Current Trends within the Canadian Hospitality Market Place.
The Canadian Hospitality Market in 2014 was robust (approx. $ 1.5B in transactions) and Colliers expects the market for 2015 to be very similar. The activity was equally split between the Eastern and Western Canada…
The Canadian Hospitality Market in 2014 was robust (approx. $ 1.5B in transactions) and Colliers expects the market for 2015 to be very similar. The activity was equally split between the Eastern and Western Canada and 2014 saw the largest number of single transactions since 2007. The primary reasons for this are the strong operating fundamentals of the hotels assets, easily accessible lower cost debt, and increasing interest from domestic institutional investors and overseas buyers. Regardless of whether the buyers are domestic or foreign, they are looking for cash flowing real estate assets which are capable for producing stable yields (income).
The increased interest from the non-traditional investors (Institutional and international) is increasing the number and speed of transactions attracting more sellers of all types of assets. This bodes well for our Fund as these larger players are looking for diversification and are buying landmark assets; not the type of assets we are targeting. This also supports our disposition strategy of selling stabilized hotels to institutional investors seeking de-risked cash flowing real estate.
The strong operating fundamentals coupled with the increased interest and lower lending rates are leading to lower cap rates. Cap rates (the ratio of Net Operating Income (NOI) to property asset value or purchase price) while often viewed as a measure of how much one pays for a $1 of income are also a measure of risk. The lower the cap rate – the lower the perceived risk. These lower cap rates are also attracting many international buyers from China and Europe. In 2014 they were responsible for 15% of the market transactions.
The new sources of debt are providing alternatives to borrowers like us, and at the same time introduce more competition which has led to lower debt financing costs. Lower interest payments may reduce the cash cycle time to investors. We concur with Colliers opinion that the cost of debt will remain lower for some time given the recent announcement from the Central Bank of Canada to leave its key lending rate unchanged.
In short the markets for 2015 look favourable for our acquisition fund as we seek under-performing hotels which we can add value to. There appears to be an abundance of product to choose from, good access to low priced debt and a healthy supply of buyers as we get ready to exit.
For a look at the Colliers 2015 Canadian Hotel Investment Report please Click Here