07 May Hospitality Investment Trends in Mexico and the Caribbean
By: Raymond A. Perez & Alexander P. Trueba
In recent years, growing demand has led to solid gains in hotel performance in Mexico and the Caribbean. Investors have once again begun placing bets in the region. Higher liquidity and foreign capital in Mexico, steady tourism to Puerto Rico, and increasing demand in the Dominican Republic, will continue to draw investors to the region. The acquisition of existing projects and the development of new hotels will continue to be a central theme in the hospitality industry.
Investment in the Mexican lodging sector is expected to grow significantly in 2014 as the country’s hotel real estate market continues to attract foreign investors to an industry customarily controlled by local players. The emergence of Fideicomisos de Inversión en Bienes Raíces (FIBRAs), and Certificados de Capital de Desarrollo (CKDs) will continue to play a major role in the sector’s development. FIBRAs, established with the help of Mexican tax laws in 2011, act in a similar fashion as Real Estate Investment Trusts (REITs) in the US; they serve as favorable tax vehicles dedicated to the acquisition and development of real estate in Mexico held for leasing. FIBRAs are required to hold assets for at least four years after the acquisition date, or end of construction.CKDs, established in 2009, are public securities that allow local pension funds, as well foreign funds, to participate in the private equity sector. In 2013, the two structures accounted for 50% of all hotel acquisitions in Mexico, up from 25% in 2012, and were crucial in injecting liquidity and allowing domestic funds to participate in the market.
Mexican hotel transaction volumes are expected to reach US $700 million in 2014, a ten-year high and a 16.7% increase from US $600 million in 2013, according to Jones Lang LaSalle.
In addition to interest in existing properties, new room construction is on the rise. As of the end of year 2012, Mexico had over 314,000 hotel rooms. Driven by continued international tourism, 191,600 new rooms project to be added to the market by 2022. For 2014, international tourism is projected at 25 million visitors, up from 23 million in 2012. Since 2010, key drivers such as RevPAR (over US $75 in 2013), occupancy (over 60% in 2013) and ADR (over US $120 in 2013) have improved annually, painting a bright picture for Mexico moving forward. Late last year, FibraHotel, one of the largest Mexican lodging FIBRAs, signed a deal with Marriott International to develop 20 Marriott branded hotels by 2016. Moreover, Strategic Hotels & Resorts sold the Four Seasons Punta Mita Resort in Nayarit and an adjacent plot of land to Cascade Investment (a private investment vehicle for Bill Gates) for US $200 million. The acquisition of the existing Four Seasons was valued at $1.1 million per key.
In Puerto Rico, while the island economy is entering its eighth year of recession, tourism has maintained stable growth. For the first nine months of 2013, tourist stopover arrivals to Puerto Rico increased 1.6% to 1.22 million from 1.20 million in the same period 2012, while room nights increased 4.0% to 3.4 million in 2013 from 3.2 million in 2012. Additionally, occupancy, ADR and RevPAR have risen steadily since 2011, and as of end of year 2013 stand at 70%, US $130.49, and US $91.11, respectively.
Currently, the island has 60 lodging projects in various stages of development; by 2017 Puerto Rico will be home to nearly 21,000 total hotel rooms, a 45% increase compared to 2013 figures, and over 200 hotels. Encanto Group, a US-based investor, purchased the Punta Candelero Beach Resort (74 luxury condo residences) and the Palmas del Mar Yacht Club Marina (158 boat slips) located in the Humacao region on the east coast of Puerto Rico in March of 2014 for an undisclosed sum. Encanto plans to invest US $200 million to develop the remaining 24 acres of oceanfront land acreage by building additional residences and a destination hotel. Additionally, Houston-based investment and financial services firm, Interra Capital Group, acquired the 173-key Normandie Hotel in San Juan at auction for an undisclosed price in late 2013 and plans to invest US $40 million into the property.
Moreover, Paulson & Co., the New York-based investment management firm run by billionaire John Paulson, has been one of the most visible investor on the island. Paulson paid US $260 million for a majority interest in the Condado Vanderbilt and La Concha Renaissance Hotel and Tower (totaling 802 rooms). The recent acquisition follows the firm’s initial investment in September 2013, when Paulson & Co. obtained a majority interest in the 139-key St. Regis Bahia Beach Resort and the Bahia Beach Resort & Golf Club, a 483 acre master-planned community with over 115 residences. At a recent conference in San Juan, Paulson stated that the island’s economy is at the beginning of a turnaround and opportunities to buy real estate in the region won’t last much longer. According to Puerto Rican officials, Paulson & Co. plans to invest $1 billion in Puerto Rican projects over the next two years, displaying confidence in a bounce back.
Meanwhile, Hyatt Hotels Corporation has made a strong return to Puerto Rico with the opening two hotels within the last five months. The international hotel operator ended its seven-year absence in the island after opening the Hyatt Place Bayamon in December 2013. The 156-key hotel was the first Hyatt Place brand to enter the Caribbean market. A second Hyatt Place hotel was opened in early March 2014, the 104-key Hyatt Place Manatí. Hyatt is also slated to open its first hotel in the extended stay sector in Puerto Rico during the fall of 2014, a 136-key Hyatt House located in San Juan. Hyatt entered into agreements to operate the 3 hotels with owner Island Hospitality Partners LLC, a local joint venture of PRISA Group & McConnell Valdes Consulting.
The Dominican Republic attracted the most tourists in the Caribbean in 2013, approximately 4.7 million visitors, a 2.8% increase versus 2012. The upward trend continues in 2014, as over 895,000 stopover visitor arrivals were already recorded for the first two months of 2014.
As in Puerto Rico, fundamentals in the tourism and hospitality sector continue to be positive. According to the Central Bank of the Dominican Republic, occupancy improved to 71.7% in 2013, and has risen every year since 2009, when it stood at 66%. These fundamentals have supported recent investments, as total rooms grew 3.3% to 68,500 in 2013 from 66,300 in 2012.
Increased investments are expected to continue. Recently, President Danilo Medina inaugurated two highly anticipated hotels built by Blue Diamond Hotel & Resorts. Royalton Punta Cana Resort & Casino and Memories Splash Punta Cana were opened in March 2013 after a US $60 million renovation, and contribute 1,010 rooms to the country’s hotel sector. Memories Splash, an all-inclusive family-friendly property, is the refurbished product of a 2012 acquisition by Blue Diamond, which originally purchased the Grand Paradise Bávaro Beach Resort.
Furthermore, Starwood Hotels & Resorts Worldwide, Inc. has added two more properties to its hospitality portfolio in the country after opening the 255-room Sheraton Santo Domingo Hotel in March 2014 and the 200-room Westin Punta Cana Resort & Club (built at a cost US $59 million) in January 2014. The Sheraton Santo Domingo Hotel, which underwent a US $12 million renovation before opening its doors, is the second hotel under Starwood’s flagship brand Sheraton; it joins the US $150 million, 124-room, Four Points by Sheraton Punta Cana Village (opened in 2012).
Sources: Caribbean Tourism Organization, Dominican Today, Hotel News Resource, Jones Lang LaSalle, Travel Weekly, World Travel & Tourism Council, Yahoo News