US hotels’ arrival to Cuba will take time
08 DECEMBER 2015 8:27 AM
The vast number of issues to resolve will slow the introduction of American hotel brands into Cuba—once they are permitted to operate there.
SAN JUAN, Puerto Rico—While the United States government has begun taking steps to normalize diplomatic relationships with Cuba, its long-standing economic embargo on the island nation remains intact and will hinder the speed in which American hotel companies can enter the market.
But, according to speakers participating on the “Cuba—Investments and opportunities” panel during the Caribbean Hotel Investment Conference & Operations Summit, that doesn’t mean U.S. brands, operators and developers interested in eventually setting up shop in Cuba should remain idle.
“That we have the opportunity of this huge untapped market in Cuba for us is extremely interesting,” said Javier Coll, EVP and chief strategy officer for Pennsylvania-based Apple Leisure Group, which has an array of offerings throughout the Caribbean region, including the AM Resorts brand. “We are already getting ready, and we will be present.”
Limitations regarding what an American company can do to prepare for the inevitable opening of a new, potentially lucrative large market remain in place. However, it’s no secret that those companies, including Apple, are doing what they can to get ready.
“If tomorrow morning they lift the embargo, tomorrow afternoon we’d be in Cuba,” Coll said. “The problem we see is infrastructure and the access to products and services.”
Amy Ironmonger, an attorney with K&L Gates, said preparation is vital because all American companies are in the same situation when it comes to expanding into Cuba.
“It’s about establishing relationships with other people that are doing the same thing and identifying local talent,” Ironmonger said, adding that her firm has launched a multi-practice, multi-jurisdictional Cuba task force focused on being ready once U.S. companies can officially embark on business ventures in Cuba.
Once the country is open for business to American companies, those firms face challenges, including financing, banking, government partnership, dispute resolution and the inflexible labor market, according to Simons Chase, a former investment banker who now serves as editor-in-chief of Cuba Journal.
“There are companies in Cuba today tackling every one of those,” Chase said. “It’s not easy, but they’re doing it because there’s nowhere in the world where there’s visibility on 3, 4, 5 times growth.”
Chase said an additional problem is that Cuba has no lending capacity because it doesn’t belong to the World Bank Group or the International Monetary Fund.
However, the door has been cracked open as Florida-based Stonegate Bank earlier this year established a correspondent banking relationship with Cuban financial institution Banco Internacional de Comercio, according to Sonia Laguna, a Cuban-born American citizen who owns Florida-based Just 90 Miles Touring Company.
The panelists agreed exact data is difficult to come by, but the consensus was that there are approximately 63,000 hotel rooms on the island—most of which are Spanish- or Canadian-owned and/or operated. The inventory is expected to double when U.S. companies are permitted to enter the market.
Chase said Spain-based Meliá Hotels International manages about 20% of the inventory in Cuba, and all-inclusive rooms outnumber 5-star high-end rooms by an 8-1 ratio.
That means there are plenty of American companies salivating to enter the market when it becomes available.
“It’s like a coastline that’s bigger than Florida just came up out of the water yesterday,” Chase said. “They have to get this right. There’s no more Russia. There’s no more Venezuela. The Dominican Republic is killing it. And they’re going to have to come around to emulating that process.”
Benchmarking is needed
The lack of reliable data for key hotel performance indicators—the Cuban government is the lone entity that supplies it, and does an inconsistent job of doing it, speakers said—is a big hurdle to clear. (STR, the parent company of Hotel News Now, is not permitted to collect data in Cuba per current American laws.)
“A lot of the barriers to entry are the same as other countries in the region, transparency being a big one,” Ironmonger said. “All these groups they have to be able to analyze their risk, and it’s difficult anywhere in the Caribbean—particularly in Cuba, where you got this extra layer of government control and really just no record at this point of getting data.”
Arturo Garcia Rosa, president and founder of the South American Hotel Investment Conference and who has conducted business in Cuba for the past half dozen years, said there’s plenty of room for growth. It’s expected that 3.7 million visitors will arrive in Cuba in 2015—an increase from the 3 million visitors in 2014.
According to Coll, Canadians account for about 35% of total passengers to Cuba, approximately 1.2 million of the more than 3 million recorded travelers.
“The rest are basically Europeans,” Coll said.
Not all of the visitors are seeking hotel stays—which is important because Cuban hotels are basically operating at 100% occupancy at the moment, according to Laguna.
“There’s a booming bed-and-breakfast market with the houses being redone to accommodate tourists,” she said.
That type of visitor base is an important foundation for the future, Chase said.
“Tourism is vital for Cuba’s success,” he said. “It’s the only thing tangible that they can put their hands on. The Cubans look at the Dominican Republic and they see how the sector there (has grown).”
But attracting tourists and attraction financing for development are two distinctly different animals, according to the panelists.
“I don’t think Cuba’s ever going to have a problem attracting people, but attracting capital is a different game,” Ironmonger said. “Right now there’s just a legal infrastructure that needs to be developed and better understood in Cuba to really get U.S. investors and foreign investors comfortable with coming to the region.”
Ironmonger cited the dispute resolution process—whether Cuba will recognize foreign judgments and the basic legal infrastructures of condo-hotel and timeshares.
“It’s hard to convince capital to come here, (that) this is a safe place to invest your money,” she said. “There’s really no infrastructure in place to really support that at this point.”
No substitute for experience
The bottom line for American hoteliers wishing to become part of Cuba’s future is all about getting to know the country now, speakers said.
“People need to go and see the island the way it is today with very little expectations of what you’re going to see but at the same time you’re going to so surprised and amorous about the place that you’ll find,” Laguna said.
Garcia, who has worked in Cuba for the past six or seven years, said the Cuban hotel industry is in need of the knowledge and expertise that American hotel companies and brands possess. Having those in place will dramatically expedite the country’s hotel expansion.
The well-documented lack of infrastructure in the country can be a blessing and a curse.
“They have to improve their facilities. … They have to have access to services and products that will be able to give the level of service that the Americans require,” Coll said. “A lot of things need to happen, and I don’t think that’s going to happen overnight. It’s going to take some time.”
But Laguna said the lack of infrastructure is not always a problem.
“The lack of infrastructure and the way things are is a major attraction,” Laguna said.
Getting to know the ins and outs, the do’s and don’ts is essential, panelists said.
“You need to go a couple of times in order for your brain to start understanding what’s going on,” Laguna said. “It’s different. As a society that’s been totally owned by the country, the way things are, the way things work is so different.”
“You have to get boots on the ground down there,” Ironmonger added. “It was completely different than I expected but completely exceeded all my expectations. The people really make it. It’s a very entrepreneurial culture because they had to be.”