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Thriving Brazil attracts investor interest
March 26 2012

Surging domestic demand and seminal international events are dramatically boosting the performance of Brazil’s hotel industry, creating an attractive environment for growth.

  • Brazil’s economic growth is projected to be twice as high as Western Europe’s and the U.S.’s for the next several years.
  • The country represents a huge opportunity for branded hotel supply, although financing and land can be difficult to obtain.
  • For new hotel developments, it is common for foreign investors to set up a joint venture with a local investor.
By Clay Dickinson and Roberta Oncken
HNN contributors

Brazil is among the world’s 10 largest economies and is Latin America’s strongest economic force by a wide margin. Solid macroeconomic policymaking during the past 10 years and the government’s commitment to structural reform have led to significant rebounds 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 during the next several years to be twice as high. With approximately 195 million inhabitants, Brazil is the world’s fifth most populous country. Not to mention, 40 million residents joined the middle class during the past five years.


Clay Dickinson

The country’s revenue per available room marked double-digit growth during 2011 and is expected to continue to rise at a similarly high level during 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
During 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 hotel markets. In the United States, 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 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. There is a substantial opportunity for master developers to enter Brazil and build up to a critical mass of 25 to 30 hotels in the branded midmarket and limited-service sectors.


Roberta Oncken

In addition, the country’s large cities, such as São Paulo, Rio de Janeiro, Belo Horizonte, Salvador, Porto Alegre and other cities with more than one million residents are generally underserved in the upper-tier segments. 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 because of the competition with other commercial property developers. In addition, there is a relative lack of financing for hotel developments. Because of 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 branding or rebranding opportunities for hotel management companies.

Active investors in the market include private-equity and institutional investors from the U.S., 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 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 during the medium term.

There are several properties in various stages of the disposition process in the country, but transfers are moving slowly.

The number of hotels that come to market during 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 the 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 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 hotel industry, creating an attractive environment for growth.

Clay Dickinson oversees Jones Lang LaSalle Hotels’ Latin America strategic advisory practice and has more than 20 years experience advising a broad range of clients in the hospitality sector. His experience includes advising on hospitality industry transactions, producing global expansion plans for hospitality companies, and valuing international property portfolios. Roberta Oncken has more than 10 years experience advising hospitality clients and is based in the firm’s São Paulo office.

The opinions expressed in this column do not necessarily reflect the opinions of or its parent company, Smith Travel Research and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

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