South American Capital Markets: Is The Grass Greener? Part 2

In the first part of this posting last week, Adam Shindler, principal, Wilshire Hospitality, Buenos Aires, discussed the impacts of the capital markets in hotel dealmaking in South America, as expounded at the recent New York “Real Share” Conference and the HVS-sponsored South American Hotel Investment Conference (SAHIC) in Rio. This is the second post in a two-part series.

As one of the largest emerging markets in the world, Brazil is rich in petroleum-based products, has a population on par with the U.S. (approx 300 million), contains the second most populated city in the western hemisphere, São Paulo (approx 18 million), behind Mexico City (approx 22 million), and its economy has been thriving over the last decade, leaping beyond those of its regional neighbors with intensity and speed.

The reais, the unit of currency in Brazil, has realized a valuation growth of nearly 60% versus the dollar since 2002, when inflationary concerns associated with the potential election of Luiz Inácio Lula da Silva (Labour Party), considered by sectors of the financial markets to be a radical populist, caused the reais to drop to a historic low of BRL$4.30:USD $1.00. With explosive middle-class growth, the economy has been flooded, in a good way, with ‘new’ money interested in traveling and willing to spend. The recent phenomenon has been the driving force behind the hospitality and tourism industry’s success; as much as 90% of the travel market in Brazil is domestic, a staggering number.

These developments have spurred a massive infrastructure investment within the country, including a new international airport in the northeast, near Salvador, which is expected to dramatically increase airlift to Brazil and provide greater travel opportunities within the country for citizens.

In Brazil, however, targeting U.S. or foreign-based visitors would likely need to follow a more upscale strategy (similar, perhaps, to that of the Guanacaste region of Costa Rica around the repositioning of the ‘Oliver North’ international airport in Liberia – which now seems drastically overbuilt – marketed mostly to tourists), as the hotels targeting the 3-star and below traveler would likely be focused on the domestic market. Future supply in this region is likely going to be led by luxury brands/properties – something we have already started to see and a common theme amongst SAHIC attendees. These potentially implementable sales/marketing strategies will be heavily dependent on the relationships that exist amongst the to-be-branded properties and the markets being targeted; if the region is only going to be considered a ‘luxury’ destination, many brands would be precluded from entering the region.

In addition to ‘regular’ travel infrastructure development, Brazil is gearing up for two of the largest international ‘exhibitions’ of athletic prowess, the World Cup in 2014 (with the precursor tournament, the Confederations Cup, in 2013), which is going to take place in 12 cities across the country, and the Summer Games in 2016 (with the Special Olympics World Games in 2015), which will take place in Rio de Janeiro.
 
The untold impact of both of these events taking place within a short period of time could be, and likely will be, incredible for the country. Never have the Olympic Games taken place in South America, and the World Cup has not been on the continent since it took place in Argentina in 1978. The exposure that Brazil will receive leading up to these events may not even be calculable in terms of the number of ‘viewers.’

In markets like Rio de Janeiro, where an extremely limited availability of land (read: high barriers to entry) is juxtaposed with a thriving economy without the presence of most international hotel brands, the desire of these brand/management companies to enter the market may create increased competition for the ‘right’ deal. With limited new supply, the local developers of projects (the most recent property developed in Ipanema was The Fasano – an über-luxe Brazilian brand with properties in Rio and São Paulo, and plans for expansion to Boa Vista, Brasil and Punta del Este, Uruguay – that took nearly nine years to develop from start to finish) have historically needed to carry their own ‘paper’ and raise capital in the form of an apart/condo-hotel model, as access to U.S./foreign capital was widely unavailable. And, in São Paulo (nearly 70% of hotel supply is based on an apart-hotel model), where commercial towers are being built at a pace equal to the condo boom of South Florida, land is available for hotel projects, but the expanse of the city and the value proposition offered by other uses (offices and residential being primary) have precluded hotel development of major internationally branded properties.

The apart/condo-hotel investment model has been the norm in Latin America, but with international investment exposure (read: interested capital), developers are looking more aggressively to raising institutional capital for their projects and following a more ‘promoted’ capital structure.  This comes with a toll as developers are not accustomed to debt instruments nor promoted returns in the manner that ‘western’ practices utilize in negotiating capital agreements.

There is no doubt that developers and the international capital that is trying to find a way in to the Brazilian markets will find a way to play in the sandbox, and the hotel sector provides opportunity for both in a vastly undersupplied market. In addition to fiscal reward, the people of Brazil will realize a huge benefit from the economic movement and potential development of the service business, as employment opportunities will increase, tapping in to a pent-up supply of labor and providing an opportunity to promote education, fiscal responsibility, job/life skills, personal growth, etc.

Hospitality is the business of the world, and in this global industry, some places receive a little more attention than others, at different times, and for different reasons. It is clear that Latin America, and perhaps Brazil specifically, may deservedly be the current recipient of the world’s attention. If you haven’t been to the region, you need to see it to believe it.  It is not as far, nor as foreign, as it may seem from up north.