Latin America signifies a host of different
countries to different people. For our purposes, Latin America applies
to the region south of the United States encompassing Mexico, the Caribbean,
Central America and South America, as presented in the table below.
Although the recent prospects for Latin America�s economies seem dubious,
there are signs of recovery and opportunity on the horizon.
Latin America
The Caribbean Islands
Aruba & Netherlands Antilles, Anguilla,
Antigua & Barbuda, Barbados, British
Virgin Islands, British West Indies, Cuba,
Dominica, Dominican Republic, Grenada,
Haiti, Jamaica, Montserrat , Puerto Rico, The Bahamas, Trinidad &
Tobago, St.
Kitts & Nevis, St. Lucia, St. Vincent & The Grenadines and
the U.S. Virgin Islands |
Mexico and Central America
Belize, Costa Rica, El Salvador,
Guatemala, Honduras, Mexico, Nicaragua
and Panama |
South America
Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, French Guyana, Paraguay,
Peru, Suriname, Uruguay and Venezuela |
The global economic deceleration, including the economies of Latin America,
has been one of the top news headlines of 2001. Frequently, there are examples
of economic struggle such as the Argentine government�s battle to sell
treasury
bills to a captive domestic debt market or the devaluation of Brazil�s
currency, the real, which has lost more than one-fifth of its value since
the beginning of the year, despite interest rate hikes. Chile�s normally
strong peso has also slid against the dollar. Even Mexico�s economy is
slowing, with its exports being impacted by shrinking U.S. demand. However,
many predict a Latin American recovery by the beginning of 2003, led by
the global and U.S. economic recovery. The predicted U.S. rebound, with
expected growth of 1.6% in 2001 and close to 2.9% in 2002, should especially
benefit countries exposed to the international business cycle, such as
Mexico.
The global recovery should also coincide with the completion of domestic
policy tightening. By 2002/2003, most Latin American governments are anticipated
to have tight domestic policies in place, bringing current account deficits
well below the long-term flows. Excess capital flows in relation to current
account deficits should make for easier international financial conditions
and sustained decline in interest rates, which could spur domestic demand.
An Argentine rally and reduced pressure on capital inflows could also
contribute to the Latin American recovery. Although the recovery is anticipated
to be gradual, it might diminish concerns about debt-default risk and consequently
ease access to international capital markets, reducing external borrowing
costs. However, the recovery will likely be uneven across countries. In
particular, oil exporters such as Colombia and Venezuela could benefit
less from these factors, as they might be impacted by the projected drop
in oil prices. Countries with a strong tourism industry, namely Argentina,
Brazil and Mexico, should in turn recover at a swifter pace.
2001 Primary Latin American Lodging Markets
Country
|
Major Hotel Market(s)
|
2001 Occupancy (f)
|
2001 ADR (f) (U.S. Dollars)
|
Recommended Hotel
Investment Strategy
|
1. Argentina |
Buenos Aires |
50% |
$145 |
Watch |
2. Brazil |
Sao Paulo / Rio de Janeiro |
50% / 68% |
$145 / $140 |
Watch/Select |
3. Chile |
Santiago |
53% |
$177 |
Watch |
4. Costa Rica |
San Jose |
75% |
$125 |
Strong Buy |
5. Columbia |
Bogota |
45% |
$115 |
Sell |
6. Cuba |
Havana |
75% |
$100 |
Watch |
7. Mexico |
Mexico City / Cancun |
64% / 75% |
$105 / $110 |
Select Buy / Watch |
8. Peru |
Lima |
48% |
$90 |
Sell |
9. Puerto Rico |
San Juan |
75% |
$200 |
Strong Buy |
10. Venzuela |
Caracas |
60% |
$120 |
Sell |
Source Jones Lang LaSalle Hotels
The Latin American hotel market cannot be summarized in a blanket statement;
all optimism or pessimism is localized. The above table provides an overview
of economic and financial market indicators for Latin America�s 10 largest
economies. We then focus on four of the region�s most prominent countries
in terms of investment potential: Argentina, Brazil, Chile and Mexico;
each of the countries�
hotel supply/demand dynamics and investment potential will be discussed.
Argentina
Argentina, the second largest economy in South America after Brazil,
is entering its third and most acute recession year. Confidence is at its
lowest point as international lenders are pondering Argentina�s abilit
y to repay its sovereign
debt. This lack of confidence is apparent with the difficulty Argentina
has encountered in selling its government bonds, carrying rates above 16%
for short- and mid-term bonds. Additionally, unemployment is at a record
high of 15%
and growing.
Recently, Domingo Cavallo, the newly appointed Economy Minister, has
been given a full range of powers to turn around the economy. He started
by convincing the international lending community to swap short-term debt
obligations for longer-term expirations, easing the Argentine financing
burden by $16 billion for each of the next five years.
He also created a new parity for the Argentine peso for import/export
transactions, basically devaluating the peso for trade purposes by approximately
8%. The long-term goal of the Economy Minister is to slowly abandon the
U.S. dollar /
peso parity for a currency basket comprised of the euro and U.S. dollar.
This policy may result in a peso devaluation, making Argentine products
more competitive in international markets and boosting GDP growth.
On the hotel/commercial real estate investment front, transactions are
practically non-existent. Bond yields have jumped from approximately 13%
to more than 16% in the last two months limiting interest in commercial
real estate, which has traditionally provided stabilized yields of between
12% and 16% (depending on asset class and position in the market). Most
local real estate owners are not ready to sell in a depressed market at
higher cap rates, and as a result, are holding onto their assets until
the market improves. The buyers, on the other hand, have lit tle incentive
to acquire assets at returns below long-term bond yields. Furthermore,
debt and equity remain scarce, although some of the foreign players who
are taking a long-term view on the region are beginning to conservatively
re-enter the market, such as GE Capital and Prudential.
The future of Argentina lies ultimately in its ability to extract itself
out of the current recession. Two schools of thought exist regarding this
speculation:
a) Argentina has hit the bottom of its economic crisis and the next
six to 12 months should show signs of recovery, making it an ideal time
to invest in Argentina at the bottom of the cycle.
b) The worst is yet to come, and Argentina is still a long way from
the bot tom. The economic crisis will widen in the region, taking its toll
on Brazil and Chile, dragging South America via contagion into recession
with little help from the northern hemisphere as it deals with its own
recession fears. At this point, it is too soon to gauge as the United States
is still sending mixed signals with its own slowdown.
Buenos Aires Area Highlights
-
With twelve million people, Buenos Aires is the second largest metropolitan
area in South America after Sao Paulo.
-
It is a well renowned international destination with total visitor volume
leading other cities in South America.
-
Foreign companies invested more than $ 89 billion in the city between 1994
and 2000.
-
Buenos Aires is considered the most cosmopoli tan cit y in South America;
its essence is more European than Latin American.
-
The city offers a modern infrastructure, a well-educated labor pool and
easy access to Brazil and Chile.
Buenos Aires Occupancy
1997 - 2001 f
1997
1998
1999
2000
2001 f |
71%
69%
61%
51%
50% |
Source: Jones Lang LaSalle Hotels
Buenos Aires contains approximately 8,200 hotel rooms. Following are
the additions to the Buenos Aires lodging supply within the last two years,
which constitute a 19.3% increase.
Buenos Aires Hotel Market Additions To
Supply
Property/Developer
|
New Supply Rooms
|
Open
|
Emperor
Loi Suites
Hilton Puerto Madero
Argenta Tower
NH Florida
NH Jousten
Chateau Park Plaza
Elegance Park
Elevage Hotel
Holiday Inn Select
NH Latino
Total |
270
112
421
97
168
85
63
43
103
126
101
1,589 |
2001
2001
2000
2000
2000
2000
1999
1999
1999
1999
1999 |
Our opinion is that Argentina has hit the bot tom of the cycle, and
although there are very few hotels offered for sale on the market, medium-
and long-term investors should have Argentina on their radar screen.
Investing in Argentina
Pros
� Monetary transparency
� New government reforms should be reactive to a sluggish economy
� Should reach investment grade in the next five years
� Educated workforce
� Dollar/peso parity creates an �easy-to-understand�
environment for new investors
� After five or six years in operation, the newly privatized
pension fund system is reaching critical mass, yet fund managers have
not invested in real estate
to date due to the long-term takeout for investment |
Cons
� Higher cost of conducting business
� Some deflation expected due to �semi-dollarized� society
� Unemployment still high, with no relief in sight
� Scarce availability of debt and equity
� Locally financed projects
� Political uncertainty is major limiting factor and last hurdle for
country to overcome
� The Argentine economy is driven by outside investment
and exports, rather than internal consumption.Thus, there is too much
reliance on foreign capital. |
Brazil
Brazil is the eighth largest economy in the world and the largest economy
in South America, dwarfing all other countries in the region. Its GDP is
larger than Denmark, Belgium and the Netherlands combined. In 1999, a Latin
America-based Citibank investment banking official commented on the crisis
of the moment: �Brazil�s reaction to this crisis has been applauded by
international investors by virtue of the controlled inflation rate, smaller-than-expected
GDP decline, relatively calm foreign exchange and declining interest rates.
The fiscal discipline the government has been showing, along with IMF funding,
should continue to restore market confidence in Brazil.�
Two years later this optimistic view has been somewhat tarnished. The
latest survey from the National Confederation of Industry shows that business
confidence has slipped significantly in the first quarter of 2001, from
65 to 60. The reason lies with the contagious crisis in Argentina, Brazil�s
largest trading partner, the electrical
energy crisis and some recent corruption scandals casting a shadow
over economic recovery.
This uncertainty has put pressure on the real, which has slipped more
than 20% since the beginning of the year. But not all is gloomy. GDP is
still expected to rebound to 3.6% in 2002. Inflation is still under control
with a projected rate of 5.3% by year-end 2001, up from previous forecasts
due to the higher cost of energy. It should drop down below 4% in 2002,
assuming that the energy crisis is successfully managed.
Sao Paulo Area Highlights
-
Sao Paulo generates 32% of Brazil�s GDP.
-
It is considered the commercial and cultural center of Brazil.
-
Sao Paolo is the second largest city in Latin America, after Mexico City.
-
$16 billion of direct foreign investments were injected into its economy
in 2001.
-
It has a significant tourism-related infrastructure.
-
1,400,000 foreign tourists visit annually.
Sao Paulo is both a city and a state. The state of Sao Paulo is responsible
for 44% of all industrial activit y in Brazil and 32% of the total Brazilian
GDP. The city of Sao Paulo is considered the nation�s business center,
and, with its 17 million people, the city accounts for 22% of the Brazilian
population.
Sao Paulo is mainly a business destination with some leisure demand.
In recent years, occupancy and ADR have slipped due to a construction boom.
This situation will most likely worsen as supply is expected to surge in
the next 20 to 36 months. Fif t y percent of the projects are condo hotels,
a capi tal structure popular among Brazilian developers.
Due to the lack of capital availability, hotel chains have chosen two
ways to expand their brands in Brazil. European hotel chains, less restricted
than U.S. chains
that are encumbered by strict SEC regulations, have taken the condo
hotel route, associating themselves with local developers. For example,
in 2000, Accor built an
Ibis propert y that was sold in a mere 48 hours.
Executives at two major, international brands decided to build hotels
with their own funds and are spending $70 million and $100 million respectively
to build hotels in Rio de Janeiro and Sao Paulo. Although many management
companies are reluctant to own or invest in real estate, sometimes it is
impossible for these companies to complete hotels unless they provide some
type of financing.
Sao Paulo Occupancy
1997 - 2001 f
1997
1998
1999
2000
2001 f |
59%
61%
50%
56%
50% |
Source: Jones Lang LaSalle Hotels
Sao Paulo has a total inventory of nearly 16,000 rooms. The following
pipeline room supply represents a 25.6% increase.
Sao Paulo Hotel Market Additions To Supply
Property/Developer
|
Rooms
|
Open
|
Accor (Mercure)
Hilton
Grupo Posadas
Sol Melia
Sol Melia
Sol Melia
Sol Melia
Sol Melia
Sol Melia
Grupo Pestana
Grupo Posadas
Sol Melia
Sol Melia
Sol Melia
Total New Supply |
260
500
400
200
210
151
396
154
400
300
383
323
252
160
4,089 |
2003
2003
2002
2002
2002
2002
2002
2002
2002
2001
2001
2001
2001
2001 |
Sao Paulo, the financial epicenter of Brazil, is a vibrant emerging
market . Although there is some concern about the supply coming on line
in the next 24 months, this supply should be absorbed by the domestic demand
in the long run. Hotel companies should focus on the limited-service sector
in order to capture Brazilian market share. This is a new development as
in the past there was virtually no mid-scale product in this sector.
Investing in Brazil
Pros
� 8th largest economy in the world; 87% of Latin American economy
� Largest economy in South America
� Sao Paulo makes up 32% of Brazil�s GDP
� Fiscal discipline and IMF funding should restore confidence
� Inflation is under control
� Fernando Enrique Cardoso is a savvy leader |
Cons
� Crime and poverty
� Lack of capital
� Lack of infrastructure |
Chile
�Investment grade� in South America? In addition to Mexico, Chile has
the enviable reputation as being one of the investment grade economies
in Latin America. According to Standard & Poor�s and Moody�s Investors
the country has a risk rating of A- in part due to the transparency of
its regulations and the predictability of its market decisions. Chile�s
A- investment rating is the highest in Latin America, a fact that has permitted
Chilean firms to finance investments through credits, collections of bonds
and shares in both local and international markets.
Moreover, the perception of country risk has continued to improve, moving
Chile further away from the rest of the countries in South America. Contributing
factors include the minor costs of financing and the best spreads obtained
from the collection of its bonds, both public and private. As a result,
Chile remains one of the most dynamic and promising markets in Latin America.
At present, Chile occupies the 15th place in the world in terms of international
competitiveness, according to the World Economic Forum. The country�s prudent
economic policy has also insured a long-term stability that cannot be
found in other Latin American countries.
In spite of the Asian crisis and its repercussions on other countries,
especially in emerging markets, Chile at tained vigorous growth though
the 90s (averaging 7.3% per annum). Forecasts for GDP growth in 2001 and
2002 are 4.0% and 5.7%, respectively. The slowing in growth is in part
due to the general slowing in the global
economy, along with the uncertainty of the Argentine economy and the
recent currency devaluation of South America�s largest economy, Brazil.
Several significant changes to foreign investment laws occurred in 2000/2001,
which
have improved capital flows. First, foreign investors are no longer
obligated to maintain their capital in the local market for at least one
year. Secondly, and more importantly, the 15% capital gains tax levied
on foreign and domestic investors trading in Chilean stocks has been eliminated.
Santiago Area Highlights
� Santiago offers strong international air access from all major regions.
� Chile has an investment grade risk rating.
� Strong underlying GDP growth is forecasted.
� There is limited new hotel supply in the pipeline (only two projects).
� Per the World Economic Forum, Chile ranks 15th place in the world
in terms of international competitiveness (per the World Economic Forum)
Since 1999, Santiago has experienced a large increase in room stock
particuraly in the four- to five-star market. Much of the new supply was
initiated on the back of the growing GDP, increasing business confidence
and booming real estate markets pre-1999. The upswing caused overconfidence
among developers resulting in a 25%
increase in new hotel stock during the past few years bringing the
city�s room inventory to 3,900.
Santiago Occupancy
1997 - 2001 f
1997
1998
1999
2000
2001 f |
81%
74%
64%
60%
53% |
Source: Jones Lang LaSalle Hotels
A slowing in the global economy, the languishing recession in Argentina
and increasing new supply in the city has caused a dramatic softening in
the Santiago hotel market. The market is reliant on increases in demand
from the corporate sector to boost overall performance. This is likely
to require a short-term recovery period where the current new supply can
be effectively absorbed. With good prospects for GDP growth and the continued
sound investment-grade ranking, underlying business confidence and opportunities
should begin to facilitate a recovery in hotel profitability.
Santiago continues to enjoy strong air access from all major markets.
These include: Aerolineas Argentinas, Aeromexico, Air France, American
Airlines, Delta, Iberia, Lacas (Costa Rica), Lloyd Aero Boliviano, Lufthansa,
Qantas, Swiss Air, TAM (Paraguay), Tame (Ecuador), United and Varig. These
airlines have allowed Santiago to remain accessible from all the major
regions including the USA, Asia Pacific and Europe.
Investing in Chile
Pros
� Lower risks
� Highly developed market compared to other markets
in Latin America
� Long-term stability anticipated as government is slowly leveraged,
and the export of key products provides a solid economic base for future
growth
� Pension funds continue to grow providing good investment partners |
Cons
� Lower returns
� More sophisticated competition
� Relatively small market � only 15 million people
� Many funds are beginning to �over-invest� relative to
international institutional investment standards and may become sellers
in years to come |
Mexico
As expected, the Mexican economy slowed sharply in Q1 2001 under pressure
from a deteri-orating external environment . The global economic slowdown,
particularly in the United States (Mexico�s main trading partner), and
lower oil prices have both hit Mexican export revenues hard. This has
had a resounding effect throughout the economy. GDP growth fell to a two-year
low in Q1 2001, while industrial activity contracted in February, March
and April. On the
other hand, domestic demand remains surprisingly dynamic, although
there are indications that it is starting to ease up slightly. Looking
beyond the short-term, Mexico�s recovery will pick up pace in 2002 as U.S.
demand for Mexican exports returns. GDP is expected to grow by 2.7% in
2001 and by 4.5% in 2002.
Mexico City Area Highlights
-
Mexico City is the largest metropolis in the world with a population of
close to 20 million.
-
The city serves as headquarters for most multinational corporations operating
in Mexico.
-
Mexico City constitutes the major center of economic, cultural and political
activity in the country.
-
It contains a significant tourism infrastructure.
The Mexico City hotel market is mostly reliant on the corporate segment,
which comprises 60% of overall demand. The leisure segment generates
16% of demand, with the meetings and airline segments generating the
balance of 24%. The business center sub-markets of Reforma, Polanco and
Santa Fe are where most of the city�s luxury / upscale full-service product
is located.
Demand growth in Mexico City is expected to dip in 2001, while ADRs
are also expected to decline slightly due to the economic slowdown within
Mexico and the United States. Few sites are available for new hotel development,
which limits new supply. Some market segments such as extended-stay and
the corporate mid-market niche are under-served, representing good opportunities
for future development.
Mexico City - Occupancy
1997 - 2001 f
1997
1998
1999
2000
2001 f |
58%
59%
62%
65%
64% |
Source: SECTUR and Jones Lang LaSalle Hotels
Mexico City has a hotel inventory of 47,000 rooms, 10% of which are
rated as luxury/upscale hotels.
Investing in Mexico
Pros
� Booming resort destinations (Los Cabos, Ixtapa, Maya Riviera and Puerto
Vallarta)
� Emerging secondary markets (Guadalajara and Monterrey)
� �New-look� government with President Vicente Fox
� Ranked as an investment grade country |
Cons
� Extremely dependent on the United States
� High-level Mexican politics and economics are not user-friendly,
not even to Mexicans |
Mexico City Hotel Market Additions To
Supply
Property/Developer
|
Rooms
|
Open
|
Fiesta Inns
Camino Real (extended-stay)
WHotel
Renaissance by Marriott
Total New Supply |
250
200
239
203
892 |
2003
2003
2002
2002 |
Summary
Until the 1990s, a period when market-economy policies and democratic
ruling started to take center stage, Latin America was an unappealing economic
market . Today, despi te a decade of market reforms, Latin America remains
dependent on foreign capital. However, we expect to see a rollout of fresh
reforms, more transparency, less corruption and more accountability in
the next five years.
Although growth will certainly slow in the next 12 months, we believe
that the region will recover by 2003. This recovery will create opportunities
for mid- to long-term investors, providing sufficient yields to justify
a fund allocation to Latin America.
Hotel Investments in Latin America
Opportunities
� San Jose � Costa Rica
� San Juan � Puerto Rico
� Rio de Janeiro � Brazil
� Havana � Cuba
�Mexico City
� International hotel branding opportunities
� Mid-priced hotels
� Significant discounts to replacement costs
� Resort development |
Avoid
� Bogota � Colombia
� Lima � Peru
� Caracas � Venezuela
Investing in Latin America |
Investing in Latin America
Pros
� Young population
� Growing middle class
� Emerging democracies
� Favorable labor costs
� A 500-million population market
|
Cons
� Can be volatile and more risky
� Financing environment is difficult
� Lack of capital and dependency on foreign investment
� Poor infrastructure outside of urban areas |
Biographies of Contributors
Christian Charre, Vice President,
Jones Lang LaSalle Hotels
Christian Charre is Vice President of Jones Lang LaSalle
Hotels in Miami. His primary responsibilities include maintaining active
contacts with investors throughout the United States, Latin America, Europe
and the Caribbean. As a hotel specialist, Mr. Charre has sold and been
involved with the operations of numerous hotels and resorts worldwide. |
Gregory Rumpel, Senior Vice President
, Jones Lang LaSalle Hotels Gregory Rumpel is Senior Vice
President of Jones Lang LaSalle Hotels. Previously, Mr. Rumpel headed up
the New Zealand operation of Jones Lang LaSalle Hotels with his main areas
of responsibilit y being investment sales and advisory services. Mr. Rumpel
relocated to Miami at the beginning of 2001 to assist Jones Lang LaSalle
Hotels� expansion into Latin America. |
Anwar Elgonemy, Associate, Jones
Lang LaSalle Hotels
Anwar Elgonemy, Associate, joined the group�s Miami office
in May 2001. His primary responsibilities include investment sales, as
well as hotel advisory work including valuations and strategic hotel real
estate consul ting. Elgonemy speaks five languages and, during his eight-year
tenure in the hospitalit y industry, has conducted assignments in Egypt,
Spain, Mexico, Portugal, South Korea and the United States. |
Jones Lang LaSalle Hotels is the largest and most qualified specialist
hotel investment banking services group in the world.
Through our 18 dedicated offices and the global Jones Lang LaSalle network
of 6,000 professional across more than 100 key markets on five continents,
we are able to provide clients with value added investment opportunities
and advice. Our recent track record for the last t wo years alone included
the sale of 13,994 hotel rooms to the value of US$1.4 billion in 75 cities
and advisory expertise to the value of US$32.6 billion across 173,021 rooms
and 343 cities. The majority of active investors worldwide have bought
or sold hotel and tourism real estate through Jones Lang LaSalle Hotels,
taking advantage of our extensive professional relationship and innovative
strategies. Our experience and success also extends to the other services,
including mergers & acquisitions, valuation & appraisal, asset
man-agement, strategic planning, operator assessment & selection, financial
advice & capital raising, and industry research.
Disclaimer Copyright � All material in this publication is the property
of Jones Lang LaSalle Hotels (NSW) Pty. Ltd. (ABN 65 075 217 462). No part
of this publication may be reproduced or copied wi thout wri t ten permission.
The information in this publication should be regarded solely as a general
guide. While care has been taken in its preparation, no representation
is made nor responsibility accepted for the accuracy of the whole or any
part. This publication is not part of any contract and parties seeking
further details should contact the author.
|