INTERNATIONAL REPORT—As they gear up for the 2014 FIFA World Cup and the 2016 Summer Olympic Games, Brazil’s Ministry of Tourism and the Brazilian Development Bank (BNDES) are looking to refresh the country’s hotel inventory with a 1-billion Brazilian reais (US$544.5-million) line of credit for property refurbishment, expansion and ground-up construction.

But unlike the development booms that typically precede other major world events, Brazil’s will likely focus on its existing supply—not new builds, according to advisors and developers who work in and have studied the region closely.

The main reason? Oversupply.

“We already have lots of rooms in the big cities of Brazil. … what we most need is renovation of the existing hotels,” said Diogo Canteras, managing director of HVS in Brazil.

According to STR Global, there are 1,316 hotels comprising 167,035 rooms in the country, thanks in part to a surge in condo-hotel development in the 1980s and 1990s. The result has been a market weighed down by too much product, yielding average daily rates that are half that of other major countries and markets within the Americas. In January 2010, for example, the country posted an ADR of US$95.55, compared with Argentina (US$165.92), Costa Rica (US$172.73), Puerto Rico (US$192.90) and Venezuela (US$147.98).

But it’s not just oversupply that plagues the industry, Canteras said. Age is an equally debilitating factor. “The average age of a hotel is 30 years. … They really deserve a good renovation.”

Nowhere is that more true than the mid-market, which represents the majority of Brazil’s existing supply.

“I see the refurbishment much more focuses on the mid market,” Canteras said. “… They have depreciated a lot during these last years, and with some renovation you can better position this property from a mid-market property to an upper, mid-market segment (property).”

Renovations sought through the new line of credit will do more than provide a face lift; they’ll help propel the Brazilian hotel industry toward the standard of its counterparts throughout South and Central America, said Rogerio Basso, practice leader of Latin America for Ernst & Young.

“It’s certainly a move in the right direction to professionalize and enhance the standards and the quality of the lodging supply,” he said.

Stalled at ground level

While the US$544.5-million line of credit will primarily go toward renovation, that’s not to say ground-up construction is completely dead. According to STR Global, there are 58 total projects comprising 8,318 rooms in Brazil’s active pipeline. Of those, 25 hotels comprising 3,778 rooms are set to open in 2010.

Accor, for example, is looking to open 90 hotels in Brazil during the next four to five years, said Michael Flaxman, COO of the Americas for the Paris-based company. The majority of those openings will be in the economy segment though conversions.

Michael Flaxman, COO of the Americas, Accor

Hilton Worldwide plans to continue development in the region as well, having just signed a deal for a new, three-building hotel complex in Salvador, according to Tom Potter, the company’s area VP for South America.

“Ideally, we want to see a good spread of Hampton Inns and Hilton Garden Inns in the small cities in Brazil, and we also want to see them on the outskirts of the larger cities,” he said. “(We also want to) have hotels in the key cities, in several key cities throughout Brazil that can comfortably cater to hotels like Hilton.”

Yet despite those plans, Potter did cite a number of challenges to hotel development in addition to oversupply, including high interest rates and a real-estate focus on residential and office space.

Other barriers to entry include complicated, recently changed zoning laws, lack of financing (despite the new line of credit) and a lack of familiarity in the market. Despite its emergence onto the world stage in recent years, Brazil is a relative new landscape for investors. For more than 15 years up until the mid-1990s, the country closed its economy, adopting a policy of self-sufficiency. 

“My concern is that there’s still a pretty steep learning curve for U.S. investors trying to get into the country,” Basso said.

Even the BNDES line of credit, which was established to spur development, is incredibly complex to navigate, Flaxman said.

There’s also the issue of time, Canteras said. Given the complexities of the development landscape, it’s unlikely that an investor could start today and secure the necessary financing and paperwork, start construction and have the property fully operational by 2014.