Backing beaches: Financing in Caribbean scarce
 
Backing beaches: Financing in Caribbean scarce
20 JANUARY 2016 2:52 PM
Despite strong market fundamentals, Caribbean investment dollars remain difficult to obtain, especially for new-build hotels.
GLOBAL REPORT—Financing for ground-up hotel development remains extremely scarce in the Caribbean despite strong and steady recent performance of hotels in the region. Even though experts say conversion projects are somewhat more feasible, overall new supply in Caribbean markets continues to hover at minimal levels.
 
It’s not for lack of success. Sources indicated the overall Caribbean hotel market is enjoying strong occupancy and average daily rate, plus rising levels of revenue per available room driven by steady rate increases. It’s a profitable time to be running hotels in the Caribbean, which makes the sluggish development outlook all the more perplexing.

 
“In terms of existing operators, their key performance indicators—ADR, RevPAR and occupancy—are better than they have been for years,” said Gary Brough, managing director of KPMG in the Turks and Caicos Islands. “Confidence amongst financiers is high and liquidity is high, but all of these positive signs are not translating into readily available capital in the region. There is a feeling that now is the time to invest, given the lead time to completion and where the U.S. economy is in its cycle.”
 
Lender uncertainty
Sources said some of the hesitancy is due to market mix. Factors such as the region’s reliance on fickle leisure demand, not to mention the impact of weather, raise a red flag among lenders. Other global macroeconomic trends dictating leisure spending also contribute to this sensitivity and are completely outside of a hotel’s control.
 
“The Caribbean tends to be highly skewed toward leisure. Because of that, investors tend to look at the Caribbean as more risky in terms of investing,” said Parris Jordan, managing director of HVS Bahamas. “If there is a downturn, the leisure market is the first segment that tends to decrease, whereas commercial travelers will still travel. The leisure traveler tends to spend less money, so the Caribbean has been perceived as being more risky than the U.S. and other first-world nations.”

The lending climate has been further affected by the retreat of many major Canadian banks that were previously active in the Caribbean. Experts said major Canadian lenders such as Scotia Bank, CIBC and RBC were primary sources of debt for much of the region, and their current absence from the market has left a financing void without new prime investment sources to fill it.
 
“It is public knowledge that the major Canadian banks are taking a more conservative approach to lending to Caribbean hotel investment projects,” Brough said. “They are still lending, but primarily to existing clients with proven track records.”
 
Conversion as a solution
Conversion projects are somewhat more feasible when financing is needed, because such projects are considered lower risk and quicker to open than ground-up developments. Development and construction can be notoriously slow in the Caribbean—often taking several years longer to build a new hotel than it would elsewhere—so the prospect of a renovation and rebranding is usually the more attractive option in the eyes of lenders.
 
“That tells a better story to the lender,” Jordan said. “The lender feels like it’s a shorter period; there’s less approvals in place; and they can see the finish line better than a pure ground-up construction, which takes a number of years, and in the Caribbean takes longer to build than in other markets.
 
“With the right product, the right brand coming in and the right location, there’s more appetite for such a deal. Those are being done and can be done easier, because the finish line is in sight.”


Rendering of the 1,800-room Hard Rock Hotel Riviera Cancun  (Photos: Hard Rock International)
 
These kinds of conversion deals might even still be viable if the big lenders pass. Caribbean developers now often turn to non-traditional, high-yield lenders when other options are lacking. Although the interest rates and equity requirements are higher than institutional sources, it could still make sense to pay these debt service costs to get the deal done.
 
“What we’re seeing is money available for properties that need to be renovated, and a lot of times properties that can be converted to a brand,” Jordan said. “So if you have a great hotel in a great location, there are high-yield lenders that are available in the marketplace, particularly on renovation projects, and especially if you’re going to brand that hotel. Some of these high-yield lenders range anywhere from 12% to 15% for loans, and they would require, in some cases, an equity kicker; they may want a piece of ownership to actually finance a project.”
 
Supply outlook
The region’s development pipeline remains favorable to occupancies but still features some noteworthy projects for both conversions and ground-up deals.
 
In the shadow of the tumultuous, bankrupt $3.5-billion Baha Mar development that’s still ongoing in the Bahamas (read “Stalled Baha Mar casts a pall over Caribbean”), other projects are moving forward, such as:
  • the $224-million, 124-room Ritz-Carlton underway in the Turks and Caicos Islands, at the island of Providenciales;
  • the massive 1,800-room Hard Rock Riviera Cancun underway on the Riviera Maya in Mexico; and
  • on the opposite end of the spectrum, the forthcoming Kimpton Seafire Resort & Spa, hailed as Grand Cayman’s first “boutique resort.”
Others to watch include the 500-room Now Onyx Punta Cana, underway in the Dominican Republic; and the conversion of the Treasure Island Resort in Grand Cayman to a 280-room Margaritaville Beach Resort, which is slated for a December 2016 opening.

“If you look at all the islands and all the construction going on, it is still pretty active,” said Christian Charre, SVP of CBRE Hotels and based in Miami. “Dominican Republic, Jamaica and the Caymans are certainly the three major markets where you see new construction going on.”
 
And while lenders have recently been iffy on many new-build Caribbean investments, sources indicated that transactions have been brisk for existing hotels among private equity groups, real estate investment trusts and even foreign trophy asset hunters, due to the highly attractive yields these strong-performing assets offer. For example, in a booming market like Montego Bay, Jamaica (which also is seeing an increase of air traffic), the sheer numbers are usually enough to convince buyers, even if they’ve never invested in the Caribbean before.
 
“The yield is excellent. It is sustainable. There’s more demand than supply, and if someone wants to build a new hotel, that will easily be absorbed among existing hotels currently running in the 90s (% occupancy),” Charre said. “That got the attention of untraditional investors, and private equity, and REITs. When you look at Jamaica, it’s pretty far off the map for untraditional money. But in the last two years, they got comfortable with the marketplace and see the Caribbean as an extension of the U.S.”
 
Time is running out, though, for those investors still eyeing the Caribbean. Given the length of time it takes to get a project off the ground there, juxtaposed with the handful of remaining good years projected to be left in the current U.S. lodging cycle, experts believe 2016 might be the last chance to ante up in the islands.
 
“I still think 2016 will be a pretty active transaction year in the Caribbean, again, because the yield is so attractive, compared to the U.S.,” Charre said. “But there is a window for the Caribbean. I would guess you’ve got another 12 months, probably, before we see this level of interest and the window closing.”


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