The seas of change are encroaching on the Caribbean and Latin America hotel markets, and Brexit, Zika and currency devaluation are all part of the tide.
After several years of solid growth, the Caribbean and Latin American hotel markets are experiencing various challenges due to the Zika virus, currency devaluation and overall economic woes. However, various markets and segments are thriving amidst these impacts.
Now is the time for regional hotel owners and investors to re-evaluate their asset management priorities. Below I highlight five key trends shaping the region.
1. Zika’s impact on the industry
Fears of visiting the Caribbean and Latin America due to the Zika Virus prevail. Industry experts point to two issues: battling the virus itself and media coverage/public relations concerning Zika.
The public is watching and worrying and hotel-related impacts are being felt throughout the region. In May, Major League Baseball postponed its games in Puerto Rico due to Zika fears. During the same period, Time magazine published a Zika story as its cover story.
On Marriott International’s first-quarter earnings call, CEO Arne Sorenson stated that Zika could affect revenue per available room by a few points in the region in Q2 2016. Similarly, Meliá Hotels International’s CEO Gabriel Juan Escarrer Jaume indicated on a recent earnings call that Zika had caused some group cancellations and affected occupancy levels. He said the company would use aggressive pricing strategies during the summer period to help generate demand to counteract Zika fears.
2. Regional currency concerns
Brazil, Chile, Colombia and Mexico are all experiencing currency devaluations. The region has experienced a slight economic slowdown influenced by international crude oil price declines, falling commodity prices, and increases in inflation and base interest rates, all of which has weakened local currencies.
Also, the depreciation of the Canadian dollar has made package travel to the Caribbean—especially Cuba—and Mexico more expensive. However, the strong U.S. dollar has positively attracted foreign tourism throughout the region and has encouraged greater domestic travel in Brazil and Mexico, the region’s two largest economies.
3. Cuba’s growing potential
With Carnival Cruises recently entering the island and Starwood’s Four Points opening in Havana in late June, this is just the tip of the iceberg for U.S. inroads into Cuba, the second largest hotel market in the Caribbean.
An influx of U.S. tourists to Cuba has potential, with Americans comprising about 50% of visitors to the Caribbean. Currently, Cuba is most visited by Canadian travelers. Industry experts cite several issues keeping Cuba from reaching its full potential, including availability of airlift, speed of new development, poor infrastructure and needed structural reforms. Cuba should attract curious tourists at first and will likely draw interest from Mexico and Caribbean travelers once basic infrastructure is improved.
4. Luxury developments
New ultra-luxury developments are taking place in the Caribbean and Latin America region in key resort destinations. Bermuda has a Ritz Reserve and St. Regis in its pipeline, Los Cabos has a recently announced Four Seasons project, and the Costa Alegre-Riviera Nayarit Corridor has Cheval Blanc, One & Only and Fairmont-branded resort residential projects underway.
According to KPMG, banks and nonbanks have increased confidence for lending in the Caribbean and Mexico, with interest rates for development currently pricing at a 400 bps spread to LIBOR, while target unlevered internal rate of returns for new development are 15% to 16% in the region.
5. Growth of soft branding
Various resorts in the Caribbean and Latin America have become recently affiliated to leading U.S. soft brands to strengthen distribution and market positioning.
Curio Collection by Hilton has added Indura Resort in Honduras, the Tranquility Beach Resort in Dominica and the Mahogany Bay Village in Belize, while the El Mangroove in Costa Rica and the French Leave Resort in the Bahamas both joined Marriott’s Autograph Collection. The prevalence of independent hotels in the region coupled with the emergence of qualified third-party-management companies should continue to support this branding trend.
Adapting to forward trends is one key way hotel asset managers maximize hotel profitability. With the Caribbean and Latin America economy softening amidst Brexit, dipping commodity prices, a global economic slowdown and receding hotel performance growth levels, reassessing investment strategies and ongoing operations in the region now remain vital.
Jonathan Kracer is VP & Managing Director, Latin America for hospitality asset management firm hotelAVE, , with a successful 10+ year track record in asset management and advisory for institutional ownership. hotelAVE’s current asset management portfolio comprises over $5.5 billion, 22,000 rooms and over 30 different hotel operators. hotelAVE supports clients in Latin America, North America, and Europe from its headquarters in Providence, Rhode Island, and its regional offices in New York and Los Angeles. Prior to hotelAVE, Kracer served as managing principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. Kracer’s columns primarily cover hotel asset-related subjects, with a specific emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at email@example.com. More information about hotelAVE can be found at www.hotelave.com.
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