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Lodging - specific investment in Latin America has been greater in magnitude and more varied than generally acknowledged, according to information KPMG Peat Marwick gathered in the fourth quarter 1997. Information was gathered from primary research in the region, including direct interviews with hotel developers and owners, banks, and pension funds located in countries throughout the region, and from a survey of 45 international hotel companies. For the purposes of this research, the Latin America region did not include the Caribbean, but did include Mexico and Central America.

The research reveals that over $750 million has been invested in Latin America by some two dozen international hotel companies alone over the past five years. More than $2 billion has been committed to be invested by these companies in the region over the next five years.

It is important to note that these amounts do not include the capital invested as a result of recent acquisitions of major international hotel companies, such as the purchase of Renaissance by Marriott International, ITT Sheraton and Westin by Starwood Hotels and Resorts, and Inter-Continental by Bass, PLC. Also not included is the level of local investment, nor that of many other domestic and international investments.

Latin America's outstanding economic performance in 1997 was the best the region has experienced in the past 25 years. This performance, combined with recent market reforms, has created conditions for sustained increases in hotel investment. Strategic acquisitions of both real assets and corporate entities, equity participation in new developments, and loans were the primary types of investment.

A surprisingly large number of new hotels have been, and continue to be, built with relatively expensive local capital. In addition, the activity of non U.S.-based hotel companies like Grupo Melia / Sol, Accor, S.A., and The Peninsula Group is also considerable.

The research indicates that, although lodging - specific investment generally lags that of general investment, it does tend to exhibit similar trends. Return flight capital and capital raised locally tends to be the first and greatest source of capital to flow into the sector. This is followed by foreign capital invested by more experienced international companies which either have a degree of existing presence, or are seeking to enhance their strategic position. This type of investment often takes the form of token equity doled out in limited quantities.

Next comes the opportunity capital, seeking either strategic positioning and/or high yields commensurate with a high degree of perceived risk.

Finally, more investment begins to flow from the more "mature" investors seeking to expand into new, often secondary markets or sub-markets of gateway cities, or to defend their strategic position through expansion, renovation and/or repositioning of existing properties. Many of these companies will have enjoyed quasi-monopoly rents until the combined effects of the preceding investments result in serious new competition.

Expressed as a percentage of total hotel rooms, international chain penetration in Latin America remains negligible compared to the U.S., and is virtually unchanged since 1991. In 1996, there were approximately
1,151,000 hotel rooms in the region, of which 89 percent were not chain affiliated. The remaining 131,000 rooms affiliated with chains were segmented as follows: United States, 48 percent; European countries, 17 percent; and other countries, 35 percent.
 
 

Between 1991 and 1997, the hotel chains which exhibited the strongest percentage growth in number of rooms were Marriott International, Inter-Continental, and Westin. Best Western, Sol / Melia, and Grupo Posadas also exhibited strong growth.

When queried regarding the most important criteria considered when deciding whether or not to invest in Latin America, survey participants rated the existence of "quality local partners" as the most important criteria. 'Economic growth" and "market size" also scored high.

Surprisingly the availability of local financing and  ''performance of existing hotels" were not considered highly important criteria. The "lack of local financing" was, however, cited as one of the major obstacles to growth in the region. Not surprisingly, Argentina,  Brazil, and Mexico were considered the most attractive markets, followed by Puerto Rico and Chile.

To receive a copy of this survey contact Clay Dickinson at 305-7892623 or Fernando Garcia - Chacon at
305-577-3642.
 

The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1998 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.

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