Although political, economic and health issues are affecting Brazil, the country’s hotel operators are ready for the upcoming 2016 Summer Olympics. The industry’s future beyond the event is less clear.
RIO DE JANEIRO—All eyes will be on Brazil this August and September as the country hosts the 2016 Summer Olympics and Paralympics. Just like previous Olympics hosts, Brazil—and Rio de Janeiro in particular—has experienced a boom in hotel development with a number of branded and unbranded hotels opening in anticipation of the nearly month-long event.
While a number of hotels have opened this year or are scheduled to open before the games begin, the country also saw a spike in hotel development prior to 2014, when it hosted the FIFA World Cup. According to STR, parent company of Hotel News Now, 22,779 hotel rooms opened in Brazil between the end of 2011 and February 2016, which was a supply increase of 11%. In Rio de Janeiro, the host city of the Summer Olympics, supply increased by 25.9% during the five years-plus period.
“Rio is as ready as any Olympic city was in the past and will be in the future,” said Paul Sistare, president and CEO of São Paulo-based Atlantica Hotels, which operates 85 branded and unbranded hotels in Brazil. “Of course, the question is what happens to the hotels and the country after the close of the games.”
The country has been battling a number of issues—a political scandal, a deep recession, falling currency values and worries over the spread of Zika virus—that could threaten health of the hotel industry.
“The Zika virus won’t be as big an issue as many people think,” Sistare said. “The virus is mosquito-borne and the month of August is the dead of winter in Rio, so the mosquitos shouldn’t be much of a problem, and the Brazilian government is doing what it should to keep the threat at a minimum.
“However, what concerns me as a Brazilian is the infrastructure of the country. The money spent on preparing for the games could have been used in much better ways in a lot of areas of the country.”
Hotel performance in Brazil has suffered in recent years. According to STR, occupancy fell to 56.7% in 2015 from a recent high of 68.7% in 2011. Average daily rate in U.S. dollars was down 3.2% last year, and revenue per available room fell 10.4%. Hotels in Rio experienced a 26.7% drop in RevPAR in 2015.
“It’s clearly been a very difficult couple of years for the hospitality industry in Brazil,” said Javier Rosenberg, COO of the Americas at Carlson Rezidor Hotel Group. “The industry is being affected by the strong devaluation of the local currency, which has impacted average rate, which for the most part is based on local currency rates. Also, the political and economic issues that have impacted the country are having a significant effect on travel.”
Building for the games
Despite these issues, the pace of hotel development has been strong in the years leading up to the Olympics. In recent months, Atlantica opened three new Carlson Rezidor properties: Radisson Blu hotels in São Paulo and Belo Horizonte, the country’s sixth largest city; and a Park Inn by Radisson in Taguatinga, near the capital Brasília.
Marriott International plans to invest $400 million Brazilian reals ($112.1 million) to develop 11 hotels in six cities in the country, tripling the company’s footprint in Brazil. According to Laurent de Kousemaeker, Marriott’s chief development officer for the Caribbean and Latin America, four hotels—two AC by Marriott properties, one Courtyard by Marriott and one Residence Inn—will open by the end of June in Barra da Tijuca, site of the Olympic Village and many venues for the games.
De Kousemaeker said the company sees long-term potential in the Brazilian hotel market.
“Brazil is going through a political and economic struggle at the moment, but we are confident the country will eventually bounce back and stabilize,” he said. “Brazil is a large country with a vast domestic market that is still underserved by a current hotel stock that doesn’t meet travelers’ expectations and, often, not even their basic needs.”
In the luxury segment, a 436-room Grand Hyatt opened in late March in the Barra da Tijuca neighborhood of Rio.
Opportunities for the future
Brazil has an active development pipeline that stretches beyond the games. According to STR, at the end of February, 298 hotels with 50,648 rooms were in the pipeline. Of those projects, 116 hotels with 21,269 rooms are under construction, and 47 properties with 6,790 rooms are in final planning phase. Rio has 23 hotels and 5,110 rooms under contract.
Sistare said opportunities for hotel development differ from market to market.
“It depends on where you’re looking,” he said. “I wouldn’t touch Rio for the next 10 years, but São Paulo could use more hotels. There are more than 200 million people in Brazil and 50 metropolitan areas we’ve identified as having a million or more people. That creates a lot of opportunity.”
While the pipeline is robust now, further development is questionable beyond projects already underway, said Arturo Garcia Rosa, president of the hotel consulting group RHC Latin America and founder of SAHIC.
“At this moment, with the huge crisis and a future that looks bad, the development atmosphere is the worst,” he said. “Beyond the projects that are advanced, most of the new projects are on hold. Nevertheless, this is a good time for foreign investors that are ready to take the risk and have patience waiting for the recovery that surely will arrive, not soon, but it will arrive.”
Not everyone agrees it is a bad time to invest in hotels in Brazil. In February, Hard Rock International announced plans to build three resorts in the country. The first will be a 400-room hotel in Brasília, which opens in 2017. The other properties will be in Caldas Novas and Itapema.
“Brazil is the largest economy in Latin America, so it is an important place for us to be,” said Marco Roca, Hard Rock’s chief development officer. “The economy doesn’t scare us. Like many countries in Latin America, you see a very volatile economy that sometimes is up and sometimes is down. Brazil being down right now means it’s a good time to enter because it won’t stay down forever.”
Following the opening of those three properties, Roca said Hard Rock would like to expand with hotels in Rio and São Paulo.
According to de Kousemaeker, there are several “structural challenges” to developing hotels in Brazil.
“The main one is the lack of project financing with conditions that allow owners to leverage the return on investment,” he said. “Debt financing is costly due to high interest rates and short terms. The second is the lack of experienced hotel development partners, including investors, developers and managers.”
According to Sistare, debt financing is generally available for up to 50% of a project’s cost.
“You’ve got to put up the other 50%, and it must be collateralized and is on a floating interest rate that changes monthly with a maximum term of five or six years,” he said. “Right now, interest rates are running 18% annum, but at the end of the month it might be 16% or 22%. You pay it by the month, so to do a hotel you realistically have to come up with 100% capital.”