colliers international hotels

INNvestment CANADA

Results of the
Canadian Hotel Investment Sentiment Survey
The Canadian Hotel Investment Sentiment Survey, a first of its kind, was FIG. 1 Q: Which region are you based in?
designed to capture the sentiment of active investors interested in the
national hotel landscape. Conducted in the Fall of 2010 by Colliers Central Canada 43%
International Hotels in conjunction with the Ted Rogers School of Western Canada 37%
Hospitality and Tourism Management at Ryerson University, the survey
Eastern Canada 11%
is designed to act as an annual benchmark capturing year-over-year
Other North America 7%
results to identify shifts in investor sentiment. The survey includes
responses from over 100 domestic and international investors seeking EMEA 1%
hotels in Canada. Asia Pacific 1%

The survey was timely given rising momentum in the Canadian hotel real
estate market. This is reflected in the estimated 70% increase in 2010
transaction volume from the cyclical low of 2009 with transaction volume
estimated to have neared $700 million for the year (versus $414 million
• Domestic investors comprised 91% of respondents.
FIG. 2 Q: How many hotels do you currently own in Canada?
0

in 2009). Final transaction figures and analysis will be released in the 20

Canadian Hotel Investment Report in February 2011. 1 to 3 40%
40
4 to 6 14%
Highlights of the survey include:
7 to 9 8%
60

>> Nearly 80% of investors are optimistic on the performance of the 80 10+ 21%
overall Canadian economy in the next three to five years, although Currently none 18%
close to 50% are weary of near-term volatility.
100

• In a cross-tabulation, results revealed that nearly 80% of private investors

>> Investors favour hotel assets in the 101-175 room range in primary
120

own 1 to 3, or currently none, while other real estate and hotel investment
(city centre) markets. companies tend to own more.

>> There is a propensity to “hold, renovate/expand” (40%) or “buy”

(37%) in the next 12 months. 40 FIG. 3 Q: What is your primary investment strategy in the next 12 months?
35
>> Nearly 20% of respondents currently do not own a hotel in Canada
30
but are looking to pursue acquisitions.
25 Hold, renovate/expand 40%
>> The majority of investors (63%) will seek an international brand or 20
Buy 37%
chain for their hotel assets, with a quarter undecided. 15
Build 19%
10
>> Owners in Western Canada tend to be more longer-term investors Sell 4%
5
with 60% holding for more than ten years.
0

>> The availability of credit, strength of the Canadian economy and • While not a primary strategy, 53% are considering or planning to sell one or
demand trends for accommodation are the top three influencers to more hotel asset(s) in the next 12 months as demonstrated in Figure 6.
decision makers. • Over one-third (37%) of investors’ primary intention is to “buy” in the next 12
months.

www.colliershotels.com
 Innvestment Canada | Canadian hotel investor sentiment survey

FIG. 4 Q: What markets are you considering buying or building? INVESTOR PROFILE
Company Structure
As a backdrop to the survey results,
we begin with a brief overview of Private investor 42%
Primary urban 57% the respondents. Domestic investors Hotel investment company 24%
Primary suburban 29% comprised approximately 91% of Real estate company 11%
participants in the survey with the Other 11%
Secondary/tertiary 12%
majority located in Central and Private equity 7%
Other 2%
Western Canada. Of the total, 43% REIT 6%
were based in Central Canada
(includes Ontario and Quebec), 37% in Western Canada (west of Ontario),
• 86% of investors are considering buying or building in primary urban (major and the remaining portion (11%) of domestic investors located in Eastern
city) or primary suburban areas (suburb to a primary city).
Canada (east of Quebec). An additional 9% reported having headquarters
outside of Canada, most of which were located in the United States (see
figure 1).
FIG. 5 Q: What is your ideal property size and asset class? While the majority of investors (40%) own one to three hotels, 21% of
investors own ten or more hotels and 18% currently own none (figure 2).
On average, 60% of private investors own one to three hotel assets, while
<50 2% about one-third of hotel investment companies own three to six properties,
51 to 100 . 26% 37% Limited service and for the most part, institutional investors own ten or more properties.
With regards to investors with existing hotels, 42% indicated owning a mix
101 to 175 . 57% 35% Full service of market segments (including limited service, select service, full service
176 to 250 6%
>250 . 10%
29% Select service and luxury hotels), while the next largest response was the full service
category at 24%.

• Some 83% are seeking lodging investments between 51 and 175 rooms. INVESTMENT INTENTIONS
• Nearly two-thirds of acquisitions would be branded by an internationally
recognized hotel chain, most favoured by Hilton Worldwide, Marriott Amongst those surveyed, 40% selected “hold, renovate or expand” as their
International, InterContinental Hotels Group and Starwood Hotels and Resorts primary investment intention in the next 12 months while 37% of respondents
brands. selected “buy” (figure 3). The survey further revealed the propensity for
investors to acquire (or build) in primary urban markets at 57%, followed
by primary suburban at 29% (figure 4). Central Canada is the most sought
FIG. 6 Selling intentions after region by investors with approximately 37% planning to pursue
40 investments in this region in the next 12 months. Western Canada was next
35 with 26% of respondents. Specifically, top markets of interest to acquire
30 Q: Are you planning to dispose any hotel or build include Calgary, Toronto Airport/West and Vancouver Downtown
25
assets in the next 12 months? at roughly 10% each, and to a lesser degree, Toronto Downtown, Vancouver
20 Airport, Toronto North/East and Ottawa, amongst others. The survey also
No 47%
15 revealed an optimal room range for hotel investments to be between 101 to
Maybe 31%
10 175 rooms for most investors (57%). In addition, over 37% of investors are
5 Yes 22% looking to focus on limited service type assets in future acquisitions and
0 35% on full service assets, with the remaining 29% on select service, the
latter being an asset class that has grown in popularity in recent years
Q: What are your reasons to sell? (figure 5).
While Figure 3 indicates the weak selling intent to one’s primary investment
Other 6%
strategy, some 53% of investors are either considering or planning to sell
one or more hotel asset(s) in the next 12 months. The balance of survey
72% would sell to My lender is telling me to 4%
respondents are not planning to sell. Key reasons to sell include redeploying
recycle capital
capital to other uses (72%), with 10% estate planning and 8% having timed
their exit. (figure 6).
The majority of investors (41%) indicated their average hold period to be
Timing the market 8% more than 10 years, while 32% selected six to ten years, and 26% selected
0 10 20 30 40 50
Estate planning 10% two to five years (figure 7). In a cross tabulation it was discovered 59% of
Western Canadian investors hold their hotel properties for more than ten
years as compared to only 18% from that region who hold their investments

p. 2 | Colliers International hotels

Innvestment Canada | Canadian hotel investor sentiment survey

for under five years. Central Canadian investors had a relatively even FIG. 7 Q: What is your average hold period?
spread between the three hold-categories of under five years, six to ten
years and more than ten years.
A summary of fundamental investment criteria showed the overall <2 years 1%
capitalization rate was the primary valuation methodology for 27% of 2 to 5 years 26%
respondents (figure 8). Other factors such as cash on cash analysis (22%) 6 to 10 years 32%
and equity yield analysis (17%), as well as discounted cash flow analysis >10 years 41%
and percentage of replacement cost were top investment criteria.

0 • 1041% of 20
respondents
30 indicated
40 an50average hold period of more than ten years.
CAPITALIZATION RATES
Some 43% of those surveyed expect capitalization rates to stay the same
FIG. 8 Q: What are your most important investment parameters?
in the next 12 months, while 36% expect an increase and 21% expect a
decrease. The majority of cap rate requirements were in the range of 9%
to 11%. Respondents also indicated average cap rate requirements for Capitalization rate 27%
primary urban full service hotels were lower as compared to their Cash on cash analysis 22%
counterparts, primary urban select service and primary urban limited
Equity yield analysis 17%
service (figure 9). The most frequently selected range of current cap rates
% of replacement cost 11%
for primary urban full-service assets was 7% to 9%. The range increased
to 9% to 11% for primary urban select-service assets and primary urban Discounted cash flow analysis 10%
limited-service assets. There was an even spread for primary suburban
select-service assets; an equal number of investors selected cap rates of 0 • 5 An additional
10 15 13%
20 chose
25 other
30 responses including multiple of total gross
9% to 11% and 11% to 13%, a slightly wider range as compared to other room revenue (7%) and terminal capitalization rate (6%).
markets.

FINANCING ENVIRONMENT FIG. 9 Capitalization rates

In regards to the current financing environment, the survey summarized
financing sources as well as interest rates and terms (figure 10). There Q: What are your expectations for capitalization
seems to be a divide between investors who believe cost of debt has rates in the next 12 months?
become more expensive in the last 12 months (38%) versus those who
believe it has become less expensive (37%); the remainder feeling there Increase 36%
has been no change at all (25%). Debt coverage expectations for financing Decrease 21%
hotel investments for the majority of respondents (51%) reflected a debt Stay the same 43%
coverage ratio (ratio of cash available for debt servicing) range of 1.26 to
1.40. A surprising number responded with ratios of 1.11 to 1.25 (17%),
which is low for current economic conditions. Loan-to-Value (the ratio of
PRIMARY URBAN MARKETS
asset to total debt value) expectations were mainly in the range of 55% to Average capitalization rates per market segment
64%, with 55% of respondents indicating as such. Some 13% indicated
limited-service
ratio expectations above this range while 28% responded below.
Under 5% 5 - 7% 7 - 9% 9 - 11% 11 - 13% Over 13%
Fixed interest rate expectations primarily fell in the ranges between 5%
and 7%. Specifically, 35% of respondents indicated an expected rate range select-service
full-service
of 5% to 6%, and 29% indicated a range between 6% to 7%. Banks
continue to be regarded as a primary source of financing with 40% of
respondents selecting it to finance new acquisitions (figure 10). The other
significant sources were found to be credit unions at 20%, and seller
financing at 15%. Subsequently, 46% of respondents indicated a current PRIMARY SUBURBAN MARKETS
Average capitalization rates per market segment
loan term expectation to be between five to six years, while 38% selected
between three to four years. Roughly 11% had loan term expectations of select-service
limited-service
more than six years.
Under 5% 5 - 7% 7 - 9% 9 - 11% 11 - 13% Over 13%
When asked how access to debt will change in the next 12 months, some
39% believe there will be no change, 37% believe access will become full-service
easier and the remainder believe it will become more difficult in the next
year (figure 10).

p. 3 | Colliers International hotels

Innvestment Canada | Canadian hotel investor sentiment survey

FIG. 10 Financing environment

0

Q: How has the cost of debt changed in the past 12

20
Q: What are your current expectations of Loan-to-Value for hotel investments?
months?
<50% 9%
More expensive 38% 50% to 54% 20%
40

60 Less expensive 37% 55% to 59% 27%

No change 25% 60% to 64% 28%
65% to 69% 12%
80

100 >70% 1%
Unsure 4%

0 20 40 60 80 100 120
0
Q: What are your current expectations for debt Q: What are your current expectations for fixed interest rates for hotel
service coverage ratios for hotel investments?
20 investments?

40 1.00 to 1.10 2% <4% 7%

1.11 to 1.25 17% 4% to 5% 15%
1.26 to 1.40 51% 5% to 6% 35%
60

80 >1.40 15% 6% to 7% 29%

Unsure 15% >7% 7%
100
Unsure 6%

0 5 10 15 20 25 30 35

Q: Who do you expect to provide primary financing for your

acquisition or new development?
Bank 41%
Credit union 20%
Seller 15% Q: What are your current expectations for loan term for hotel investments?
Pension fund 11%
Other 8%
3 to 4 years 38%
Insurance company 4%
5 to 6 years 46%
>6 years 11%
Unsure 5%

Q: Overall, how do you think access to debt will change0 in the 10 20 30 40 50

next 12 months?
No change 39%
Become easier 37%
Become more difficult 24%

p. 4 | Colliers International hotels

 Innvestment Canada | Canadian hotel investor sentiment survey

OUTLOOK
Since the onset of the global crisis, various factors have affected buyers and sellers in their short- and COLLIERS INTERNATIONAL HOTELS
long-term investment strategies. Survey respondents were asked to identify three factors that are most
influential on their investment decisions. The top responses were availability of credit, slowing Canadian CANADA
economy and anticipated accommodation demand at 25%, 21% and 21%, respectively (figure 11). Another
Toronto
top response was a slowing US economy, indicating continued Canadian reliance on the US. One Queen Street East, Suite 2200
As reflected in figure 12, most investors (46% of those surveyed) are somewhat concerned about the Toronto, ON M5C 2Z2
Canadian economy, and 14% have indicated they are very concerned with the economy. 29% of investors Vancouver
feel neutral and approximately 11% are not concerned. However, when asked about economic sentiment 200 Granville Street, Suite 1900
for Canada in the next three to five years, over 75% of respondents indicated a positive or somewhat Vancouver, BC V6C 2R6
positive economic sentiment. Only a handful of respondents (2%) concluded a “somewhat negative”
Alam Pirani
outlook for Canada over the next three to five years. +1 416 643 3414
alam.pirani@colliers.com
25
FIG. 11 Q: What factors are most influential on your investment decisions?
Tom Andrews
+1 604 661 0846
20
Availability of credit 25% tom.andrews@colliers.com
15 Slowing Canadian economy 21% Robin Mcluskie
Anticipated demand 21% +1 416 643 3456
10
robin.mcluskie@colliers.com
Slowing U.S. economy 19%
5 Exchange rate 5% Russell Beaudry
Labour markets 5% +1 416 643 3761
0 russell.beaudry@colliers.com
Other 3%
amy kwan
+1 416 643 3497
amy.kwan@colliers.com
FIG. 12 Economic outlook
www.colliershotels.com

Q: Are you concerned about the fundamentals

of the Canadian economy? INTERNATIONAL
With offices in: Oslo
Very concerned 14% Auckland Singapore
Somewhat concerned 46% Costa Rica Shanghai
Neutral 29% Hong Kong Sydney
London Tokyo
Not concerned 7% Mexico City United States
Really not concerned 4% Moscow Warsaw

Q: What is your long term (three to five year) COLLIERS INTERNATIONAL

economic view?

Positive 31%
480 offices in
Somewhat positive 46% 61 countries on
Average
Somewhat negative 2%
21%
6 continents
Canada: 39 United States: 135
Asia Pacific: 194 Latin America: 17
• 60% are pessimistic (somewhat or very concerned) about Canada’s economic performance today, although EMEA: 95
nearly 98% of respondents have a positive outlook on economic performance in the next three to five
years. www.colliers.com

A special thank you to Professor Richard Wade and fourth year students Aliya Bhatia,
Antonio Gasbarrini, Andrew Higgs and Sanja Kajic of the Ted Rogers School of Hospitality
and Tourism Management at Ryerson University.
Accelerating success.
Note: Percentages may not equal 100% due to rounding.

www.colliers.com/marketname
p. 5 | www.colliershotels.com