News for the Hospitality Executive
April 4, 2012 - Brazil is among the world’s ten largest economies and is Latin America’s strongest economic force by a wide margin. Solid macroeconomic policymaking over the past ten years and the government’s commitment to structural reform have led to significant bounds in investor sentiment. The country’s long-term growth potential is generating considerable interest among property investors.
A contrast to the underwhelming economic growth in Western Europe and the U.S., Brazil provides a more upbeat picture, with economic growth over the next several years to be twice as high. With 197 million inhabitants, Brazil is the world’s fifth most populous country. Forty million residents have joined the middle class during the past five years.
The country’s revenue per available room (RevPAR) marked double-digit growth in 2011 and RevPAR is expected to continue to rise at similarly high levels in 2012 as strong economic growth, a rapidly increasing middle class and healthy inbound tourism levels – all amid constrained supply – combine to produce solid operating fundamentals.
The Americas’ next hotel development frontier
Over the next decade, investors’ focus in Brazil will be on new development, which is accompanied by large-scale opportunity. Brazil’s development potential is further solidified by the upcoming FIFA World Cup in 2014 and the Summer Olympic Games in 2016.
Just 15% of room supply in Brazil is affiliated with an international hotel brand and the country still lags with respect to the product differentiation seen in mature lodging markets. In the U.S., there is one brand-affiliated hotel room for every 100 residents; in Brazil, the ratio offers a stark difference, with one branded hotel room for every 2,800 residents. This highlights just how much room there is for the establishment of branded hotel supply in Brazil.
Over the medium term, Brazil will attract a higher level of brand differentiation to serve different demographic groups, in particular the emerging middle class. Entering Brazil as a master developer and building up to a critical mass of 25 to 30 hotels in the branded mid-market and limited service sectors is a substantial investment opportunity.
In addition, the country’s large cities, such as São Paulo, Rio de Janeiro, Belo Horizonte, Salvador, Porto Alegre and other cities with over one million residents are generally underserved in the upper-tier segments and such hotel projects can represent viable development opportunities in these cities as well.
A challenge that investors face is finding superior development sites in cities due to the competition with other commercial property developers. In addition, there is a relative lack of financing for hotel developments. Due to this constraint, numerous hotels have been developed under the local condo-hotel structure, whereby dozens of individual investors pool capital to finance a project. The illiquid market for hotel financing has kept a lid on excessive development. The spate of existing condo-hotels now presents a number of branding or re-branding opportunities for hotel management companies.
Active investors in the market include private equity and institutional investors from the United States, Europe and Latin America. Investment funds from the Middle East and Asia have Brazil on their radar as well.
Amid all this interest, the market is not facing an explosion of new supply—a contrast to other emerging markets such as China. The pipeline for Brazil remains moderate: The number of rooms under construction and in advanced stages of planning for the next three years represents a moderate increase of approximately 7% of total existing rooms in the country.
Transactions market slowly opening up
Relatively speaking, Brazil’s hotel transaction market is still undeveloped, though it will slowly continue to open up over the medium term. There are several properties in various stages of the disposition process in the country, but any transfers are moving slowly. The number of hotels that come to market in the near term will continue to be limited as the market is dominated by domestic and intra-regional investors, most of whom are long-term holders. That said, several recent full service hotels that transacted in gateway cities will help set the market in the future.
Market entry options for foreign investors
For new hotel developments, it is common for foreign investors to set up a joint venture with a local investor. Joint ventures are structured through the establishment of a company, in form of a limited company (Sociedade por Quotas de Responsabilidade Limitada, or more simply a ‘Limitada’) or a privately held corporation (Sociedade Anônima - SA) and ownership stakes vary. The underlying joint venture vehicle is a Brazilian company, subject to Brazilian law. Benefits of this structure include the ability to leverage the regional expertise of the local partner.
Foreign investors are allowed to own 100% of a hotel asset in Brazil but investors taking this route must also establish a Brazilian subsidiary, both for land purchases and hotel developments. This entry option is prevalent in Bahía and other resort destinations in the Northeast, where Portuguese and Spanish investors have entered the market without local partners. The benefit of this structure is that the foreign investor has full control over ownership activities and exit strategy.
Brazil has become the most attractive Latin American hotel investment market. Surging domestic demand and seminal international events are dramatically boosting the performance of Brazil’s lodging industry, creating an attractive environment for growth.
This article originally appeared on http://hotelnewsnow.com/
About Jones Lang LaSalle Hotels
Jones Lang LaSalle Hotels is a global real estate services firm focused exclusively on hotels & hospitality. We provide acquisition and financing advice, valuations, investment sales and asset management for luxury hotels, select service and budget hotels, smaller hotels and pubs, from single assets to large portfolios and mixed-use developments. In the last five years we completed nearly 4,000 advisory and valuation assignments and more sale, purchase and financing transactions than any other hotels real estate firm in the world…worth over $30 billion. With 42 offices in 20 countries, no other firm is better connected. Through our depth and breadth of research and experience we know the market at every level, we know the players and we know how to get results. www.joneslanglasallehotels.com
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