Should Keep their Eyes Wide Open
The Plays to Make Successful International Hotel Investments
|By Jim Butler, Hotel Lawyer | Author of www.HotelLawBlog.com / January
In a number of recent postings on www.HotelLawBlog.com, I have focused on the attractiveness of international hotel investments and some of the big names pouring investment overseas. Some of the hot markets include Mexico, Costa Rica, the Caribbean, Spain, Italy, London, Saudi Arabia, Dubai, China and India. In Why we’re building hotels in India like crazy, I focused entirely on India, an explosive market that has often been overshadowed by opportunities in China. In announcing plans for Starwood Capital to invest a half billion in India alone, Barry Sternlicht says that there is so much demand that he is targeting an average annual return of 20% on investments in India!
With all the exciting potential for hotel development in these booming markets, it is tempting for developers and investors to rush in to “scoop up the profits”. But before they do, it would be wise to remember that risk is usually commensurate with reward. At the very least, they should ask: “What is the best way to make successful foreign hotel investments?” Here are a few thoughts from www.HotelLawBlog.com . . .
The tempting prize of international hotel investment
To give you a quick recap, the hotel markets are sizzling — along with foreign hotel investments in places such as: Mexico in general, Baja and La Paz in particular, including mixed-use projects there such as Trump’s Baja project.
In fact, in my career as a hotel lawyer, the international markets have never commanded so much attention — as I noted in my comments from the Phoenix Lodging Conference, Hotels in China, India and Mexico are capturing the imagination and resources of the hotel industry and as a number of industry experts expressed in Hotel mixed-use development projects in China, India, Mexico, the Caribbean, Guam — what the experts say now. Further, condo hotels are just beginning to proliferate in foreign markets, borrowing from the US "technology" that we have been perfecting the last 5 years. This is a trend that offers plenty of opportunities for developers and investors.
What will separate the successful deals from the failures, aside from luck?
Not surprisingly, great opportunities are usually accompanied by great challenges. That is certainly true for international hotel investment, whether in China, India, Latin America or any of the other hot markets we have been discussing.
Perhaps the best summary of this is a chart our team researched and put together from the World Bank's assessment of difficulties in doing business in various countries. Take a look at this!
World Bank's statistics suggest some "issues" to watch for
What are some of the hottest foreign markets? China, India, Mexico .
. . The World Bank ranks India as number 134 in the world in terms of the
ease of doing business there and an even lower 173 in enforcing business
contracts. It ranks China 93 in the ease of doing business and 63 in enforcing
contracts, while Mexico gets the highest relative rank of 43 and 87. The
U.S. is ranked third and sixth in these categories (for more rankings,
see the chart below).
With opportunity comes risk
So as the hotel industry embraces emerging markets — as it should — hotel developers should keep their eyes wide open. Both opportunities and risks abound, and the winners will assess each carefully as they proceed with their ambitious plans. More on the international hotel opportunities and risks soon.
In India, where the hospitality industry grew 23.7 per cent in 2005-06, a major shortage of hotel rooms in commercial centers like Delhi, Mumbai, Bangalore, Jaipur and Hyderabad still exists. Hotel developers are interested in entering these markets, but experts say that the skyrocketing price of land in Indian cities is keeping more projects from getting under way. Although I work and reside near some of the most expensive real estate in Southern California, it’s still hard to imagine that a 2.5-acre plot for building a new hotel in Delhi was sold recently for $43.4 million (as reported by R. K. Singh, the Delhi Development Authority’s land commissioner). By some estimates, those kinds of prices mean that land costs would account for the bulk of building a new hotel in India, a country where materials and labor remain cheap by most standards. (By the way, an industry “rule of thumb” is for land to account for 15 percent of the cost of a new hotel.)
Skyrocketing land and construction prices are just the tip of the iceberg. U.S. investors can be frustrated by the difficulty of doing business in many foreign markets, running into obstacles such as bureaucratic rules, infrastructure limitations, arcane business practices and corruption — even with a local partner. And local partners will find the hesitations and concerns of foreign investors equally challenging to deal with. But the rewards can be so great, that investors and developers will continue to attempt harvesting the riches promised by these exciting markets. Some will succeed and other will not.
Play #1: build new hotels and get them up and running
Play #2: Form alliances between local developers and foreign capital
Play #3: Stake out the market segment or segments that work
Play #4 Form alliances with foreign brands or management companies
Play #5 Negotiate special arrangements unique to your deal
In one case study involving China, we helped local developers in executing a plan to build affordable hotel rooms all over China. (This was 10 years ago, before this kind of thing was popular.) We advised them to use a basic U.S. brand on a management/franchise arrangement, where certain markets were carved out as exclusives for our client as long as they maintained a schedule of development. This was good for both the developer and the brand. The local developer got the exclusive rights to the brand as long as it developed a minimum number of hotels per the schedule. The brand was happy because it was not “tied up” if the developer could not deliver hotels. But most important to the local developer, it had the option to terminate the management and/or branding after 10 years. Because their goal was to build their own management company — and ultimately their own brand — the developer had time to build and train a staff and then take over a minimum critical mass of hotels for their own brand. This model worked quite well for them. However, many local developers find that the value of international branding outweighs the seeming advantages of having their own brands.
Capital providers seeking good international projects
On May 3, 2007 in Los Angeles, our Meet
the Money® conference will feature more than 100 providers of debt
or equity financing for hotel-related projects, including those in international
markets. If you are an active provider of capital, or a consumer of capital,
mark the date in your calendar and sign up now. This conference is custom-tailored
to help providers and consumers of capital find the right match. Many delegates
are signing up already to take advantage of the early bird registration
and to secure a seat.
Jim Butler is one of the top hotel lawyers in the world.
GOOGLE “hotel lawyer” or “hotel mixed-use” or “condo hotel lawyer” and
you will see why. Jim devotes 100% of his practice to hospitality, representing
hotel owners, developers and lenders. Jim leads JMBM’s Global Hospitality
Group® — a team of 50 seasoned professionals with more than $40 billion
of hotel transactional experience, involving more than 1,000 properties
located around the globe. Jim and his team are more than “just” great hotel
lawyers. They are also hospitality consultants and business advisors. They
are deal makers. They can help find the right operator or capital provider.
They know who to call and how to reach them. They are a major gateway of
hotel finance, facilitating the flow of capital with their legal skill,
hospitality industry knowledge and ability to find the right “fit” for
all parts of the capital stack. Because they are part of the very fabric
of the hotel industry, they are able to help clients identify key business
goals, assemble the right team, strategize the approach to optimize value
and then get the deal done.
|Also See:||What the Experts Say Now: Hotel Mixed-Use Development Projects in China, India, Mexico, the Caribbean, Guam / Jim Butler / December 2006|
|How Will You Finance Your Hotel Project in 2007? / Jim Butler / January 2007|