A shared ownership concept that has been used in B.C. for more than a decade to finance hotel development appears to be ending as investors face staggering losses in hotel-condos and fractional real estate plays. Now hotel developers are increasingly looking at mixed-use projects, especially full ownership strata residential, to get new projects off the ground.
“Every hotel condo investment [in B.C.] has lost money for the investor,” said real estate consultant Ozzie Jurock. “Every one.”
The evidence is in a frightening free fall in prices.
At Sun Peaks ski resort near Kamloops, hotel condos at the Sunset Lodge and Hearthstone Lodge that once sold for around $199,000 are now being offered at from $19,000 to $25,000 – with some selling for even less. The typical arrangement allow owners 56 days of use per year with the units potentially rented the rest of the time. The catch, and what has made them such a poor investment, is that monthly fees for owners can easily top $360 per month and the owner receives less than half of any rental income, with the rest going to management. In most cases, rental incomes don’t cover the management fees.
A Vancouver investor who bought a shared unit at the Penticton Lakeside Resort in the Okanagan for $140,000 three years ago estimates the unit has lost half its value. “We only used it for 12 days in the last two years,” said the buyer, who asked not to be named, “but the rentals have never covered our costs.”
At Whistler, hotel condos – known as Phase 2 units - are selling this year for less than they were in 1999, according to veteran Whistler realtor Mike Wintemute. Recent listings show one-bedroom Phase 2 suites at Whistler are now priced as low as $61,000.
Fractional units, where hotel suites are usually sold in one-eighth to one-quarter shares, have also floundered. The most recent and highest profile collapse is the luxury Parkside Resort and Spa in Victoria where one-eighth fractional shares were being sold from $115,000 to $121,000 last January. By November 2011, Parkside was in receivership with more than $61 million in unsold inventory, according to court filings by Victoria-based developer Aviawest Resort Group.
As Jurock explains, the problem with fractionals during a downturn is that up to eight owners will be all trying to sell the same unit at the same time.
“No one will build hotel condos or fractionals anymore,” predicts Zack Bhaista, vice-president of Mayfair Hotels and Resorts of Vancouver, which has just broken ground on the Crystal Blu Hotel on Vancouver's Robson Street. “Anybody who bought a [shared ownership] hotel unit in the last 10 years has lost a tremendous amount of money,” he said.
Bhaista said the end of shared ownership as a financing avenue will make it tough for hotel developers in a province where the average hotel is half vacant most of the time. “It is next to impossible to get financing for a hotel in B.C.,” he said.
Mayfair’s Crystal Blu, like Vancouver’s new Shangri-La, Fairmont and the Rosewood at Georgia, show perhaps the only solution for B.C. hotel developers, he said: include full ownership strata units. “The profit you make on the condos pays for the hotel; that is the only way to make it work," Bhaista said.
Betsy MacDonald, a partner in North Vancouver-based hotel consultancy HVS International, said the industry rule of thumb is that a hotel room must make $1 per night for every $1,000 it takes to build or buy. “If the hotel costs $125,000 per [room], the room has to rent for $125 per night on average and you need 60 per cent to 70 per cent occupancy to break even,” she explained. Across B.C., the average daily rate for a hotel room is $119 and the average occupancy rate is around 42 per cent, according to the most recent HVS survey.