Airlift issues, political turmoil and economic concerns make Latin America a difficult landscape for hotel development success, but opportunities do exist in the right markets.
GLOBAL REPORT—Latin America experienced many travel-related highlights in 2016, including the Summer Olympics hosted by Rio de Janeiro, Brazil, and the opening of Cuba to U.S. travelers for the first time. Hotel developers and brand executives see potential in many markets, despite setbacks related to political and economic issues.
Hotel News Now asked a group of brand executives and consultants active in the region to comment on Latin America’s winning markets, supply outlook and other opportunities in 2017.
Arturo García Rosa, president, SAHIC
SVP of development, Latin America, Hilton Worldwide Holdings
VP of sales and marketing, Atlantica Hotels International
managing director, Horwath HTL
VP of development,
Latin America, IHG
Latin America is a diverse mix of markets and geographies. What areas in particular were winners, hotel performance-wise, in 2016, and which presented the most challenges? Will that change in 2017?
Arturo García Rosa, president, SAHIC: “For particular markets, definitely the clear winner has been Cuba, with a significant growth of average daily rate, motivated by the increase of both occupancy and average rate. While the trigger has been the openness with the United States, the truth is that there has been growth in traditional markets, mainly in Europe, which has been very important. (We’ve seen growth in) Cuba, followed by Costa Rica, Chile, Peru and Colombia, in that order. Not forgetting Chile, who, mainly thanks to a strong increase in the demand of Argentines, have discovered a combination of leisure and shopping like no other in the region.”
Ted Middleton, SVP, development, Latin America, Hilton Worldwide Holdings: “In 2016, the top-performing markets in terms of our development growth were Mexico, Colombia and Peru, where we currently have approximately 30, 10 and seven projects in the pipeline, respectively. Brazil can present challenges, but there is potential for growth in the market. It is important to have an understanding of the local environment, how to navigate the economic and government structure, as well as how to adapt to the infrastructure. We generally expect the same trends in 2017.”
Annie Morrissey, VP of sales and marketing, Atlantica Hotels International, speaking only on Brazil: “Brazil’s challenges in 2016 were Manaus and Belo Horizonte, mainly because of the oversupply. In BH, there have been 42 new hotels opened since the World Cup, and Manaus (faces challenges) due to the three years of recession that Brazil has faced and the political turmoil that has affected all regions. For example, this year, the number of domestic flights has been below 2015 for the whole year; i.e., the demand has dropped dramatically because of the political turmoil. The winners have been São Paulo, Curitiba, the Northeast of Brazil and some destinations with strong agrobusiness, like Goiânia and the interior of São Paulo. Rio de Janeiro, obviously, was positively affected by the Olympics, but now will have problems with oversupply.”
Andrew Cohan, managing director, Horwath HTL: “The most challenging of the larger markets was Brazil, due to economic, political and health concerns. Fortunately, the Summer Olympics were executed with no major infrastructure or hotel mishaps, and the growth in Rio’s hotel inventory leading up to the events should take some time to fully absorb. Argentina will be a market to watch in 2017 as the Macri government has worked to eliminate the obstacles to foreign investment that kept the country from enjoying growth in recent years as did its neighbors. Already, Viceroy and SLS Hotels (projects) have been announced, and many global brands and investors are now testing the waters and considering new deals.”
Salo Smaletz, VP of development, Latin America, IHG: “The upper-midscale chain scale was a winner, with strong performance across the region. At IHG, we have seen the most growth from our Holiday Inn and Holiday Inn Express brands. We have nearly 40 hotels in the pipeline in Mexico, South America and Central America, the majority of which fall under our upper-midscale brands. One factor which is key to our success is the importance of having, keeping and forging strong relationships with owners. We have established long-standing relationships with key hotel owners in Latin America, who have trust and confidence in IHG and our brands.”
What regions will the industry see the most supply come online in 2017, and in which chain scales? What are the biggest concerns and opportunities surrounding this supply outlook?
García Rosa: “Incredibly Cuba is by far the market with the largest pipeline in all of Latin America. Its 60,000 rooms in varying degrees of development are a number that impresses. Suffice it to take into account the contrast that this means with the approximately 32,000 rooms (in) the pipeline of Mexico and the Caribbean or the approximately 60,000 rooms (in) the region of South America and Central America, including markets like Costa Rica and Panama to different degrees.”
Middleton: “Mexico and Colombia continue to experience strong growth in supply, driven strongly by the focused service segment. We see overbuilding in some markets, but internationally branded hotels are not as susceptible to the oversupply as are national unbranded properties.”
Morrissey: “Before the World Cup, Rio de Janeiro had around 30,000 rooms; and today it has 50,000 and this is a problem. For example, occupancy in the Barra region today is 25% and many hotels are very concerned. The Pestana Hotel in Barra, which opened in July, has just closed. There will be excess demand in Campinas and Goiânia also. Atlantica is opening two hotels in Campinas—the new Radisson Red and our own brand Go Inn. Atlantica is concentrating on secondary markets like Pindamonhangaba, Santo André, Maringá, Jacareí and Guarulhos.”
Cohan: “Colombia, especially Cartagena and Bogota, is witnessing the completion of many hotels that have been in the development pipeline for the past 30 months or so, especially at the upper-upscale and luxury tiers. We have seen increasing interest in mixed-use resort plans for the Caribbean coastline between Cartagena and Barranquilla. Our opinion is that this area may develop best by targeting the national tourism and second home market, as the Caribbean has many pristine beach areas with more convenient airlift.”
Smaletz: “The luxury market continues to do well. We have seven InterContinental properties in Mexico located in urban centers and beach locations. Upscale and upper-midscale chains are also doing very well. Mexico’s strong tourism and investment infrastructure contribute to its continued growth. Chile, Colombia, Ecuador and Peru, will continue to see growth as their economies continue to strengthen. Increasing tourism and stabilizing economies in countries such as Chile and Colombia are reasons to be optimistic. Political instability, or any barriers to obtaining financing, may present challenges in the region overall.”
What major consumer and economic trends will have an impact on hotel performance and growth in Latin America in 2017?
García Rosa: “From the business opportunities side, Argentina will be in the lead due to the growing interest of investors to join the new development process of the country after almost six years of stagnation. With regard to the continuous development in recent years, Peru and Colombia will continue to have improvements in the performance of hotels ranging from high-end to select-service. Chile will continue its climb based on the aforementioned new role as the ‘Miami of South America,’ a particular phenomenon that began as something trendy but seems that it will remain for some time. Paraguay will continue to grow with the appeal of an economy that continues to grow in a country where there is much to be done and opportunities abound. Costa Rica will continue its expansion in the leisure market jointly with Dominican Republic and Cancun, Mexico.”
Middleton: “Due to the growth in the region’s middle class, we expect to continue welcoming first-time travelers, with our focused service brands like Hampton and Hilton Garden Inn acting as ideal options for capturing this market. There will also be a continued focus on innovative technologies to meet the evolving needs of today’s travelers. And, we expect to see strengthening of oil prices, the phasing out of the Colombian tax benefits for hotel developers, and the impact of the U.S. presidential election.”
Morrissey: “2017 is a transition year. We have government that needs to take some serious steps to keep spending under control, reform the labor laws and other difficult issues to bring back confidence for investment in Brazil. There are no big international events and so we shall have to see how the economy reacts to start a slow recovery of ADR and occupancy.”
Cohan: “The state of hotel investment in the U.S. market should benefit investment in Latin American hotel assets. That is, with most U.S. markets at or just past their peak performance levels, it will be more difficult to reach desired yield levels by purchasing U.S. hotel assets. With cap rates expected to rise and little expectation of further improvements in revenue per available room, it will be increasingly difficult to ‘buy low and sell high.’ Therefore, as investors look for higher-yield alternatives they will look south to Latin America and especially Mexico—a nearby, relatively low-risk market where hotel density in both urban and resort markets has significant remaining growth potential.”
Smaletz: “Everything in Latin America moves in cycles. Major sporting events such as the FIFA World Cup in 2014 and the 2016 Summer Olympic Games were major boosts for tourism to Brazil, and these events will continue to be drivers for tourism. Manufacturing, construction and the drop of oil prices have steered economic trends in the past. Access to financing, as well as joint ventures or mergers—which we are seeing more of in the industry—will be key factors in providing more economic opportunities in the region. Building and construction can be challenging at times due to resourcing materials and the workforce, but our partners are able to ensure construction developments from the beginning to end.”