REPORT FROM BRAZIL—After much speculation, Brazil’s hotel supply is on track to meet the impending demand of the FIFA World Cup, Olympic Games and a burgeoning middle class.
The country, which has approximately 223,000 existing rooms, also has 200 more projects comprising 30,500 rooms under construction or in an advanced stage of planning that will be affiliated with a major hotel chain, according to Jones Lang LaSalle Hotels.
The rooms are largely new-builds concentrated in the economy and midscale segments, said Lauro Ferroni, VP of research for JLLH.
“It is expected that there is enough room stock for the impending demand,” said Ricardo Mader, executive VP at JLLH based in the company’s São Paulo office. “The World Cup has people on the ground in Brazil mapping out the hotels, and they have identified about 750 hotels within 50 kilometers (31 miles) of the 12 (host) cities.”
Brazil is preparing for about 400,000 people when it hosts the World Cup in 2014, Mader added. The next swell of demand will come during the Summer Olympics in 2016.
Brands jump on board
Most of Brazil’s existing supply is owned and operated by independent hoteliers, according to Mariano Carrizo, director with Horwath HTL in the firm’s Buenos Aires office.
Research from JLLH supports his findings.
“In the U.S., there is one brand-affiliated hotel room for every 100 residents,” JLLH’s Ferroni said via email. “In Brazil, the ratio offers a stark difference, with one branded hotel room for every 2,800 residents. This highlights just how much room there is for the establishment of branded hotel supply in Brazil.”
Major hotel chains throughout the globe have taken notice. Paris-based Accor, for example, has approximately 150 ibis hotels in the country, 75% of which fly the ibis flag.
Choice Hotels International also is incredibly active in Brazil. The Silver Spring, Maryland-based company has 60 properties in the country with two more scheduled to open during 2012. An additional 40 Choice-branded properties are in the pipeline.
The company has 26 properties under construction, 18 of which are scheduled to open in time for the World Cup, according to Mark Pearce, senior VP of the company’s international division.
Denham, U.K.-based InterContinental Hotels Group has 12 properties open in Brazil and an additional four—all Holiday Inn Express brands—under construction, said Salo Smaletz, the company’s regional VP of development in Latin America.
“Most of the deals that we have in negotiations are Holiday Inn or Holiday Inn Express. Why? We truly believe the great opportunity in Brazil is midscale hotels or limited-service hotels,” he said.
Phoenix-based Best Western International last week opened its first Premier hotel in the country, the 135-room, 15-suite Best Western Premier Majestic Ponta Negra Beach. The company now has 17 hotels in Brazil.
Financing and partners
While the major brands--as well as foreign and domestic investors—are active that is not to say development in Brazil is easy.
For one thing, financing in the country is difficult to come by.
“There is a lack of financing in Brazil. We don’t find the typically project financing as in Europe and the U.S. where there are 20-year loans and low interest rates, and you need very little collateral … here in Brazil there’s only one type of financing, through BNDES, the Brazilian Development Bank. That is the only way you can leverage your investment,” said Guilherme Cesari, VP of development in Brazil for Marriott International.
Marriott has five hotels in Brazil.
And what debt financing is available comes at a steep price, sources said.
“Current interest rates hover around 14% and float monthly,” Choice’s Pearce said. “Amortization periods have become more lenient but are still onerous in the traditional sense. Current amortization of the principal is now up to seven years.”
Further complicating matters is the high demand of real estate—and not just for hotels.
“The real estate sector in Brazil is booming; there is huge demand for residential and commercial. Hotels are competing against these alternative uses,” Marriott’s Cesari said.
Many investors have opted to join with local partners to get their feet in the door. Choice, for example, has a master franchise agreement with Brazil-based Atlantica Hotels International, which is the largest independent management company in the country.
Marriott has taken a more stratified approach, Cesari said.
“International players are active here in Brazil,” he said. “Some of them are institutional investors, and we can see also some developers, some local developers and owners, with very valuable experience in the hotel business. We are dealing with different types of players and partners in the market.”
Finding a local partner also is crucial to help developers and brands navigate the country’s sometimes confusing bureaucracy, according to Horwath HTL’s Carrizo.
In addition, a local partner can help hotel chains tailor their products to the needs and tastes of the market.
“For instance, (Accor’s) ibis hotels in Brazil, which are a huge success, do not have the exact same profile as the ones that you have in Europe,” Carrizo said. “Some services and aspects of the infrastructure should be adapted.”
Likewise, IHG has will launch this month a Holiday Inn prototype that has a 30% to 40% smaller footprint and is thus better suited for development in the competitive real-estate market, Smaletz said.
Other hotel development is taking the route of mixed-use condo construction, sources said.
“Since funding is not very ‘natural’ for hotel projects and financing is not a viable option, many hotels are build under the condo-hotel structure,” Corrizo said. “Basically the rooms are sold to individual investors that seek hotel projects as a way to have a stable and long-term income. So you have a lot of hotels that are owned by 30, 40 or even 100 people.”
Whatever the road to development, will the building frenzy be supported by long-term demand after the luster of the World Cup and Olympic Games fade?
“I think that there will be enough demand to absorb future supply in most of the markets, mainly because Brazil has become the fifth largest economy in the world and will maintain its growth for a long period of time,” Carrizo said.
But he advised hoteliers from putting blind faith in the country.
“Each specific market/city should be analyzed because in our country hotel development is extremely linked to the real-estate market, and the needs of the real-estate market could be different from those of the hotel market,” Carrizo said. “For the real-estate market selling 500 hotel rooms in a city that had no previous hotel offerings is great business. For the hotel market, the oversupply danger is not such a great business.”