Checking into buy or build opportunities in the West as Canada-wide revenues hit a record high
Investors are taking note of the Canadian hotel market like never before because performance indicators are strong and have been steadily improving for some time. In 2017, Canada saw the highest prices per room for a single asset sale in its history and also stellar RevPAR (revenue per available room) performance.
In this healthy environment, hotel investment opportunities are present in throughout Canada and in particular Western Canada; however, this does not necessarily mean that opportunities are present everywhere or are easy to identify. First of all, averages never tell the full story. The RevPAR for all of Canada grew a record-breaking 7.7 per cent in 2017, but the performance of individual markets within Western Canadian varied wildly. At one end, the Vancouver Airport market sustained a remarkable 14 per cent increase in RevPAR, while the Regina market suffered a severe 10.5 per cent decline. Between these two bookends strong performances outweighed the weak ones by a considerable amount.
The key to a successful hotel investment is knowing the conditions that best diminish risk in that particular market. For those markets that merit an investment, the best option may be to acquire a site and build a new hotel, or it may be that acquiring an existing asset is the best route to success.
Prior to entering a hotel market, an investor has to be in agreement with two foundational, non-negotiable principles:
- 1.Hotels live and die according to the number heads in beds each night. Since this is a risky proposition, leveraged equity return expectations should be in the mid-to-high teens Without the possibility of a high return from the start, a hotel investment may yield no return in the end.
- 2.Hotel investments require a long-term time horizon to cope with market cycles. The market can quickly go from a high point like in 2018 to what happened in 2009 when the financial crisis wiped out the market. At these low points, hotels can lose more than 25 per cent of their value and be virtually impossible to finance.
Many hotel investors find success in building new hotels when they have a superior site, a strong brand, and a product that has been tailored to meet the needs of the local market. This winning recipe can quickly propel a new property to the top of its competitive market, but only if the correct ingredients are put into the mix.
Finding a site is easy, but finding a site that is actually conducive to a successful hotel development is much more difficult. If you can easily find a site for a hotel development, then so can competitors. The Calgary Airport market is currently experiencing this situation, where the availability of easily acquirable sites has resulted in a glut of new hotel supply that is not easily being absorbed.
Controlling an excellent site in a market with high barriers to entry is the best land scenario. At present, most of B.C.’s Lower Mainland would be categorized as having high barriers to entry. In this area, potential hotel sites are competing with residential condo uses, which is driving up prices and limiting the availability of land. Consequently, the region has seen few new hotel developments in the last decade, but those that have all been strong performers. A prime example is the reinvented Rosewood Hotel Georgia, which netted the highest price per room ever paid for a hotel property in Canada at $929,000 per room in 2017.
Expertise in building is also an essential consideration. The most successful hotel developers have an expansive knowledge of construction, including both costs and schedules.
If you lack building expertise and have not secured a great site, buying your way into the hotel market may be the better option. Canada on the whole is now more of a seller’s market than a buyer’s market. That said, the resource-based lodging markets in Alberta and Saskatchewan have been running contrary to the general national performance; in these provinces, some buying opportunities may now exist.
When looking at an acquisition, there are three essential considerations that must be taken to heart:
- 1.It is crucial to look at the potential new supply in the market and project how your purchase would fare against a brand-new hotel.
- 2.The additional costs associated with an acquisition must be quantified and included in the vision for how the investment will perform. For example, an asset with deferred maintenance or that is facing brand-mandated renovations may require extensive, additional capital costs.
- 3.Professional management needs to be secured for the asset, as this is integral to the successful performance of a hotel investment.
The hotel market is often a small slice of a real estate portfolio, but it deserves attention given the returns that can be achieved for those willing to take the risk. When considering an investment in a hotel, it is important to find locations that have strong demand fundamentals and potential barriers to entry that will limit the amount of future competition. With some digging and proper due diligence, these opportunities can be found in Western Canada.