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Significant Amount of New Development Money
Entering the Mexican Hotel Investment Scene;
 Mexico City An Active Market

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By Hans Desai, HVS

Mexico - April 2004

As the economic climate in North America begins to ripen, investment opportunities in Mexico have been deemed more attractive by the international hotel investment community. The trailing twelve-month performance in Mexico appears to have bottomed out in 2003, and the prevailing thought is that it’s a good time to get in the hunt. Though hotel acquisitions is the preferred route for most foreign investors considering coming into the market, a significant amount of new development money is entering the Mexican hotel investment scene as well.

Mexican resort destinations typically get most of the attention; however, Mexico City has been an active market within the last twelve months. Several new hotel projects are underway, a number of properties have changed ownership, and new brands are being introduced into the market. A new Embassy Suites (first in Mexico) will arrive in Mexico City in 2005. NH Hotels is continuing to expand its presence and will have four properties in operation in the Mexico City market by 2005. Hilton is in the process of constructing its first Hilton Garden Inn in the Santa Fe district of Mexico City and high-end brands such as Mandarin, Fairmont and Ritz Carlton continue to express interest in this market. Below is a table outlining the number of hotel rooms by hotel category level for the Mexico City market.
 

Mexico Category Level
Number of Hotels
Number of Rooms
% of Total Rooms
Three Star
56
4,364
17.2 %
Four Star
76
8,395
33.1 %
Five Star
35
6,660
26.3 %
Grand Turismo
17
5,923
23.4 %
 
Total
184
25,342
100.0 %

An official government sponsored hotel rating system was ended in 1992 prompting the hotels in Mexico to provide their own assessment of which specific category to belong. There are some generally recognized standards such as a swimming pool, parking and other amenities which “allow” a property to call itself a Grand Turismo class hotel; however, in general the hotels operate on an honor system in regards to their self categorization. The above table represents information published by the Association of Mexico City Hotels. It should be noted that there are many small independent properties which are not affiliated with the Association of Mexico City Hotels and therefore are not included in these figures.

Of the 25,342 "rated" hotel rooms in Mexico City, there are 4,364 which are considered in the three-star category. We estimate that the majority of these properties would fall in the one-to two-star Mobil Guide range and represent small independent, owner operated hotels. There are approximately 8,400 rooms in the four-star category which would be considered two- to three-star within the same Mobil guidelines. Included in the 6,660 five-star hotels are approximately 1,750 which would qualify as Mobil four-star with the balance being at a Mobil three-star level. The Grand Tursimo class reflects the highest standard of hotel category in Mexico, and totals nearly 6,000 hotel rooms or 23.4% of the three-star and above hotels in Mexico City. Within this category we can further redact this group to reflect internationally branded five-star luxury properties which in reality represent only three hotels totaling roundly 800 rooms. For the second largest city in the world, this is a remarkably low number and represents approximately 3% of the discussed lodging market.

(It should be noted that though the Mobil star rating guide does not include hotels in Mexico, when applying the Mobil rating standards to the previously discussed hotel categories, the Mexico hotel “rating” system is in most cases at least one to two stars higher than what the Mobil Guide would apply).

The luxury category saw the introduction of one new hotel, the "W", in 2003. This is the first truly luxury property to enter the Mexico City market since the opening of the JW Marriott in 1996. The Sheraton Centro Historico opened in late 2002 representing a first class international standard Sheraton property. There are no new Grand Turismo hotels due to open in the Mexico City market in 2004. As previously mentioned a new 172-room Embassy Suites will enter the market in 2005 and will be situated near the Centro Historico area. 

The table below is a representative aggregate of what could be considered Mobil four- and five-star hotels in the Mexico City lodging market. With one exception, all of the hotels have an internationally recognized brand affiliation.
 

 
1998
1999
2000
2001
2002
2003
Average Annual Compounded 
Change: 1998-2003
Average Daily Room Count
3,824
3,824
3,824
3,824
3,900
4,341
Available Room Nights
1,395,760
1,395,760
1,395,760
1,395,760
1,423,637
1,584,369
Change
-
0.0 %
0.0 %
0.0 %
2.0 %
11.3 %
2.6 %
Occupied Room Nights
858,578
853,220
872,633
850,317
892,165
1,017,284
Change
-
(0.6) %
2.3 %
(2.6) %
4.9 %
14.0 %
3.5 %
Occupancy
61.5 %
61.1 %
62.5 %
60.9 %
62.7 %
64.2 %
Change
-
(0.6) %
2.3 %
(2.6) %
2.9 %
2.5 %
0.9 %
Average Rate $115.84 $129.76 $134.34
$126.99
$133.56
$155.80
Change
-
12.0 %
3.5 %
(5.5) %
5.2 %
16.7 %
6.1 %
RevPAR $71.25 $79.32 $83.99
$77.37
$83.70
$100.04
Change
-
11.3 %
5.9 %
(7.9) %
8.2 %
19.5 %
7.0 %
Source: Smith Travel Research

In 2001 the Mexico City higher-end market reflected an overall decline as travel in general decreased in part due to the terrorist attacks in the United States on September 11, 2001. However, this aggregate of hotels exhibited a 14% increase in occupied room nights in 2003 over 2002 levels. This increase can be somewhat attributed to the 11.3% increase in room inventory, allowing the absorption of previously unaccommodated demand in the area. Additionally, as evidenced in the table, ADR increased 16.7% in 2003 from 2002. This dynamic occurred while the U.S. was still climbing out of three years of a down or sluggish economy. With the Mexican economy inextricably linked with that of the United States this is a positive sign as we move into 2004. The table below provides key economic indicators for Mexico from 1998-2003.
 

 
1998
1999
2000
2001
2002
2003
GDP (real annual %-change)
4.9 %
3.7 %
6.6 %
-0.3 %
0.9 %
1.3 %
Consumption (real annual %-change)
5.0 %
4.4 %
7.4 %
1.9 %
1.2 %
2.9 %
Investment (real annual %-change)
10.3 %
7.7 %
11.4 %
-5.6 %
-1.0 %
-0.4 %
Agriculture (real annual %-change)
0.8 %
3.6 %
0.6 %
3.3 %
0.5 %
3.9 %
Industry (real annual %-change)
6.3 %
4.2 %
6.1 %
-3.6 %
-0.2 %
-0.8 %
Services (real annual %-change)
4.7 %
3.6 %
7.4 %
0.9 %
1.7 %
2.1 %
Industry (real annual %-change)
6.3 %
4.2 %
6.0 %
-3.4 %
-0.3 %
-0.8 %
Maquiladora ind. (real ann. %-change)
11.3 %
12.8 %
13.3 %
-9.7 %
-10.8 %
-0.6 %
Retail Sales (real annual %-change)
5.5 %
4.3 %
10.0 %
2.7 %
0.0 %
3.3 %
Investment (real annual %-change)
10.3 %
7.7 %
11.4 %
-5.8 %
-0.9 %
-0.4 %
Unemployment (%)
2.6 %
2.0 %
1.9 %
2.5 %
2.1 %
3.0 %
Fiscal Balance (% of GDP)
-1.3 %
-1.1 %
-1.1 %
-0.7 %
-1.3 %
-0.6 %
Source: LatinFocus 2004

The majority of these key indicators suggest that the Mexico economy like the rest of North America bottomed in 2001 after strong performances from 1998 thru 2000. The Mexico economy appears to be working its way towards recovery, albeit at a slow pace as evidenced by results in 2003. A key indicator is foreign investment in Mexico. This is not only important because it reflects the general investment climate within the country but as external investment in Mexico increases so does foreign travel with an accompanying increase in room night demand, particularly at the higher-end hotels.

Direct Foreign Investment
(In Millions)


Foreign Investment
1998
1999
2000
2001
2002
2003
 
$12,284.8
$13,165.6
$16,448.7
$26,569.2
$14,435.3
$10,731.4
Source: Ministry of the Economy 
Sistema del Registro National de Inversiones Extranjeras 2003

Direct foreign investment in Mexico from 1998 to 2003, peaked in 2001 with investments reaching 26.6 billion dollars; however, it should be noted that this year included a transaction of roundly $12 billion from the purchase of Banamex by Citigroup. If this is taken out of the 2001 total, foreign investments crested in 2000 at roundly 16.5 billion dollars and reached a low in 2003 of 10.7 billion dollars. At the time of this article direct foreign investment forecasted for 2004 had yet to be released. However, in speaking to representatives of the Secretary of the Economy, it was indicated that direct foreign investment in Mexico is expected to reach 15 billion in 2004 representing a 40% increase over 2003 levels.

As previously shown, solid performance in the four- and five-star (Mobil level) categories combined with positive economic indicators bodes well for investment in higher end hotel products in Mexico City. Due to the aforementioned dearth of international level luxury properties, this category of hotels in particular appears to warrant future development consideration. We estimate that based on recent market performance, an increase in international travel due to improving economic conditions in North America, and a general lack of luxury hotel rooms in the market that high-end luxury product cap rates will trade between 9% and 11% over the next twelve to twenty-four months.

Hotel investment interest in Mexico appears to be gaining velocity as several sales transactions have consummated in 2004 and new hotel projects are underway throughout the country. For new projects, a strong Mexican partner such as an experienced construction company can go a long way in providing the required local expertise and know-how to bring the hotel to fruition on time and on budget. This can be beneficial for a foreign developer in avoiding some of the common pitfalls relative to construction permitting, licenses and taxes. Additionally, it provides an advantage in facilitating the financing of the project as financial institutions in Mexico will generally look more favorably upon a project with a successful local partner. Both the public and private sectors in Mexico are taking great efforts in attempting to "internationalize" the processes associated with foreign investment and development. From financial institutions to title companies and building contractors the higher risk elements associated with acquisitions and development have been continually undergoing scrutiny creating a generally more positive investment environment. 

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Hans Desai brings over 25 years of hotel operations and management experience to HVS Hotel Management. Hans' experience has ranged from Director of F&B for Hyatt Hotels to General Manager of a small luxury hotel in Macao. Contact Hans at: hdesai@hvshotels.com

 
Contact:
HVS
Hans Desai, CHA, COO
777 29th Street, Suite 100
Boulder, CO, 80303
Phone:  (303) 554-9766  x20
hdesai@hvshotels.com
Also See: Merchant Model or Web Booking Engine? / Ed Brill / December 2003
Mexico: Opportunities and Pitfalls in a Unique Hotel Market / JMBM / Aug 1997
Posadas Hotel Group Opens First Luxury Hotel in More than 10 Years in Mexico City, the Fiesta Americana Grand Chapultepec / Sept 2001


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