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Is Latin America the next great opportunity?

Starwood's new W Punta de Mita in Mexico’s Riviera Nayarit
Starwood’s new W Punta de Mita in Mexico’s Riviera Nayarit

There are certainly signs that merit further enquiry. Latin America has been in the news a lot lately. Brazil has garnered the lion’s share of attention in the region by hosting the Summer Olympic Games. Although there were some rough spots, and widespread concerns about safety and logistics in the lead up to the games, Rio produced a fairly solid performance, exposing this venerable city to a worldwide audience.

Beyond the Olympics, however, there are still lingering regional concerns. Several of the larger national economies of the region are struggling, with a number in recession. Currencies have depreciated, particularly in countries heavily dependent upon commodities for economic growth.

Against the backdrop of all these developments, future investment opportunities were top of mind at the recent BHN Hotel Opportunities Latin America (HOLA) conference in Miami. In one HOLA session – “The View from the Boardroom” – several C-suite executives offered their views on the current state, and the future, of the industry in this dynamic region.

The bottom line from the panelists is that Latin America cannot be viewed as one homogenous economy. The World Bank echoes this sentiment, suggesting that the region is currently somewhat bifurcated; the northern portion – Mexico and Central America – is expected to see modest macroeconomic growth, while as a whole the region’s southern economy – dominated overwhelmingly by Brazil and Argentina – is expected to continue to contract.  There are, of course, individual countries and sub-markets within the region which are distinguished by very specific local trends and conditions.

The panelists seemed to agree that Mexico, with its close ties to the U.S. economy, has been the star of the Latin American region. “Overall demand growth in Mexico has been very positive,” said Bruce Wardinski, Chairman and CEO of Playa Hotels & Resorts. “Other parts of Latin America may have softened, but Mexico remained very strong, driven by both North American and European demand.”

This solid performance has meant that international investment in Mexican real estate has increased signficantly over the past two years. Additionally, Mexico now has a well-established REIT structure (Fibras) which has created a number of institutional-quality, well-capitalized hotel ownership entities – something that in the region is unique to Mexico.

This view was endorsed by Jose Carolos Azcarraga, CEO of Grupo Posadas, who noted that Mexico in particular has benefitted from contrasting seasonality with the United States and Europe. “Domestic corporate and leisure demand in Latin America has helped carry the region through periods when demand from Europe and the U.S. has gone down,” he said.

But what of other countries in the region? Over the past decade, productivity gains and relative political stability raised economic hopes nearly everywhere. It began to feel like the boom and bust cycle that had afflicted Latin America was a thing of the past.

More recently, macroeconomic trends have not been overly encouraging. In 2015, for the fifth consecutive year, overall Latin America saw a continued slowing of economic growth. This was particularly problematic in those Latin American countries where commodities prices drive GDP. The slowdown in China’s and other economies, which led to a dip in demand for the region’s oil, gas, metals and minerals, exacerbated the situation.

Out of this regional malaise, Colombia, Chile, Mexico and Peru are expected to see modest economic growth over the next few years. Prospects are less certain in countries like Argentina and Brazil, which are showing signs of progress after years of severe economic contraction.

Against the backdrop of this economic uncertainty, hotel supply has increased. Much of this development was predicated on expectations of an economic recovery that to date hasn’t quite materialized. That does not mean, however, that there are not opportunities to grow and invest.

A JLL trend study confirms that there is, in certain markets, insufficient demand to adequately satisfy current supply. Occupancies, particularly in South America, remain below historic levels. It all adds up to several more years of challenging operating conditions in many markets. However, notwithstanding this near-term imbalance, JLL felt that there were opportunities to add to the region’s hotel stock to take advantage of longer-term macroeconomic trends.

Panelists at HOLA endorsed this optimism. “The diverse, inconsistent and localized economic conditions of the varying countries in Latin America make it more difficult to analyze on a macro level,” said Javier Rosenberg, COO of Carlson Rezidor Hotel Group. However, according to Rosenberg, sustained U.S. economic growth should spill over and help a number of Latin American countries. “I’m optimistic on the region, particularly with the recent infrastructure improvements and a steady growth of the middle class,” he continued. “I see great opportunities in secondary and tertiary markets, including conversions of independent hotels looking for the power and support of a global brand.”

One of the best opportunities may be realized by large, global multi-brand hotel companies. The expected Marriott-Starwood merger, HNA’s acquisition of Carlson Rezidor, and Accor’s acquisition of Fairmont all point to increasing global consolidation amongst hotel brands. These larger corporate entities will be looking to accelerate growth throughout the world across numerous brands.

Regions like Latin America – which has historically been dominated by smaller, regional and independent brands – represent a huge opportunity for global hotel companies looking to add properties at a time when strong demand-generating systems are particularly critical.

Again, panelists at the HOLA seminar believe Latin America represents opportunity for the right companies making the right investments. Francisco Levine, CEO of Atton Hotels, said his company is adding to its presence in Chile, Peru and Colombia to take advantage of current economic conditions and makes the case for the benefits of strong regional specialists. “To succeed in this region you must have a local perspective, so that you can fully understand the risks and opportunities,” Levine said. “We focus on being alert and focused on diversification.”

Some of the more alert players will see the advent of the “soft brand” or affiliation as a key to footprint growth in Latin America. One fertile avenue for growth will be those regional or global chains, which can efficiently incorporate independent properties into their systems. Over the coming years, this should create heightened competition between nimble, local players and the larger regional and global brands looking to add properties to achieve the economies of scale necessary to compete more effectively.  Victor Vazquez, Starwood’s head of development for Latin America, commented, “In recent years, interest from independent hotels to connect to our system by affiliating with ‘soft’ brands like The Luxury Collection and Tribute Portfolio has increased meaningfully; it’s a new concept for the region, but quickly building momentum.”

Investment in hotel real estate in the region has been limited, largely to players from within Latin America, and oftentimes investments remain focused within home countries. Cross-border intra-regional investment, both debt and equity, while increasing modestly in recent years remains limited. Investment in hotel assets from outside the region is nascent.

Today, capital is more mobile than ever before, and the hotel industry has certainly seen a growing cadre of hotel investors become increasingly comfortable making investments around the world. Latin America, however, has historically been a region of very little international inbound investment. Managing currency exposure, as well as a thin lending market, has frequently been cited as a barrier for investors from outside the region. Just looking at currency fluctuations over the past year firmly illustrates this point. The currencies of Argentina, Brazil, Columbia and Mexico have each depreciated between approximately 30% and 40% against the U.S. dollar in the past 12 months.

However, the significant depreciation of Latin American currencies against the U.S. dollar has created an opportunistic era when combined with the region’s hotel supply/demand environment. Could this be the right time for “new” money to take a close look at the region, particularly if there are institutional-quality assets available for purchase? With the region’s currencies at historic lows, is this the time for global investors to take the view that there’s only upside from here if an investor has Euros, U.S. dollars or Yuan to spend?

Arthur Adler, managing director and CEO of the Americas at JLL’s Hotels & Hospitality Group, observed, “More international investors are looking at investing in Latin America, but interest is narrowly targeted to specific countries. There is particular interest in leveraging the strong dollar to invest in platforms in Colombia and Brazil. There is a view that Brazil will undergo a meaningful political and economic change which could give rise to opportunistic investments. Investors continue to avoid Venezuela and Panama, due to – respectively – political and economic risk and an enduring over supply of hotel rooms. Investment continues to grow in markets like Mexico, Costa Rica and the Caribbean that are generally tied to the recovery in the United States. Argentina is the big question mark; interest in the country is high, as investors assess whether the policy reforms will stabilize the market for international investors. Overall, we see a gradual increase in investment coming from outside the region.”

Scott Berman, industry leader, Hospitality & Leisure Group at PricewaterhouseCoopers, added, “Global investors have been perpetually cautiously optimistic as to the prospects for Latin America for decades. Unfortunately, the region is impacted all too frequently by extreme volatility caused by macro-economic or geo-political events/factors. While there are certainly pockets of hotel investment success, there have similarly been spectacular failures. Investment execution risk is particularly high and being able to quickly and meaningfully adapt and course-correct when external factors alter the expected trajectory of underwriting is critical. Thus far, investors from within the region have been more able and willing to manage through the volatility. An opportunity does exist for a substantial global investor to mine the region for opportunities, but they will need to come well-prepared.”

 

 


Contributed by Simon Turner, president – global development, Starwood Hotels & Resorts

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