Lodging in Latin America: An Investment Outlook
By: Jon R. Simon, International Real Estate & Hospitality Partner and Fernando Garcia Chicon, Senior Consultant
Lately, the devaluation of the Mexican Peso and the resulting confidence crisis have produced numerous questions as to the viability of the economic growth and reforms achieved in the rest of Latin America over the past ten years and the outlook for lodging investments. However, while there exists many inefficiencies and problems throughout the region, one must recognize the progress and potential of the area as a whole. Nearly all countries have liberalized their laws allowing for greater foreign investment and guaranteeing the security to the investor.
With the decrease in the value of the dollar relative to most European and Pacific Rim currencies -but the increase in the value of the dollar against most Latin American currencies - it is expected that U.S. tourism will begin to look at Latin America as an alternative destination. Increased trade among Latin American countries and greater cross-border opportunities should lead to a significant expansion in business-related travel. As a result, the Latin American hospitality industry, which has grown significantly in the past decade, should continue to expand as foreign investment grows and economies stabilize.
The country's tourism industry has great potential, offering a variety of settings including a cosmopolitan city in Buenos Aires, first class ski resorts in Bariloche and Las Lenas, entire regions of wildlife in Patagonia, and the water-fall and rain forest areas of Iguazu. In 1993, 2.56 million tourists visited the country, including 216,000 Americans and 443,000 Europeans. Yet the largest segment, representing more than half of all tourists, visited from Uruguay. In the hospitality sector, Sheraton has expanded its Buenos Aires property with the addition of a luxury tower wing. Inter-Continental opened a 315-room luxury hotel earlier this year. In 1994, Marriott was named managing company for the historic, five-star Plaza Hotel, currently undergoing renovation. Clarion Hotel Los Alaciares, a 150-room property in Calafate, and part of the Clarion brand of Choice Hotels International, also opened last year. Radisson, through Hotel Royal, is planning a 31 5400m hotel in Buenos Aires.
Despite its many attractions, tourism in Brazil remains a small industry relative to the country's size, with an estimated 1.6 million visitors in 1993 according to the Brazilian Association of Tourist Agencies. However, the government has designated the tourism industry to receive preferential treatment to encourage its development. In recent years, Rio de Janeiro, the country's most popular destination, has suffered as a result of an increase in crime. Earlier this year federal troops were called in to patrol certain Rio beach areas. Nonetheless, tourism to other areas in the country; primarily the Northeast regions of Fortaleza and Bahia and the southern state of Minas Gerais, has expanded. As a result, Bahia is the fastest growing tourist area in all of South America. Last year, the largest construction company in Brazil announced a $2.2 billion (all figures given in U.S. dollars) hotel resort project to be built in Bahia. A number of hotel chains have already expressed interest in entering the resort. Near the same area, Embratur, the state tourist agency, is working with local and American investors to develop a $30 million resort in the Amazon region, 30 kilometers from Belem.
Durong 1994, foreign visitors totaled 1.62 million, an increase of 15 percent over 1993 levels. This year however; visitation should only grow by five percent as Argentinean tourists, who represent nearly half of all visitors to the country, curtail their travel as a result of economic problems at home. Chile has seen much activity in the hospitality sector as international chains discover the country's stable and growing econorny. Sernatur, the government's tourist agency, reported 47 ongoing hotel investments representing an investment of $144 million. Holiday Inn is in the midst of $30 million, eight-city expansion throughout the country. Hampton Inns, known for their mid-level market penetration, has been very active. Recently, Radisson has announced the development of a $17 million Radisson Royal hotel in the capital city of Santiago. ITT Sheraton confirmed reports of a $40 million investment to upgrade and expand its Santiago Hotel to a luxury property. The project will include a 20-story tower, a new convention center, and added parking area. The Hotel Sonesta Santiago, a 103-room, $12 million property also opened in late 1994.
On the hospitality front, a Colombian government study predicts that the hotel sector should grow annually between eight and nine percent over the next ten years as the country emerges from a decade of drug violence. International hotel chains are gaining a foothold, primarily through the use of franchise agreements. Forte, which signed a franchise agreement with Bogota-based Hoteles Ltd. de Colombia in 1990, opened its sixth hotel in the country in May of last year. During the fall of 1993, Holiday Inn signed a franchise agreement with Bogota-based Hotelex. In the summer of 1995, Radisson, through a franchise agreement with Hoteles Royal, is expected to open a 296-room hotel in Cartagena. Marriott is reportedly looking for a joint venture partner. Hoteles Estelar de Colombia, owner of the Cali Intercontinental, acquired an 18 percent stake in CHC, proprietor of the Cartagena Hilton.
Tourism, overtaking coffee and bananas, is now the largest source of foreign exchange revenue in the Costa Rican economy. Tourism officials estimate that the number of American tourists increased ten percent over 1993 levels to approximately 260,000 visitors in 1994. Costa Rica, with its tropical rain forests, was one of the first countries to recognize the potential of "Ecotourism;' a new approach to travel which provides a personal encounter with nature. To that end, and to control any overbuilding, the government has entered into a number of joint ventures with foreign operators to develop a number of resorts in the northwest province of Guanacaste. Currently, a Canadian developer is building 110 villas in the area. Together with Sonesta International, they will also develop a Sonesta Beach Resort. The government has also entered into a joint venture with Grupo Situr to develop a $150 million project named "El Papagayo". However, given Mexico's currency crisis and the fact that Situr defaulted on a major loan agreement, the future of this venture is in doubt. Most recently, a 260-room Camino Real Hotel opened in San Jose last November.
Tourism, which remains a key component of the Dominican national economy, has grown by an average of 5.2 percent annually since 1989 (through 1993) as measured by the number of visitors to the island. It should he noted that the country has registered both a significant increase of European visitors and a slowdown in North American visits Recent hotel openings include a 150-room Radisson property in Santo Domingo. And hotel development is occurring currently on the North Coast of the island where Grupo Sitra, a joint venture between Trafalgar House and Grupo Sidek of Mexico, is developing a $30 million hotel resort to be named Caribbean Village Club Resort. However, considering the participation of a Mexican partner in the venture, it is not known whether this development will be affected by the Mexican currency crisis.
It is still uncertain what effect the currency crisis and economic slowdown will have on the country's hospitality and tourism industries in the short term. On the one hand it signals a return to the days when Mexico was perceived as a cheaper destination value by the international traveler. On the other hand, however, many tourist packages and hotel rates are priced in dollars - not pesos - partially dissipating the illusion. The steep rise in interest rates has halted hotel development by many hospitality groups including Grupo Situr, Grupo Posados, Presidente Hotels, and Holiday Inn. Recognizing the full importance of the hospitality and tourism industry to the country's recovery; the government is taking a strong and active interest in helping these companies. And, as a result, it is fully expected that, once the current economic crisis stabilizes and nears resolution, tourist and business travel will recover and these hotel developments will resume. Furthermore, the long-term outlook for foreign investment in Mexican hotel properties continues to he positive. That optimism is based, in large part, on tile passage of the 1993 Foreign Investment Law which provides foreign investors with the ability to hold legal title in the so - called "forbidden zone" (3l miles from shoreline and 62 miles from borders) for commercial, industrial, timeshare, or hotel purposes.
So far, most of the hotel development activity has centered within the capital where Radisson, in a joint venture with a local developer, is currently building a mixed-use project that combines a hotel and retail center. Marriott is reported to be looking for a property. Outside the capital, Playa Coronado and Isla Contadom will, in all likelihood, see additional development. Lastly, Panama is also targeting the "Ecotourism" visitor with a hotel development in proximity to the rain forest near the northern border with Costa Rica.
The government continues to go ahead with a privatization program, which includes the sale earlier this year of 33 hotels and tourist inns for $25.3 million. Most of these purchases were done by local companies. Despite an earlier border conflict with neighboring Ecuador, the government tourism promotion board expects a 25 percent increase (500,000 visits) in tourist visits over 1994 levels. To accommodate this increase, numerous hotel projects are underway. Oro Verde, a Swiss-run chain is currently developing a 250-room, $25 million luxury hotel in San Isidro, one of Lima's most renowned residential suburbs. The Spanish-owned hotel chain, Cesar's, began construction for hotels in both Cuzco and Arequipa, Peru's second largest city. A four-star, 100-room hotel concession for the Airport is in the planning/development stages, as is a $20 million, 300-room oceanside complex in Lima to be named El Delfin (The Dolphin) that will feature a large aquarium for dolphins. A number of international chains, led by Marriott, InterContinental, Holiday Inn, and Hyatt are reported to be looking at sites in the country. Both Hilton and Sheraton are looking for franchise opportunities in the old colonial city of Cuzco, the number one tourist destination in Peru and the gateway to Machu Picchu. International companies, which had postponed major decisions pending the outcome of the 1995 elections, are expected to enter the market after the reelection of President Fujimori in April.
The country has been gradually shifting from an agricultural based economy to service industries, including tourism and banking. During 1994, it is estimated that 2.2 million tourists visited the country, a seven percent increase over 1993. The World Tourist Organization listed Uruguay, behind Argentina, as the second most popular destination in South America. Punta del Este, South America's version of the French Riviera, remains the country’s most popular - but highly seasonal - resort area. But, preliminary figures for the most recent peak season reflect a decline in visits, as domestic uncertainties kept many visitors from Argentina closer to home. During 1994, Sheraton entered into a joint venture agreement with a local developer, Tonoso SA, to build a 224-room five-star luxury hotel in Montevideo. Plans are on hold, however, for the Conrad Hotel and Casino in Punta del Este that had been announced by Hilton Hotels Corporation's international arm.
Venezuela has, perhaps, the greatest untapped hospitality potential of any country in the region. Among the areas awaiting development are more than 1,600 miles of Caribbean coast line, 72 off-shore islands, and vast areas of rain forest which are the site of the world's highest waterfall and the world's longest and highest tramway. The most popular resort continues to be Margarita Island which historically has served as a weekend and holiday destination for Venezuelan tourists and condominium owners. But continuing economic problems have eroded the purchasing power of the country's population. As a result, the island's tourism industry, highly dependent on mainland Venezuelan visitors, has suffered. Nonetheless, this year Hilton International will open the largest hotel on the island, its fifth property. Caesar Park is considering a Venezuelan hotel as part of its longer-term Latin American strategy
Conclusion
Opportunities abound for the savvy investor who knows the Latin American region and, more importantly, can recognize the difference between U.S.-based investment techniques and those used abroad in developing countries. Currency devaluations and inflation are part of the economic environment of developing nations, despite any assurances governmental agencies may give. The key ingredients for success are to study the fundamentals of a given country, carefully map out a strategy for hedging foreign debt where the income of the venture is based on local currency, and co-venture the project with a trustworthy local partner.
The Real Estate Report is published by KPMG's National Real Estate, Hospitality, and Construction Practice. © 1996 by KPMG Peat Marwick LLP All rights reserved. For additional information email KPMG.
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