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. 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. 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.

Build

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.  

Buy 

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. 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. 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. 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.

A station in neighbouring Port Coquitlam, where Self Serve is an option Two western Canadian cities that mandate gas stations employ attendants to pump fuel are outliers in a nation where most citizens are accustomed to do-it-yourself fill ups.

Two western Canadian cities that mandate gas stations employ attendants to pump fuel are outliers in a nation where most citizens are accustomed to do-it-yourself fill ups.

Richmond and Coquitlam, B.C., have prohibited self-service stations for decades and against multiple waves of industry pushback, including a recent salvo by Chevron Canada Ltd. for Coquitlam to revoke its regulation.

Their choice is once more in the spotlight as Oregon shifted this week to permit some gas stations to allow drivers to refuel their vehicles without assistance.

Oregon passed the bill, which took effect Jan. 1, in counties with populations of 40,000 or less — much to the chagrin of some locals, with those who vehemently oppose the change saying they don't know how to pump gas, fear for their safety when doing so, or aren't keen on smelling like fuel.

While many have mocked such responses on social media, Richmond and Coquitlam still believe there's good reason to enforce full-service pumps in 2018.

Full article click here.

There are approximately 183,000 owners of manufactured homes in Canada, and nearly all of them have been banned from accessing refinancing of their mortgaged homes.

Recent government actions outlawing the refinancing apply to all homeowners with an insured mortgage, but owners living in manufactured home parks will be the most affected.

“The overwhelming majority of mortgage lenders financing mobile homes [from chartered banks, credit unions or mortgage finance companies] require mortgage insurance,” said Dustan Woodhouse, a mortgage broker with Dominion Lending Centres in Coquitlam.

“This mortgage insurance is required in just shy of 100% of transactions involving a mobile home.”

But last October, the federal government banned the three main insurers in Canada – Canada Mortgage and Housing Corp (CMHC), Genworth and Canada Guaranty – from backing any kind of residential refinance transaction.

“As a result of Department of Finance changes, government-backed mortgage default insurance is no longer available for refinancing properties of any type,” said Jonathan Rotundo, a senior media relations officer with CMHC.

“There is nothing in the rules that is unique to manufactured homes – this change applies to all property types.”

But, as Woodhouse noted, it is owners of manufactured homes and others on the bottom fringe of the housing market that will be most affected.

“They did not take a measured step and reduce the refinance from 80% of the property value to say 75 per cent or even 65 per cent. Instead, in one stroke of the pen, the federal government flat out eliminated refinance options for tens of thousands of Canadian families,” he said.

Rotundo pointed out that “lenders may continue to refinance on a conventional [uninsured] basis,” but Woodhouse and other brokers say the interest rate on such loans is much higher than what is available with insured mortgages.

Several brokers are already reporting cases where their clients have tried to refinance only to find it wasn’t possible, or they are having to use private lenders that don’t fall under the same government regulations as the mainstream lenders.

Joe Tomkins, a mortgage broker with DLC Canadian Mortgage Experts in Nanaimo, B.C., said several of his clients have already been forced to use a private lender in order to refinance, at a much greater cost.

“A client of mine had to refinance for personal reasons and they needed to get equity out of their home,” he said. “It had to go to a MIC [mortgage investment corporation], and it was 12 per cent and included a very high fee as well. But that was the only option.”

Joel Olson, a DLC Mortgage Experts mortgage broker in Kamloops, B.C., has also had clients refinance at 12 per cent and pay a $4,000 fee because “that was the best and cheapest option of everybody out there.”

He added that the restrictions aren’t unique to mobile homes, but can also include other affordable homes, such as small condos under 550 square feet.

Tomkins noted that while there’s nothing preventing mobile home purchases, he said the key is that buyers, their real estate agents and mortgage brokers should be aware of the restrictions they will face if they plan on refinancing down the road to access the equity in their home.