Regained Confidence
After years of conservative development in Latin America and the Caribbean, hotel companies are showing signs of aggressive commitment to the area.
By Tony Dela Cruz, Managing Editor -- HOTELS Magazine, 10/1/1999
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Few hotel companies headquartered outside of Latin America are willing to say they are bullish on the area because too often in the past such declarations have served as a kiss of death. But historically volatile markets such as Mexico and Brazil, even in the face of recent currency devaluation, are showing resiliency, with the Brazilian economy, in particular, fighting off forecasts made last year of 25% inflation to settle into a more palatable 8% rate. Chile, which has experienced the most room additions over the past five years, can also boast of occupancies in key destinations of well above 80%. Argentina, thanks to increasing privatization of hotels and boosts in business travel, is nearly as inviting a market as Chile.
Still, the world's largest international hotel companies paint Latin America with a broad brush and light touch, seeking market coverage through management contracts and sliver stakes of equity, sticking for the most part to primary markets. This holds true even in the Caribbean and Mexico, where branded hotels are often operated as part of a North American portfolio.
The broad coverage sought by many large players is typified by Starwood Hotels & Resorts Worldwide. From its regional office in Buenos Aires, the operator and franchisor of the Sheraton and Westin brands identifies 15 key destinations in the 21 countries that comprise Latin America. "It is a hub-and-spoke strategy, not too original, but that's what we call it," says David Martinez, Starwood's vice president of acquisitions and development, Latin America. Starwood has a 5-star hotel open in every key Latin American hub with the exception of Caracas, he says. The company has 35 hotels total in the region, with eight more under contract and in development. One specific goal for Starwood is to introduce the Westin brand to four or five target markets in the area.
Martinez says most large hotel companies would agree the greatest growth potential for Latin America is in the mid-scale segment. Starwood wants to roll out its more moderately priced Four Points brand in the same countries being examined by other operators looking to seed mid-scale flags.
Mid-market Advances
Tom Arasi, president, the Americas, Bass Hotels and Resorts, London, agrees the next wave of development in Latin America will be with mid-market brands in secondary and tertiary markets. "It must be noted that these secondary markets are still very large markets," Arasi says,comparable in size to Tampa, Florida.
Miami-based Emanuel Schreibmaier, director of sales and marketing for Sol Meliá in North America, says Meliá's greatest growth potential lies in markets such as Reforma, Mexico, where the Spanish company recently converted the Crowne Plaza there into the Meliá de Reforma. Meliá is also using its smaller, complementary Meliá Consort brand "in places where it makes no sense to have two Meliá hotels," he says.
But the primary challenge of operating hotels in Latin America is opening them, as neither financing nor local investor support is easy to find. "There is no one strategy for financing a hotel," Arasi says. Latin hotels are funded on a project-by-project basis and underwritten through traditional institutional debt sources who are reluctant to lend to first-time developers. Indeed, these institutions seem willing to lend only to those who do not need to borrow; debt-to-cost ratios run between 40% and 60%, according to Arasi.
Paul Sistare, president and CEO of São Paulo-based Choice Atlantica Hotels, the South American master franchisee of Choice Hotels International, sees an odd lack of both rooms and venture capital. "Product supply is significantly below the demand, but there is a catch to it: there's no financing available." Scott Berman, Miami-based partner with the hospitality and leisure consulting group of PricewaterhouseCoopers, says therein lies the key to Latin America. "Clearly the investors who come up with the mid-market strategy first for the whole of that continent will be ahead for the next decade."
Evry, France-based Accor may already have a template for taking the lead in the Latin mid-market. An upscale owner/developer that has seeded its Sofitel brand in Latin America to impressive depth (four in Brazil, two in Colombia and three in the Caribbean), Accor is also deploying its economy/mid-scale brands, Ibis, Novotel and Mercure in Argentina, Brazil and Mexico. The same three countries will also be the target of Sofitel development in their capitol cities. Like many others, Accor's confidence in Latin America is tempered by concern over political and financial stability, according to a spokesperson.
Unrealized Potential
Although most hotel companies stop shy of labeling themselves bullish on Latin America, perhaps because of the area's volatile economies, Berman says he is extremely confident of hotel development prospects, particularly due to what he views as a dearth of mid-market offerings. "There's two types of hotels--there are luxury hotels and there are 1-star properties sold as 3-star properties." He also points out that irregardless of the economies, the whole of Latin America is undersupplied in the lodging sector. "When you look at population bases and per capita incomes and the size of the lodging supply throughout the region, there is absolutely unrealized potential," Berman says.
On a practical level, hotel operators agree but out of necessity exercise more prudence and caution. Bass Hotels and Resorts is a major player in the region, with two upscale brands, Crowne Plaza and Inter-Continental and "a mid-scale presence with ample room to grow," says Arasi. However, Brazil has also just come through what he calls a very difficult period of economic uncertainty and some level of economic paralysis. "Relative to Latin America, Brazil has kept its currency stable, inflation down, but there continues to be significant pressures that could possibly destabilize Brazil," Arasi says. "We're not out of the woods yet. As Brazil would go, so would go Argentina and, to a degree, Chile."
With 40% of the population of South America residing in either Brazil or Argentina, the two countries are viewed as pivotal markets for the region. Within Brazil, Ernesto Marino, president of São Paulo-based BSH Consultoria Hoteleira, says room rates have recovered following a drop earlier this year in reaction to the devalued local currency, the real. He notes 5-star hotels in São Paulo are now posting average daily rates of $190, while other 5-star Brazilian markets such as Rio de Janeiro, Porto Alegre and Belo Horizonte are between $110 and $130. "The devaluation process helped the resort market a lot," he says. "Today, Brazilians are travelling more around the country than a year ago."
If much of Latin America's fortune hinges on the health of Brazil, Marino calls São Paulo that country's most important market over the next several years. "Hilton, Marriott and Hyatt are all planning new hotels in the south part of the city," he says. "At the same time there are close to 12,000 rooms to be opened in the next two years, all of them in the 4-star niche." Marino says Grupo Posadas is also looking to develop a second Caesar Park hotel in the city and that Meridien, Four Seasons and Orient-Express are all interested in São Paulo as well.
Marriott's Confidence
Marriott International, Washington D.C., is part of the same mix of international players present in São Paulo, but its efforts are more part of an ongoing campaign, like that of Starwood, to establish roots in all of Latin America. "We will have 36 hotels in Latin America by the end of 2000," says Ed Fuller, president and managing director of international operations, Marriott International. By contrast, 10 years ago Marriott's Latin exposure was limited to four to five hotels in the Caribbean.
Near-term, Marriott will have five flags in 19 Latin American countries for a total of about 12,000 rooms, with openings in 2000 representing about a 33% increase over 1998. Highlights of the expansion include the launch of Courtyard in Monterrey, Mexico as well as in Buenos Aires in late-1999 and 2000, respectively, along with the first Marriotts opening in San Salvador and Peru. "We are very aggressive in this market and we are looking to be the market leader," says Miller. Starwood's Martinez acknowledges the fast approach of Marriott. "The competition is emulating us, attacking principal destinations with anchor brands; Marriott is dogged about their growth, they are everywhere that we are," he says. "We have the luxury of having 35 hotels in 26 or 27 destinations."
The dynamics of risk and reward are more predictable in Mexico, Central America and the Caribbean, markets frequently slotted in North American portfolios of operators not only because of their proximity to the U.S. but because of their visitor arrival base, which can consist mostly of Americans.
Luis F. Ponce, Miami-based vice president, Radisson Hotels International - Latin America, says potential in the region is spread out between various countries. "We are certainly confident in the region, as demonstrated by our rapid expansion in the last two years, where we have opened new hotels in Bogota, Quito, Panama and converted others in Costa Rica, El Salvador and most recently in in Montevideo, Uruguay," he says. Ponce believes the region is cycling toward recovery, although he adds investors will continue to lack the confidence to have large capital exposure in Latin projects. Still, that has not stopped Radisson from proceeding with its secondary market development in Antigua, Guatemala, Panama and Ecuador.
Mexico's development prospects are led by Los Cabos, the resort destination with the highest ADRs in the country (averaging $220), and Cancun, Mexico's largest market which continues to expand, according to Miguel Rivera, vice president, HVS International, Mexico. "There are approximately 1,000 new hotel rooms planned, including a Fiesta Americana, a Ritz Carlton, a Hilton, a Hyatt, and a very high-end boutique hotel," Rivera says. Los Cabos is already home to three luxury boutique hotels, Las Ventanas, Palmilla and Twin Dolphin.
Mapping Mexico
Cancun, a mature market of 23,500 rooms, has two new areas developing around it. Puerto Cancun is a proposed 840-acre multi-use development north of Cancun that will include a Jack Nicklaus golf course, marina, hotels, vacation ownership and condominiums in a multi-island layout. Riviera Maya, meanwhile, is 130 kilometers of coastline that currently has 10,000 rooms under development in a mixture of 1,000-plus room hotels and small, eco-tourism-based projects. "This is the kingdom of the all-inclusive hotels and the wholesale tour operators," Rivera says. "European tourism is prevalent here, and there is a lot of investment from large European players, such as Riu, Barceló, Sol Meliá (all from Spain), Robinson Club (Germany), and Viva (Italy)."
Nicholas Crespo, president of Phoenix Hospitality and Consulting Corp. in Key Biscayne, Florida, draws a distinction between the Spanish-speaking Caribbean, led by Puerto Rico, Cuba and the Dominican Republic, and the Anglicized Caribbean, typified by Jamaica and the islands southeast of Puerto Rico, which he calls smaller but higher-performing markets.
Crespo considers Puerto Rico and the Dominican Republic the strongest Spanish Caribbean markets and praises Jamaica as a healthy mid- to upper-priced destination for what he calls the Anglophile Caribbean. "Barbados is a very elegant nation, with loyal clientele who go there every year," he adds. "Cayman is doing well, but is very small, with fewer than 3,500 rooms.
Included in the "small, nice" category is the U.S. Virgin Islands. Ron Olstad, general manager of the Westin St. John resort, says his biggest challenge has been airlift and educating travelers about St. John's proximity to St. Thomas, the USVI's main gateway. "We feel extra fortunate because of added airlift from Puerto Rico, with two new commuter services in the past six months," Olstad says. "St. Thomas is 20 minutes away."
Risks And Rewards
The Westin property itself is illustrative of the risks and rewards of operating in a hurricane zone. Westin bought the resort in 1997 after St. John took a severe hit from Hurricane Marilyn in 1995. Also, Crespo says the Caribbean as a whole continues to suffer from an identity problem. "Ask European travelers and some think all of Mexico is part of the Caribbean," he says.
PricewaterhouseCoopers' Berman points out that Cuba continues to be the wild-card because it continues to draw travelers away from the Dominican Republic and Western Mexico. "It has even had some minimal impact on Florida," he says. But because of the U.S. embargo on trade with Cuba, its full potential will be impossible to measure. "For the moment, the stronger islands like Puerto Rico and Jamaica have realized some new projects that are image builders, most notably Atlantis in the Bahamas, and are reaping the benefit of their visitation and the impact they are having on the local economies."
Other Caribbean highlights, according to Berman, include the opening of a Ritz-Carlton on Jamaica that should diversify the island's all-inclusive image, a new Hyatt that should spruce up St. Lucia and the Four Seasons Nevis which has given high-end investors confidence in the region.
Ultimately, in the same way China and Japan can act as fulcrums for the Asian economy, so do Brazil, Argentina and Chile determine prospects in Latin America. "We're reading things are not as bad as expected, but from talking to Brazilians, the next two years will not be so good," says Tom O'Neill, managing director, Hotel Consulting International, Miami. He notes Chile and Argentina have recently spent more time in recession than not, but he predicts the next two years will be "a good time to be buying hotels at an opportunistic price," and he predicts European players like Accor and Sol Meliá as being more willing to buy than U.S. companies.
Michael Asmussen, director of the São Paulo office of HVS International, says the medium- and long-term perspectives for Brazil have never been as reliable as they are now. "In a perfect world, you would want slightly stronger government and stronger fiscal reforms, but considering where we came from, we have made mammoth strides," he says. He cites Hyatt International as a prime example of improved confidence. "They have been scouting São Paulo for 20 years, and they finally bought a site and will finance it themselves," he says.
Markets At A Glance
Argentina
Cautiously optimistic might seem an ambivalent way to describe a hotel market, but it is appropriate for Argentina, where Marriott is opening a full-service hotel in a secondary market like Mendoza as well as a Courtyard in Buenos Aires. Despite that apparent bullishness, others are concerned of a new president due in 2000, an ongoing recession and the possibility of a currency collapse if the government floats the Argentine peso.
Bahamas
It is infrequent that a single property is given credit for boosting the popularity of an entire destination, but that is the distinction analysts award to Sun International's Atlantis resort and casino on Paradise Island. This has allowed the Bahamas to improve on the 5% per annum growth the Caribbean as a whole has enjoyed since 1992. The hurricane season always plays havoc with arrivals, but Atlantis seems to have taught a lasting lesson on image-building for the area.
Brazil
Historically known for lacking both room supply and development capital, Latin America's largest country is benefiting from new developer confidence. Having established upscale properties in key gateway cities, large corporate chains are branching out with lower-priced brands and also preparing to enter secondary markets. Whether or not they succeed seems to hinge on their ability to tap into local travelers.
Chile
Smaller than both Brazil and Argentina, Chile is viewed as one of the more forward-thinking South American economies, one that has positioned itself for the globalization of hotel brands. It has enjoyed a high number of room additions in recent years yet can boast of high occupancies well above 80% in key cities. Although political instability holds down developer confidence, it remains a favorite among analysts who watch the region.
Colombia
The tourist perception of Colombia as a hostile destination closely matches reality, but there are opportunities for aparthotels, in which capital is fronted prior to development. Also, a local chain of eight hotels is for sale, but financing overall is not available in this country. "Unfortunately," as one analyst puts it, "people go to Colombia only if they must."
Dominican Republic
Along with Cuba, Barbados and the Bahamas, the Dominican Republic is recognized as one of the strongest hotel markets in the Caribbean, primarily through bargain-priced tour group business that draws from all over North America and Europe. This season, Dominican arrivals have been very difficult to predict, with August, usually its busiest month, flat compared to 1998, but more bookings lined up for October.
Mexico
In Mexico City, average daily rates are just now starting to return to levels from before the 1995 currency crisis and investors are thus being lured back to the city. Resort areas such as Cancun and Los Cabos recovered more quickly; resort areas in general are developed faster in Mexico. On the real estate front, financially troubled Situr, once Mexico's largest hotel owner, is obligated to sell most of its portfolio over the next four years. And the on-again, off-again attempts to sell the Camino Real portfolio should start up again in a year.
Peru
Experts say the Peruvian market is an interesting opportunity for management companies but not for real estate owners. Lima is a city typified by overbuilding, most hotels are typically non-branded and there is not much inter-regional travel. Occupancies have leveled at about 50% in the country. Still some optimists view Peru's low cost of labor as a point in favor of developing there and one analyst places it alongside the select group of Argentina, Chile and Brazil as being investment-worthy.
Paraguay
Investment in Paraguay, which this year saw its vice president assassinated and president deposed and indicted, is advised only for cautious developers. But political instability aside, the hotel market forges on. One major hotel is under development in the capitol of Asuncion, while another is up for lease. There is actually more interest in building new hotels rather than converting.
Venezuela
Like many of the less-enticing markets in Latin America, Venezuela is plagued by concerns over governmental stability and a weak economy, but those factors create downside pricing and the opportunity for investors to shop at the bottom of the country's real estate cycle. And long-term players like Sol Meliá can count Venezuela as one of its strongest markets.
Chartwell, Hilton Match Needs In Franchise Relationship
The franchising of full-service hotels in Latin America can be daunting because of quality control issues, but in the case of Grupo Chartwell de Mexico, Mexico City, and Beverly Hills, California-based Hilton Hotels Corp., the partnership yields an abundance of benefits on both sides. Concerns over hotel financing are soothed by Chartwell's strong combination of Mexican and American investors and the Hilton brand name is considered safe in the hands of Chartwell CEO Francisco Zinzer, a former Grupo Posadas executive. Hilton's Senior Vice President Of Franchising Jim Abrahamson says Zinzer's experience was an "essential ingredient" in the franchise agreement. "Francisco was very experienced, had been running the Fiesta Inns team and he had to be good at picking general managers for new build hotels," Abrahamson says. "Those issues all led us to Chartwell."
Although Chartwell's solid financial footing has opened doors and sped its growth, Zinzer says his company's financial structure is only uncommon from a North American perspective. "I would not call it rare, I think that it is much more common internationally than in Mexico," he says. "We have an institutional investor with Credit Suisse First Boston and, we have a group of private investors from the U.S. and Mexico. This gives us certain strengths, as every group has something to contribute besides the capital."
Now in the second year of a five-year deal with Hilton that will develop a total of 20 Hilton Garden Inns in Mexico, Chartwell has emerged as one of the country's most prolific hotel developers. Including its non-Hilton hotels, since its inception in1996 Chartwell has opened 12 hotels in 11 states, a total of 2,300 rooms.
Zinzer says Mexico today has as much market potential as the U.S. did in the 1960s. "Mexico has about 400,000 hotel rooms in the country out of which about 75,000 are chain-affiliated, or 20%," he says. "Today the U.S. is basically the other way around and I do not see why Mexico will not follow that trend."
Abrahamson sees Grupo Chartwell as a long-term player, something necessary given the stops and starts of the Mexico economy. "We see growth in spurts," he says. "Plenty of it depends on access to lending capital; it's very difficult to obtain loans in Mexico."
Zinzer says Grupo Chartwell has access to capital because it has been able to attract institutional investors. "With today's financial vehicles, there are ways of creating possible exits for any partner," he says. "This, in turn, usually generates a more institutional base. It has only proven to be a vehicle of growth."
Mexican Trailblazer
Grupo Posadas widens its development base with expansion
into luxury and eco-resort segments.
If experience and sheer size count for much, then it would be no surprise Grupo Posadas is the most prominent player in the Mexico hotel market. Posadas was the country's first Holiday Inn franchisee, and following that early success, Posadas created its Fiesta Americana and Fiesta Inn brands.
Last year it diversified further, acquiring the rights to the Caesar Park brand, a move that brought Posadas a luxury flag as well as entry into South America, with hotels in São Paulo, Rio de Janeiro and Fortaleza, Brazil and Buenos Aires, Argentina. The Mexico City-based company of more than 50 hotels has also launched a resort concept based on "soft adventure" called The Explorean. Aimed at upscale travelers, Explorean place resorts in undeveloped areas and combines upscale amenities with a closeness to nature.
Vice President of Operations Pablo Azcarraga sees enough similarities in the North American, South American and Mexican markets that Posadas can thrive in all three. "Mexico receives more tourists than any other country in Latin America," he says. "The resorts are as good as any in the world and have standards as good as those in the U.S." He says the business travelers can find accommodations in Brazil and Argentina similar to what they might expect in an American hotel.
It's no secret, Azcarraga says, that Mexican hotel operators have cloned the hotel management style of the U.S., but he feels Posadas has also combined the ability to franchise with the capacity to manage on a fee basis, something that only a handful of the largest American hotel companies can do. That balance has allowed Posadas to grow aggressively over the years. "Our next competitor in Mexico is less than a third of our size," he says. "We have developed in a single year sometimes more than the total portfolios of some of our competition."
As with most Latin American hotel development, local financing is the basis for the company's success, Azcarraga says. "Posadas has had the ability to find institutional investors to support local hotels; that is probably the reason why growth has come so quickly," he says. "Also many hotel companies do not invest as much as the locals do; ultimately that complicates hotel development."
Posadas is wasting little time in developing a distribution plan for the Caesar Park brand in South America. Duplicating the hub-and-spoke model used for the Fiesta brands in Mexico, Azcarraga directed the creation of a brand extension, Caesar Business Hotels to compliment the larger, more fully-featured Caesar Parks. "We are constructing two Caesar Business hotels now; we will develop several more," he says. Although Chile, Venezuela and Colombia are all part of a planned second stage of South American expansion, first there will be more Caesar flags in Brazil.
The two Explorean resorts, located in Mexico's Quintana Roo region, one in mid-jungle, the other on a virgin beach, emphasize sporting and cultural activities outside for upscale customers. Azcarraga envisions a businessperson "who lives in New York, works on Wall Street, drives a 4-by-4 and wears Timberland shoes," as a prototypical guest. "The future of pleasure travel, we feel, will have a lot to do with these resorts which provide contact with nature in a large area," he says.
Private Equity To Dominate Investment
With Latin economies cycling out of recession but lacking
liquidity, private investment in hotels is showing
its upside.
With the U.S. hotel real estate market currently in the doldrums, private investors are increasingly turning their attention to Latin America. Hotel real estate prices there currently are among the world's most attractive on a risk-adjusted basis. National economies generally are rebounding and the exchange rate favors foreign ownership. In many cases, local hotel investments are more stable than the overall Latin American economy, providing low downside and high upside opportunities.
In the second half of 1998, public U.S. lodging and real estate companies were sidelined due to a sharp decline in hotel stock prices. Private equity has not yet demonstrated a return to the market, creating a significant short-term opportunity for equity capital in foreign markets.
Despite these factors, hotel investment in Latin America remains somewhat cautionary, often for the wrong reasons. A primary concern about Latin American hotel investment is generated by negative headlines about various national economies, which tends to paint all countries with the same broad brush. Imagine not investing in California because New York is in an economic slump.
Recently, news coverage has focused primarily on the public equity markets and often has not reflected the total picture. While the direction of the public markets is important, foreign stock markets play a much less important role than they do in the United States or Europe.
Mexico's Upside
For example, the Mexican stock market has a market capitalization of US$100 billion, which is only 25% of the country's US$390 billion Gross Domestic Product (GDP). By contrast, the New York Stock Exchange alone equates to 14% of the U.S. GDP. The five largest companies on BOLSA, the Mexican stock exchange, equal roughly 50% of the exchange's market capitalization. The five largest companies on the NYSE constitute only 14% of that exchange's market cap. Thus, when swings occur in only a handful of Mexican companies, including those within highly volatile industries such as mining and oil, the movement can overemphasize what actually may be occurring. Foreign direct investment (private) has ranged from US$9 to US$12 billion annually between 1994 and 1998. Foreign (public) portfolio investment has ranged from a negative US$9.7 billion to a positive US$13.4 billion in the same period.
The hotel investment cycle in Latin America is approximately where the U.S. cycle was in 1992: beginning to gain momentum. Many Latin American economies are coming out of recession but continue to have severe liquidity problems, making the upside from private equity investments in hotel real estate quite attractive.
What makes these markets particularly attractive is their highly fragmented distribution. Only about 18% of all hotel rooms in Latin America are branded, compared to 70% in the U.S. and Canada. This situation creates an excellent opportunity for the private investor who wants to build share in an attractive market.
Demographics favor continued growth in travel to Latin America. The U.S. Hispanic population is the nation's fastest growing and will be the largest minority group in the country by the year 2001. This strong growth is expected to foster even greater international travel between North and South America as both family and business relationships expand between the two continents.
Opportunity Knocks
Mexico is a good bellwether indicator of Latin American opportunity. Today, Mexico is the second most important market for U.S. exports, the world's 10th largest trading country and the largest in Latin America. It has one of the region's strongest and more rapidly growing economies and a strong relationship with the U.S.
More than 90% of Mexico's international guests originate from the U.S. Mexico has not had a decline in foreign visitors in more than a decade. And, because of the lack of liquidity and conversions to timeshare and condominiums, room supply has been and is projected to remain stable and primarily in the all-inclusive category.
Mexico's banking industry is going through a major merger and acquisition phase with more than 75% of the industry's assets moving to just five banking groups. The country adopted a floating exchange rate and U.S. GAAP accounting standards, which makes consistent accurate financial information readily available. These events are expected to add significant stability to Mexican economic and financial conditions.
Over the next three years, foreign investment in Mexican hotels as well as other Latin America countries is expected to increase substantially. Pricing and supply/demand remains quite attractive. The lead in investment will be private funding because of much higher volatility in public equity markets and the greater flexibility and higher entrepreneurial advantage of private equity. Foreign real estate provides portfolio stabilization through diversification and is an attractive alternative to the expensive U.S. market.
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