Cuba Takes Bigger Steps
While travel restrictions remain and ownership is limited, development taking steps in the right direction.
Charles Suddaby -- Hotels, 11/30/2008 11:00:00 PM
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Sol Melia’s sprawling resort on the beach at Varadero. |
Cuba has evolved into one of the most popular travel destinations in the Caribbean with a plethora of hotels having been built in short succession to meet the demands of a world travel market anxious to see what the country has to offer. The number of foreign tourists has increased from 300,000 in 1988 to more than two million today. The country has gone on a hotel and resort development frenzy to meet the demands of this burgeoning market; there are now about 275 hotels with some 45,000 rooms across the land. Much of this development was built using Cuba’s internal and somewhat insulated resources, with no real knowledge of anything other than the economy-minded, all-inclusive market.
One of the constraints to growth has been the perception of poor construction standards and a lack of creativity in products and services—a result of the construction industry’s limited exposure to international development. The Ministry of Tourism has recognized these shortcomings and has paved the way for the introduction of foreign management companies and joint-venture partners able to introduce fresh ideas. There are now approximately 50 hotels managed by 12 foreign hotel companies, and more than 30 hotels open or being developed under joint-venture agreements. This has led to a more contemporary style of development and more contemporary management.
The traditional joint-venture arrangement calls for a roughly equal investment by a Cuban hotel company and a foreign partner. There is no standard structure and each deal is negotiated separately; however, it is common to see the Cuban hotel company contribute the land and local resources (local building materials, construction crews, equipment, etc.) while the foreign partner injects cash, foreign building materials, equipment, products and supplies. The negotiation of the joint-venture agreement can be a fairly lengthy process, requiring legal advice on local matters to ensure that there is fair contribution by both parties.
Going Upscale
The primary issue confronting Cuba’s hotel sector is its appeal as an inexpensive, all-inclusive destination. This has allowed tour operators to have strong influence over pricing, resulting in revenue per guestroom well below those in other areas of the Caribbean. Even in some of the best commercial hotels in Havana, the heavy volume of tour groups has driven the average rate down to under US$100 per night. As a result, the government is looking for ways to reduce the influence of tour groups on these hotels and devise strategies to attract more independent travelers.
In a more general attempt to broaden its tourism appeal and to expand foreign investment, the Ministry of Tourism and the Cuban hotel companies are building upon the vast array of tourism experiences and tourism regions to develop different products and services. There are now upscale resorts, many of them all-inclusive, located beside spectacular beaches and pristine cays. These resorts tend to feature overly large guestrooms with ample use of marble and upscale furniture packages, while dining options include an array of specialty restaurants and bars.
The focus of development for the resorts tends to be along Cuba’s north coast, particularly in areas such as Cayo Coco, Cayo Guillermo, Cayo Romano and Cayo Sabinal, where there are several hundred miles of beaches. Another focal area is Cayo Largo, off the south coast, with little development today other than a fairly modern international airport.
The city center hotels, particularly those in Havana, tend to comprise recent developments (such as the Melia Cohiba) or conversion of beautiful colonial buildings in Habana Vieja. Those hotels constructed in the last 10 years are typically in the Vedado or Miramar areas of the city and reflect traditional 3- to 4-star quality. The cost of construction is generally in the US$75,000 to US$125,000 per room range. The hotels in Habana Vieja tend to be small, but extremely attractive old buildings accommodating up to about 50 rooms, with redevelopment costs again in the same range.
The building structures retain their classic colonial exteriors, while the interiors are substantially renovated. Unfortunately, in many cases, the interiors tend to lack the input of international designers and the operational expertise of international hoteliers and investors that would raise the quality of facilities and services to their deserved level. These properties are currently achieving average rates in the US$60 to US$100 level, but with improved finishes and more astute pricing could easily surpass US$150.
Over the next few years, we can expect to see Cuba focus on diversifying into new products and reaching into the upscale markets with the development of even higher quality products. These will include mainly resorts and urban hotels, but developers also expect to see some top quality destination spas and medical retreats, ranches and eco-lodges.
The government is negotiating with foreign investors for projects upwards of US$200,000 and even US$300,000 per key. These projects may not yet be of the standard of Ritz-Carlton or Little Dix Bay, but they are a clear indication of the enormous future potential that awaits this country.
Interest Diversifying
Considering that Havana receives about one million visitors a year, the majority of international hotel companies are focused on this market, and we are now starting to see some top-class developments in the pipeline. As more and more interest is shown in this market, expect to see some very high quality redevelopments that will drive rates well beyond their current levels and closer to those seen in top-rated hotels in destinations like San Juan, Bridgetown or Nassau.
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| The historic lobby of the Hotel Raquel in Habana Vieja, among the newer, boutique-style hotels in Havana. |
One such project, located near the Spanish Embassy at the entrance to Habana Vieja, will see the development of about 150 rooms, about 5,000 sq. ft. (465 sq. m) of meeting space, a 100-seat upscale restaurant and 50-seat lobby bar. Construction cost estimates have yet to be finalized, but will likely be in excess of US$200,000 per room. While this may not seem particularly high by international standards, it is significantly more than any previous hotel development and must also be considered in the context of Cuba’s low wage rates in the construction industry.
Current legislation in Cuba does allow for foreigners to hold a 100% interest in real estate, but the government is not yet ready (and may not ever) to approve any such deal. As a result, international investors are unable to take on some of the more classic mixed-use projects involving sale of ownership in residential units.
The Ministry of Tourism is open to discussion on timeshare and fractional ownership structures, but only in the context of a 'right to use’ rather than 'fee simple’ ownership. There are several projects in the early planning stages where these concepts are being considered, but we have yet to see some actual developments in the ground.
One project in the development pipeline involves several hundred acres of land east of Havana that is being planned to include three hotels, a championship golf course, marina and about 200 residential units around a centrally-located retail village. Again, construction costs have not been fully assessed, but it is likely this project could reach close to US$200 million.
There is much speculation as to what may ultimately happen in Cuba, when travel restrictions may be lifted, and how the U.S. market may be accepted if and when those barriers are lifted. This same discussion has been going on for years, and it is unclear whether relationships today are any better than they were 10 years ago or if they will be better 10 years from now.
What is evident, though, is that Cuba is taking steps to establish itself, even without the enormous U.S. market, as one of the key tourism markets in the region. As an outside observer, one has to wonder about the enormous potential of this country’s tourism sector over the next 20 years.
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