Dressed for the Weather
The world's economies are slowing in a lockstep, and Latin America and the Caribbean are no exception. But hoteliers throughout the region see opportunities even in these troubled times.
By Joan Marsan, Managing Editor -- HOTELS Magazine, 10/1/2001
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Cloudy skies have moved in over the Western Hemisphere, but close to the equator, there is still the distant sound of samba and the hint of sunshine. No recession, after all, lasts forever, and analysts expect the economies of Brazil and Mexico, which had achieved unparalleled growth rates, to recover in 2002. Brazil, with a diversified economy and some of the world's largest cities, promises to be a vital market for industries, and therefore hotel companies, worldwide. Similarly, Mexico offers opportunities throughout its growing resort and business segments, and the Caribbean's beaches continue to beckon to vacationers and developers alike.
"In the long term, Latin America is the place to be," says Thomas O'Neill, managing director, Hotel Consulting International, Miami. And clearly, many hoteliers agree, establishing partnerships that will place them in good stead for the era of growth they foresee in the region. Kingston, Jamaica-based SuperClubs Resorts signed a master franchise agreement in March with Boston-based Sonesta International Hotels Corp. to develop 10 new Sonesta brand hotels in Brazil over a five-year period, allowing Sonesta to venture out of Peru and SuperClubs to move beyond the all-inclusive segment. São Paulo-based Choice Atlantica became Atlantica Hotels International, reflecting its position as an independent hospitality management company operating multiple brands in Brazil, this year adding Four Points by Sheraton and Radisson to the roster. Spain's Sol Meliá is busily digesting the Tryp portfolio it absorbed in August 2000, including 61 hotels operating in the region and another 40-50 under development.
In the short term, while occupancies may be falling throughout Latin America and currencies may be crumbling, hotels remain a relatively attractive investment for those who know that when paper money burns, land is left behind. And so, development in the region has continued unabated. Evry, France-based Accor plans to increase its number of rooms in São Paulo from 30,000 at the end of 2001 to more than 60,000 within three years despite a clear overbuild situation. Likewise, the Brazilian Birman company borrowed US$15 million from Toronto-based Four Seasons in order to complete construction of a US$60 million hotel in São Paulo that will open under the name Four Seasons São Paulo when it is completed (slated for March 2002).
An agreement with GS Consorcio Operador, Mexico City, will spur the development and franchising within five years of five Country Inns & Suites by Carlson, Minneapolis, Minnesota, throughout Mexico, a country emerging from decades of political stagnation and presently in economic recession. Hilton Hotels Corp., Beverly Hills, California, plans to oversee the franchising of five properties in Venezuela in the face of the country's political and economic turbulence. "Business circumvents political and economic conditions," says Nelson Diaz, vice president, franchise development, Hilton Hotels Corp., Memphis, explaining the principle that is driving hoteliers to develop even Latin America's most besieged markets, markets which, Diaz believes, offer yet-unrealized potential.
Economic Woes In The Southern Cone
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Presently, however, many fear the impact of Argentina's financial crisis, if unchecked, could continue to threaten the entire region's performance. "The tango effect from Argentina is having a chilling effect on Mercosur (Chile, Argentina and Brazil)," says Roger Titley, vice president, development and asset management, Latin America, Six Continents, Miami. Argentina has been struggling under the weight of a US$130 billion public debt and a three-year-old recession that has sent unemployment above 15%; a US$8 billion emergency aid package from the International Monetary Fund (IMF) approved in August promises relief for, though not a solution to, the country's problems. Chile, feeling its neighbor's fiscal pinch, has seen its peso devalued by more than 19%. Brazil, despite efforts to separate itself from any dependence upon Argentina, has been rocked by the ripples of economic uncertainty that have been waving through the Southern Cone. In addition, the country is suffering a severe energy crisis brought on by hydroelectric shortfalls due to low rain, forcing consumers and businesses alike to reduce energy use by as much as 20%. Economic growth in Brazil, which measured 4.5% in 2000, and 4.28% year-to-year in the first quarter of 2001, has been resigned down to .79%.
Occupancies, and even more so in some cases, rates, have followed suit as Latin American businesses have placed strict controls on spending and U.S. companies have reduced business travel to the region. According to an Andersen Hotel Industry Benchmark Survey, January to June year-to-date performance figures demonstrated a 2.1% dip in occupancies in São Paulo and a 15.4% drop in rates. Buenos Aires saw occupancies decline 9.3% while rates plummeted 16.1%. Santiago, Chile, experienced an 8.2% rate decline while occupancies descended 5.1%. Central America and the Caribbean were not immune from the slump. Guatemala City saw occupancies fall 7.5% and ADR drop 2.7%. Puerto Rico, while not posting drastic losses, watched occupancies creep up by .2%, while ADR dropped .6%. "We are optimistic that this is a short-term phenomenon, precipitated by the global slowdown," says Jack Kerr, senior vice president, development, Hyatt International, Chicago. "In the medium term, we still believe that Latin America will have higher growth rates than Europe and North America, but the path will be bumpy."
Finding The Money
A dour financial picture in the short term isn't an automatic disaster for hoteliers. "The downside brings opportunity," says David Martinez, vice president, acquisitions and development, Starwood Hotels and Resorts Worldwide, White Plains, New York. "Whereas before we might have been competing with six or eight chains for a deal, now we're competing with one or two. Net-net there are fewer opportunities because some were [canceled], but of those that are there, we're facing less competition."
Competition is weeded out, because in troubled times, the debt market dries up, especially in Latin America, where financing is scarce to begin with. But tactics designed for the region have brought developers such as Paul Sistare, president and CEO, Atlantica, much-needed capital, even when the economic picture has looked grim. For Atlantica, capital comes not from international sources, but from more locally attuned Latin investors. Within three months of the devaluation of the real in 1998, Atlantica, which had contracts on nine hotels in Brazil, had boosted its number of projects to 32 with the aid of a roster of Brazilian investors partaking of flat-financing opportunities.
Sistare's team employs a modified approach to flat financing, the strategy often associated with projects described as condo-hotels and aparthotels, whereby a group of individuals buys a group of, or individual, units. This allows multiple parties to obtain title to a property or group of properties, creating an attractive savings vehicle for Brazilians, who have operated in a financial environment rife with threats of hyper-inflation and currency devaluation, where real estate, rather than currency, is the safer savings alternative-especially when times are tough. "This way, they are owning real estate and getting an investment/savings account at the same time," Sistare says. "In the United States, because of FDIC insurance, we think the bank is safe. In Brazil they put money into what's safe, too, and it's real estate."
The condo-hotel structure, then, may provide an effective shelter for capital for Brazilians-both individual investors and pension funds-waiting out economic uncertainty. But O'Neill would argue that such hotels built in an oversupplied environment like São Paulo will fail to produce satisfactory returns for owners and may come into a forced-sell situation to the international companies that are managing them. Some São Paulo hotels are reporting occupancies in the teens, rates at 5-star hotels that formerly charged US$150 per night are creeping down to compete with limited service hotels' US$55-US$65 ADRs and another 9,000 rooms are forecasted to open next year. "European hotel companies such as Spain's Sol Meliá and France's Accor, who were attracted to this ownership structure, must now consider such options as wringing more capital from disappointed owners, purchasing their units, or, perhaps, abandoning some positions."
São Paulo may be overbuilt, but Sistare points out that Campinas, a satellite city about two hours by car from São Paulo, has a population of more than one million, is home to the offices of several Fortune 500 companies, and before Atlantica opened a Comfort Inn & Suites there, had about 1,900 hotel rooms. The Comfort Inn opened with an occupancy rate of 80%, which it has maintained with an ADR of US$50 ever since. "There are more cities in Brazil with populations of 500,000 or more than in the United States," Sistare says. "You go to those cities. Why ignore the cities where all the people are and the economic indexes are growing at double-digit rates?"
Chieko Aoki, president of São Paulo-based Blue Tree Hotels, agrees. "In Brazil, there's a strong need for city hotels in the secondary markets," Aoki says. "Many are family hotels and not updated." Aoki has altered Blue Tree's development plans to accommodate this need, moving away from plans to expand throughout Latin America, and instead concentrating on her home turf. "The first market we wanted to go into was Argentina, but it's not doing so well," she says. "And there are so many opportunities in Brazil. We haven't changed our long-term target, but for now we're focusing on Brazil."
While Aoki prefers city hotels, which she says are more stable, she notes that Bahia, with its government-supported development of infrastructure, is a prime destination market. And indeed, the 325-room SuperClubs Breezes Costa do Sauípe, is reporting occupancies of 95% during the high season, with an ADR of US$200, fed by an eager Brazilian customer base of 75%. "Everybody is watching that development with a great deal of interest," says Scott Berman, Partner, Pricewaterhouse-Coopers, Miami. "There is a great thirst for that type of product in Latin America; before it didn't exist."
Now, Paris-based Sofitel; Washington, D.C.-based Marriott International; and SuperClubs operate five hotels in the multi-million dollar Sauípe complex. "The fact that dissimilar operators can join together in a similar complex is testimony to what this type of project can become," Berman says, not just in Brazil, but throughout Latin America. "It's not as much where, but who, and that's backwards, but that's the issue in Latin America, identifying well-financed, sophisticated real estate developers."
Others, however, argue that location matters more than operators, and there is no sense in establishing properties geared toward the international market without first establishing a substantial client base already attracted to the destination. "Sauípe is not the right place to try," says Starwood's Martinez. "We could never get comfortable with putting our flag on those hotels. That's truly a field of dreams situation. Putting up those hotels with the hope that it will become a destination is a long shot. Some companies have taken that bet."
Expanding Offerings In Mexico
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The U.S. economic slowdown has sharply affected Mexico, which counts its northern neighbor as its primary trade partner. That impact, in combination with lower oil prices, brought the Mexican GDP growth rate to a two-year low in the first quarter of 2001. Domestic demand, however, remained strong and dynamic, lending credence to hoteliers' assertions that, in Mexico as in Brazil and many Latin countries, quality, branded mid-scale properties geared toward the local market offer the strongest opportunities for growth.
Development at all levels, however, continues apace. With the advent of an active new government, investor confidence in Mexico has increased, and the country is seeing a florescence of new product. About 81 hotels are slated to be built within the coming year, and another 31 tourist developments such as condominiums, clubs, eco-tourism projects and resorts are under construction. Developers are planning to invest more than US$1.5 billion in tourism projects throughout Mexico, with about 30% of the investment expected to come from foreigners, according to government figures. Approximately 1/3 of the investment will be spent on beach resorts and another 1/3 will be allocated to the Riviera Maya region, which has seen the sharp growth of all-inclusives catering to the European market.
The Riviera Maya's expansion, doubling in size over the last year, has come at Cancun's expense, says Francisco Zinser, president, Zinser Consultores En Hoteleria, Mexico City. Indeed, Cancun's occupancies have drooped slightly and rates have barely budged. But the market will remain strong, Berman says. "Cancun will only suffer from oversupply if the new product developed is more of the same," he says. "By that I mean square boxes and square pools. What they need to do is avoid competing with Cuba, which is selling price, and low price. Creative resort product will allow them to be successful." Creative doesn't have to come at great expense, Berman says, asserting it can be as simple as an open-air lobby, a striking color scheme, or a quality restaurant serving localized cuisine.
But many hoteliers, sensing the imminent maturation of some of Mexico's resort markets, are looking to diversify by strengthening their city and business hotel portfolios. "Keep an eye on the cities," says Chuck Bedsole, hospitality practice leader, Ernst & Young, Dallas, and that is what companies including Hilton Hotels Corp. and NH Hoteles are doing. While it continues to re-flag the 4- and 5-star, 14-property Camino Real portfolio owned by Grupo Empresarial Angeles, Hilton also will build its limited-service offerings in cities.
"For North American companies, Mexico is a natural development partner, in terms of the exchange of business traffic," says Nelson Diaz, vice president, franchise development, Hilton Hotels Corp., Memphis. "The greatest potential there is in terms of limited service. As far as full service, I think we will see fewer new builds, except in specific markets that are new. But there will be a lot of re-flagging of hotels as the market gets globalized."
Similarly, Madrid-based NH Hoteles will hold 58.7% of NH Mexico through its Gestión Hotelera subsidiary in a deal that also gives NH Mexico contracts to manage and flag all 14 hotels and 2,756 rooms previously operated by Grupo Chartwell, Mexico City. Chartwell gets a 41.25% interest in NH Mexico. NH Chairman Gabriele Burgio says Mexico has very interesting growth possibilities, and mirroring Diaz' strategy, notes that the creation of NH Mexico could provide a bridge to other markets, such as the United States.
Business Slows In The Caribbean
As in Sauípe, where developer more so than location, could determine the success of development projects, the Caribbean's most promising destinations are dependent upon infrastructure improvements and airlift that will allow more upscale properties to run at a profit. "Costa Rica remains an incipient market with good potential for the tourist trade, but critical infrastructure-roads to the coast from San Jose and airports-are still in progress," says Hyatt's Kerr. "The same is true for other Central American markets. Getting to the popular beaches in Guanacaste province still requires two flights. Low-end eco-tourism is still the main draw, with the 5-star market still not large enough to generate certain returns. More air travel lift will drive returns."
The situation is similar in the Dominican Republic, where independent and all-inclusive resorts with low ADRs keep rates low, although airlift, infrastructure, low labor costs and miles of undeveloped beachfront are attracting hoteliers. Six Continents is testing the waters with two new Crowne Plazas, one in Santiago, and one in Santo Domingo that is part of a multi-use upscale retail space including condominiums on the Malecón. But, in the Dominican Republic, "as an effect of the all inclusive, rates are very difficult to push up to the same levels that you see in other areas of the Caribbean," says Alvaro Diago, vice president, operations, Six Continents, Miami. "If you compare islands, the [Dominican Republic] is the lowest. Even when you bring the best products into the market, that will drive rates up another 10%-15%, but not more than that."
Elsewhere in the Caribbean, "This year has really been a mixed bag of goods," says John Lynch, executive vice president, marketing, Sandals Resorts International, Jamaica, describing surprisingly strong sales in July, but a fall season approaching with sales down 30%, largely the result of sagging consumer confidence. Across the Caribbean, the story is the same: Some markets hanging on to occupancies in the 70s, others experiencing greater declines. Howard Friedman, president, the Americas, Hilton International, Miami, reports Hilton's Caribbean properties were performing at 70% overall, just before heading into the slower fall months. Puerto Rico saw 73% occupancies, while St. Lucia was at 72%, down from 84% last year. Nassau and Tobago were faring worse, the Tobago property having opened in the past year to a slowing market.
But nowhere in the Caribbean are operators portending disaster, and they shouldn't be, says PricewaterhouseCoopers' Berman. "Over the last five years we've been so knocked out by high occupancies that you tend to get spoiled," Berman says. "When you look at the metrics today, they're fine in 75% of the locations. San Juan-there's a market that was running in the mid- to high-80s. Now it's in the high 70s, and everybody is scratching their heads. But, the high 70s is pretty good." Especially, as many would point out, in the midst of a recession.
Markets At A Glance
Argentina: Some say Argentina's economy has hit bottom and is on its way back up, others think it is still heading down. One thing is certain. Argentina, South America's second largest economy, is in its third and most severe year of recession. "The good news is that laws recently passed by the economy minister should make Argentine hotels more competitive," says Anwar Elgonemy, associate, Jones Lange LaSalle Hotels. Those laws include a moratorium on real estate tax until 2003, 100% of payroll tax credited toward sales tax and taxes on private foreign debt abolished.
Brazil: São Paulo is oversupplied but continues to attract international operators with gateway city approaches. Many argue key locations in the city still are under-served, and so the room count continues to grow, with another 9,000 additions slated this year. Additionally, changes in flight patterns, with more international carriers whisking travelers in and out of the city, have curtailed business stays. Outside of São Paulo, Brazil's many half-million-plus-population cities beckon, and its endless miles of beachfront, though lacking essential infrastructure, suggest resort development opportunities if government support comes through as it did in Costa do Sauipe, Bahia.
Caribbean: Anguilla and Nevis hotels reopened, and St. Lucia felt the pinch, with both occupancies and ADRs dropping. The Dominican Republic, however, is the Caribbean's point of intrigue. This market, predominantly European- and Canadian-driven, low-rated, all-inclusive business over the last 25 years, is going through a metamorphosis toward a more diversified destination, with luxury resorts and a growth in the American market.
Central America: In Central America, several of the capital cities only have 800-1,000 hotel rooms, but a big percentage increase could have a disastrous impact, says Thomas O'Neill, managing director, Hotel Consulting International, Miami. Panama's market was decimated by the loss of U.S. governmental business associated with the defense department's withdrawal, and it has a long way to go before recovery. But elsewhere in Central America, there are bright spots.
"Costa Rica is Hawaii 40 years ago," says Scott Berman, partner, PricewaterhouseCoopers, Miami. It has a relatively small supply and a lot of development interest, particularly along the Pacific Coast. It is a short flight from the United States, suggesting a wealth of potential customers are available. San Jose has seen steadily rising occupancies and rates.
Belize, though a diver's mecca, is a relatively poor country with limited infrastructure, so developers are afforded little incentive to build there. But smaller, independent casual resorts and all-inclusives will pave the way in this country that has much to offer, geographically, if not in terms of usable sites.
Chile: "Chile is still a model, but it's not performing as well as it had been," O'Neill says. An increase in supply, pitted against the effects of the slowing global economy and the Argentine recession, has softened the Santiago hotel market, which is highly dependent upon the corporate sector. Still, Chile promises a strong return, attracting business through the transparency of its regulations and the predictability of its market decisions, Elgonemy says.
Mexico: Figuratively speaking, Mexico is the sunniest spot in the Latin American region. Its emerging secondary markets, mid-tier business hotels and resorts that have seen strong RevPAR gains (24.4% in Puerto Vallarta) are displaying resiliency despite Mexico's own recession, as well as that of the United States, its primary trade partner. Cancun is holding steady, despite drop-offs in American tourism, by selling to domestic travelers. International investors who have recognized Mexico's strengths are pouring capital into resort and business properties. Analysts expect a 2002 economic recovery, just in time to fill new supply.
Words From The Wise Secrets To Success In Latin America
Xavier Veciana, general manager, Breezes Costa do Sauipe Resort, and director general, Brazil, SuperClubs "In order to operate in Latin America, you should completely forget about the idea that it's going to be cheap," Veciana says. Operators expect high costs in North America and Europe, but there's a tendency to believe everywhere else is inexpensive. In Latin America that's not true, he says, though the reasons vary from market to market (He should know--he has run hotels in Europe, Asia, the Caribbean, and Central and South America.) In Brazil, labor costs, because of government-mandated benefits, are high. In Venezuela, infrastructure often is lacking. The Dominican Republic offers the greatest low-cost opportunities in the region, he says, but even there, electricity is pricey. Wherever you go, Veciana says, "You have to be lean."
Paul Sistare, president and CEO, Atlantica Hotels International, São Paulo "Tropicalize," Sistare says. Understand that things may be done differently in Latin America than elsewhere, though it's important to know what you won't sacrifice to regional attitudes. Sistare wouldn't budge on installing full-fledged fire protection in the manner required by U.S. fire codes throughout Atlantica's Brazilian properties, though Brazilian codes were less strict. He does, however, install local GMs in every Brazilian hotel. "We made a huge mistake when we first got started in this business," Sistare says. Atlantica imported management for the opening of the first hotel. Despite all the support corporate offices lent to the European GM who staffed the hotel, it wasn't until a Brazilian GM took over that sales went up 33% in 90 days. Now, all Atlantica hotels are staffed locally. But they are required to have all the expertise of the finest internationally trained managers. They must be CHA (Certified Hotel Administrator) certified within one year of employment, assuring they have a local focus with an international perspective.
Jack Kerr, senior vice president, development, Hyatt International, Chicago "Patience is essential; short-term volatility is inevitable," Kerr says. Occupancies and rates bear this out for any hotel operator, but in Latin America, the shifting political and economic climate does, too. Every process, in fact, is affected by the region's mercurial nature. Construction is more difficult to manage. Financing is never a given. And currency and tax issues, constantly evolving, make careful ownership and financing structuring critical.
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