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Hotel investment plunges 77%
Hotel investment plunges 77%
Market is `exercising extreme caution' amid uncertain economy
Mar 26, 2009 04:30 AM

Business Reporter

Ontario hotels are feeling the brunt of an economic slowdown combined with a drop in tourist and business travel that has taken a bite out of the industry.

Hotel investment across Canada fell 77 per cent to $1.1 billion in 2008, according to a report yesterday by Colliers International Hotels.

"The market is exercising extreme caution given the economic uncertainty," Bill Stone, executive managing director of Colliers Hotels, said in an interview. "There was a perception we were heading into a distressed hotel environment."

Ontario posted the lowest average price per room – an industry measure that reflects the cost of the property divided by the number of rooms – at $65,100, down 26 per cent from 2007.

"Given the drop in the manufacturing base and the fact there was early supply growth, Ontario has had it harder than the other provinces," said Stone.

Meanwhile, the value of hotel rooms in the key downtown Toronto market is forecast to decline by another 7 per cent by the end of this year as a steady supply of upscale hotels such as The Four Seasons, Ritz-Carlton and Shangri-La open for business starting next year.

Colliers is not forecasting a market glut, but the release of so many new rooms could place downward pressure on values.

"What happens will really be a function of the economy at the time," said Stone. "Hopefully, the economy will be pointing in the right direction by then."

As for this year, "the return to a lower Canadian dollar and reduced fuel prices will likely not be enough to spur lodging demand growth in 2009, particularly as airlines reduce capacity and consumer and business confidence remain weak," Colliers said.

In contrast to previous years that saw foreign buyers snapping up Canadian hotels, most of the activity in 2008 was domestic. Private investors were most active, followed by investment companies, Real Estate Investment Trusts and pension funds.

"Due to the current financial meltdown, hotel real estate lending has become the biggest challenge for transactions," said Colliers.

During the peak period of 2005 to 2007, the availability of easy credit made hotels an attractive investment acquisition target as activity hit record highs in Canada.

Deep-pocketed overseas investors, including Microsoft founder Bill Gates, were attracted to some of the top Canadian brands on the auction block, including Four Seasons and Fairmont.

While Colliers does not expect a return to that level of activity soon, it is also not seeing a reprisal of the early '90s, when recession triggered a record number of failures, placing many hotels in the hands of lenders.

Published Thursday, March 26, 2009 10:26 AM by Kang Kim

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