Recession drives hotel investment to five-year low

Investment in Canadian hotels last year dropped to levels not seen since 2004, when the industry was dealing with the aftermath of SARS, according to a new report.

Colliers International Hotels says there were $414-million in hotels purchased in 2009, a 61% decline from a year earlier. The figure was the lowest since the $360-million of transaction activity in 2004, when tourism was still recovering from the SARS outbreak. At the height of the market in 2007, there was $4.58-billion in activity.

Alam Pirani, executive managing director with Colliers International Hotels, said this time the culprit was the recession. Occupancy levels were down 8% in 2009 from a year earlier, while average daily rates fell 12.3% during the same period.

"Last year, you'd try and forecast and budget and it was impossible. No one wanted to invest. There was no clear indication the market had bottomed," said Mr. Pirani, noting the market has improved in 2010.

Colliers said there were only 74 hotel transactions last year and most of them were led by private investors, who controlled 60% of the transaction volume.

The low level of transactions and values drove down the average selling price per room from $116,500 in 2008 to $65,500 last year, a 44% decline. Collier's hotel value index, which measures hotel values based on various market indicators, was off 7.3% in 2009.

Ontario, with 48 transactions, accounted for the majority of hotel sales last year, with a dollar value of $212.9-million. But Canada's largest province by population drove down prices, with the average price per room at $61,900 last year, below the national average of $65,500.

To illustrate how few hotel deals there were last year, Mr. Pirani noted the largest single transaction in the entire country was a $24-million deal in Toronto's eastern suburbs for a hotel/conference centre that came with some vacant land.

The problem has not been raising equity, but tight credit. Hoteliers used to be able to finance a property with 65% loan to value, but that's down to as little as 55%.

But it could be worse. Mr. Pirani noted it is almost impossible to raise money for a hotel purchase in the United States.

Not surprisingly, the lack of capital and operating difficulties also affected the decision to build new hotels. Only 60 new hotels opened in Canada last year, boosting the national room supply by just 1.5%.

Steve Gupta, chief executive of Markham, Ont.-based Easton's Group of Hotels, is one of the few hoteliers still building, but he admits borrowing has become more difficult in this economy. He has had to put more equity into some of his projects than he has done in the past.

"It affects you because if you are planning to build, say, 10 hotels, now you can only build six," said Mr. Gupta, who built three hotels in 2009 and plans another four for this year.

(prepared by Garry Marr/Financial Post/National Post)