Asia/Pacific investors discover the Caribbean
Asia/Pacific investors discover the Caribbean
23 JULY 2013 9:02 AM

Accelerating investment activity in the Caribbean can be traced to strong liquidity in the Asian capital markets as well as weak local debt markets.

GLOBAL REPORT—Fueled by formidable wealth creation in the region, liquidity in its capital markets and a fondness for the destination, Asia/Pacific investment in Caribbean hotels is becoming a strong trend with no end in sight. And it represents an important change in the way capital is raised for projects.

"Investments in the Caribbean historically have been dominated by intra-regional Caribbean investors, such as (Jamaica's) Sandals Resorts," said Jonathan Kracer, Hotel News Now columnist and managing principal of Sion Capital, a Miami-based hospitality and real estate advisory and investment firm. The other traditional sources, he said, have been British and European investors because of historical colonial links, as well as American, Canadian and Latin American entities.

"But this recent influx of Asian investors is definitely an emerging trend," Kracer said. "And based on what I'm seeing, it is here to stay."

Alam Pirani, executive managing director of Toronto-based Colliers International Hotels, a real estate investment advisory firm that specializes in the hospitality industry, does not see the trend as a recent phenomenon.

"If you look at some of the significant investments that have been made in the Caribbean, even beyond the hotel sector, you see investments by Asian entities such as Hutchison Whampoa of Hong Kong in the late 1990s in a $1-billion container port in Grand Bahama," Pirani said. "And as part of that, they bought the Grand Lucayan Hotel."

One key to the accelerating investment activity, however, is strong liquidity in Asian
capital markets, Pirani said. "Investors are cash strong and that gives them a good opportunity to enter the market. And debt markets in the Caribbean are not as strong as they are in the U.S. So you're not getting the same kind of leverage you would at hotels in other markets. For many of these deals today, someone just writes a check. They don't have to worry about securing debt."

Underlying market factors are also driving growing interest in Caribbean investment, said Jan Freitag, senior VP of strategic development at STR, parent company of HNN.

"Occupancy this year, based on our data through May, has increased nicely, by 3.7% to over 73%, "Freitag said. “That bodes well for pricing power of Caribbean resorts. Indeed, (average daily rate) has increased 6.3% year to date. Revenue per available room has increased well over 10% through May. Such excellent performance metrics will fuel acquisitions but also increases sale prices for quarters to come."

Baha Mar leads the way
By far, the most high-profile project currently underway is the $3.5-billion development of Baha Mar, a 1,000-acre complex in Nassau, the Bahamas, that will be the largest single-phase luxury resort project in the history of the Caribbean. It will include Rosewood Hotels & Resorts, Mondrian and Grand Hyatt hotels, as well as a major casino-hotel.

Baha Mar, which will open in December 2014, is funded by a $2.5-billion loan from the Import-Export Bank of China, with $850 million in equity funding from private investors led by the Swiss-Bahamian Izmirlian family. General contractor China State Construction Engineering Corporation holds $150 million in preferred equity.

A key to Baha Mar's realization was its Chinese financing, initiated in late 2007 and closed in January 2011 in the aftermath of the financial crisis, said Baha Mar’s CFO Doug Ludwig.

"And there were not a lot of normal (financing) market options at that point," Ludwig said.
"They were pretty few."

One factor that made Baha Mar attractive to the Chinese, Ludwig said, was its strategy of working with world-class hotel brands. "The fact we were working with the best brands in the world added to their comfort factor because that increased our chances of delivering the financial results we were projecting," he said. "And the involvement of China State Construction clearly improved the bank's confidence that the project would be completed on time and on budget."

Ludwig said the executive team assembled for the project—from backgrounds at the Walt Disney Company, Four Seasons Hotels and Resorts and Caesars Entertainment—further enhanced confidence that Baha Mar was a solid investment.

Another factor in its favor, Pirani said, is a major expansion of Nassau airport, which will mean enhanced airlift and the ability to bring in more flights from China and the rest of Asia.

Kracer said Baha Mar will almost certainly drive more interest and investment in Caribbean hotels. "Clearly, a $3.5-billion master-planned resort project is going to make global headlines," he said. "So it definitely is going to catch the attention of other Asian investors."

Other projects
Although Baha Mar has generated more publicity, another Asian-funded Bahamian project made its debut first, with the 1 July opening of the $24-million Resorts World Bimini Bay Casino, a joint venture between developer Rav Bahamas and Genting Malaysia Berhad.

Another significant project just getting underway is Paradise Haven, a 500-acre eco-
friendly golf and beach resort being developed in St. Kitts & Nevis. In early July, Asia Pacific Investment House announced that it had raised $50 million in first-round financing for the $250-million luxury complex that will include a 5-star hotel, as well as villas and condominiums.

“Though there is a growth in holidays to emerging destinations, one of the most popular areas for inbound travel still remains the Caribbean,” said Pierre Dupre Moerland, APIH's senior executive director, private placements. “Resort development goes hand in hand with travel demands and keeps evolving, though is still remains that one of the most popular areas for inbound travel is the Caribbean.”

Kracer said there are nine existing Asian-funded luxury hotels in the Caribbean.
Rosewood, acquired by New World Development Company Limited of Hong Kong, operates properties in the U.S. Virgin Islands, British Virgin Islands, Bermuda and Barbuda. The Baha Mar outpost will be its fifth.

Aman Resorts operates Amanyara in Turks and Caicos, where Singapore-based Como Hotels & Resorts owns Parrot Cay and Regent Hotels & Resorts operates the Regent Palms and Regent Grand. Additionally, a Mandarin Oriental Elbow Beach in Bermuda and a Raffles Resort Canouan Island in St. Vincent are also Asia-funded hotels.

Despite such a roster of existing hotels and new development, the 800-pound gorilla in the region is Cuba, Kracer noted. There is huge pent-up demand, he said, as anticipation of the end of a half-century-old U.S. travel ban increases. "And I think we have just seen the tip of the iceberg in terms of that demand," Kracer said.

In anticipation of U.S. visitors, the Cuban government has entered into a joint venture with a Chinese developer to build a 600-room Hemingway Hotel designed to attract American tourists.

Pirani warned, however, that a herd mentality among investors could raise the future risks of Caribbean investments. "Whenever you see investments in high-profile projects like Baha Mar," he said, "you see that other investments follow. And I believe based on that, there will be
substantial additional capital going into the Caribbean."

The key to success, he said, will be choosing projects carefully and wisely.

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