotel portfolio bit by bit, and will be accepting first-round bids for the Fairmont Chateau Laurier in Ottawa next month (outside Canada, Ivanhoé Cambridge is also currently selling the Fairmont Washington and a portfolio of 18 Intercontinental-related hotels in Europe).
It once owned as many as 60 hotels, but decided a couple of years ago that it would rather stick to office, retail and residential real estate investments.
Sylvain Fortier, executive vice-president of the residential and hotel businesses at Ivanhoé Cambridge, says he thinks the growing foreign interest stems from Canada's new-found reputation as a relative safe-haven in the wake of the financial crisis, because success in the hotel business is highly tied to the local economy.
He adds that the trend towards deals for one or two hotels, rather than entire portfolios, is the result of continuing weakness in the commercial mortgage-backed security market. "It's harder to syndicate massive loans now, lenders will keep most of their loans on their own balance sheets, so it makes it difficult to go and sell large portfolios," he says.
That being said, conditions are conducive to the pickup that is occurring in overall activity, driven by smaller deals. "Lenders are back in the market, buyers can get higher loan-to-value ratios, rates are extremely low, spreads are becoming smaller," he says.
The hotel business is not an easy one. "It's a very operational business, it takes a lot of expertise, you need to deal with business and leisure, you need to deal with seasonality, with brands," Mr. Fortier says, explaining why Ivanhoé has chosen to concentrate on other real estate asset classes. But his group has a few hotels that it's not sure it can part with. It has decided to hold onto the Chateau Frontenac in Quebec city ("It's an asset we sell on our postcards," Mr. Fortier says), the Fairmont The Queen Elizabeth in Montreal (Because a major revitalization plan is under way), and the W Montreal (because it's attached to Ivanhoé's head office).
"The jury is still out on the Royal York," Mr. Fortier says of the Toronto landmark. "It is also due for major renovations, we're looking at various plans right now, so we need to check our piggy bank."
More than half of the total Canadian hotel transaction volume in the first six months of this year took place in the Greater Toronto Area, where 16 hotels traded worth an aggregate $415.6-million. That compares to six hotels in the GTA during the same period last year, totalling $221.7-million.