Today I am excited to share with you the first part of my journey across South America.

My trip began in Argentina where I made a long-overdue visit to Buenos Aires. The capital city was historically one of the main trading connections between Europe and South America for gold and silver. Its streets echoed that tradition, lined with historical residential buildings decorated with fine architecture and completed with high, magnificent ceilings. Not surprisingly, my first impression was not only that Buenos Aires’ avenues were the image of wealth but also that its hotels had the same grandeur one would expect in some of the finest properties in either Paris or Madrid.

The recently renovated Savoy Hotel in the city center is one such example.

“The Savoy Hotel is a privately owned property by local investors who clearly wanted to rejuvenate the property with its old heritage as you can see in the lobby, with the ceiling covered by paintings, chandeliers and supported by long columns,” GM Mariano Barbeito said.

“Our property is located between the house of congress (Congresso) and the buzzing streets of Avenida Corrientes with its theatres. One of the main demands for us is business travelers during the week. Once the weekend approaches, we tend to see more leisure visitors staying with us. Brazilian visitors are certainly the main segment for us, making about 60% of our customer mix at the moment.”

That reliance on Brazilian travelers was also apparent further away from downtown in the hip and trendy Palermo neighborhood, which attracts a completely different crowd. Turning from one block to another, Palermo’s magic lies with its residential cobble streets and boutiques of designer clothes or art deco furniture. Here modern restaurants and boutique hotels attracts a younger, trendy and more eclectic crowd.

Julian Grano, GM of the 27-room Fierro Hotel in Palermo, a locally owned Argentinean boutique hotel, told me how important leisure travelers from Brazil were for his property.

Source: Fierro Hotel Buenos Aires

“A shift in our customer mix has been seen in the last couple of years, as previously we had a larger number of visitors from the U.S. and Europe. The trend is towards Brazilian visitors who seek an uncomplicated and relaxed atmosphere in the heart of Palermo.”

It takes two to tango
The heavy reliance on Brazil is also apparent in Buenos Aires’ broader macroeconomic landscape.

During my trip, I attended a class lecture at Universidad Argentina de la Empresa business school that focused on Latin America’s economic drivers—and in particular those in Argentina.

During the presentation, Professor Marcelo F. Simon continuously referenced the political and economic environments, which have their historical roots in the European explorations in the 1500s, when the Spanish and Portuguese set out to explore the “New World.”

Today the region has a number of trade agreements between countries from North, Central and South America, with each having its own economic driver and specificity.  The Mercosur, for instance, promotes free trade between Argentina, Brazil, Paraguay, Uraguay and Venezuela.

The presence of Brazil on that list is no coincidence. The country comprises half the land size and population of Latin America and is the region’s and Argentina’s key economic partner. Indeed, much of the region’s economic progress—as well as its hotel demand—involves a two-way partnership with Brazil. And this, from my perspective, sounds like a true Argentinean Tango!

With Argentina’s economy being closely linked to Brazil, a sudden increase in hotel prices might have an impact on the region’s key source market for hoteliers. While the Argentinean Peso has declined against the U.S. dollar during the past 12 months, the Peso has strengthened against the Brazilian Real by almost 20%.

Another sensitive area for hoteliers is the impact the inflation rate has on the operating department costs. According to the 2012 STR Global Profitability Survey, which looks at year-over-year hotel performance in 2010 and 2011, the hotel operating department costs have increased by almost 25% and payroll has increased by more than 30% in 2011. With official inflation figures reported at 9.89% up to October 2011, the discrepancy between real cost increases and inflation growth can place hoteliers in the challenging position to further drive up prices to cover the real cost of inflation. The good news is in 2011 hoteliers saw a healthy increase in gross operating profit by more than 46% in local currency year on year.

The development landscape
Given such growth, my first thought was Buenos Aires should be booming with new hotel projects. But compared to other emerging global hot spots, that isn’t quite the case.

Hotel pipeline data from STR Global shows there are eight active projects each with less than 150 rooms. Hotel supply in Buenos Aires increased 1.3% during the first five months of the year; the previous year, new supply has increased by 0.9%. STR Global is a sister company of HotelNewsNow.com. www.strglobal.com

Part of the disconnect between development and economic growth stems from the market’s barriers to entry, according to Ramiro Alem, executive director of the Argentinean Chamber of Tourism, which represents all industry players in the country. He explained to me that whilst Argentina has seen an increase in new supply in recent years, most of the new projects have mainly been funded by local investors who have a better understanding of the country’s economic cycle and who have more confidence in the market than foreign investors.

Argentina has seen multiple cyclical crises during the past couple of decades. Today, the market has seen positive growth in terms of average daily rate (+13.8%) through May 2012 compared to the previous year, which saw an increase of 11.6% during the same period. The rate increases come despite a slowdown in demand, from 0.6% growth during 2011 to a decline of 3.8% year-to-May 2012. (The slowdown is more notable given that it increased 5.5% during the first five months of 2011.)

Ramiro further explained one of his tasks will be to further strengthen transparency in terms of reporting performance across the tourism sector, which will help foreign investors have greater confidence in the market. Such reports certainly will be a milestone to support hotel developments in the capital as well as in regions that have a limited number of branded properties so far.

It is clear Buenos Aires hoteliers certainly have not made their last move, and the hotel market most likely will continue to dance the tango, responding to the country’s economic cycles and its dependency on Brazilian visitors.

David can be contacted at david.grossniklaus@ehl.ch. Follow him on Twitter @dgrossniklaus.

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