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Cuba supply hurdles limit post-embargo growth
January 30 2013

With an anticipated end to decades-old travel embargos, Cuba’s undersupplied hotel industry is ill-prepared for the potential influx of demand, sources report.

Highlights
  • “Cuba has been the forbidden fruit for 55 years now, and people are curious about it,” said SNR Denton’s Timothy Ashby.
  • Experts anticipate the travel embargo between the U.S. and Cuba will be lifted during President Obama’s second term.
  • Cuba’s hotel market does not have enough supply to meet domestic demand, let alone an infusion of global travelers.
By Samantha Worgull
Editorial Assistant
sworgull@hotelnewsnow.com

REPORT FROM THE U.S.—As Barack Obama enters his second term as United States president, Cuban travel industry experts hope the administration will lift the travel ban that has prevented most Americans from visiting Cuba for the past 50 years. But they fear the country’s lack of hotel supply might not satisfy that pent-up demand.

“They already have a problem accommodating in Havana, Varadero and Cayo Largo,” Timothy Ashby, who specializes in Cuban law and commerce as legal counsel at SNR Denton, said. “(The) travel ban will be lifted, and they’re not ready for it.”

Jeremy Tang, managing partner at Hong Kong-based Hemingway Capital, which makes investments in Cuban businesses and properties that are actively looking for a hotel development partner, echoed Ashby’s concerns, explaining that supply is needed first to satisfy organic growth within Cuba—regardless of changes to the American travel embargo.

Based on statistics from the Oficina Nacional de Estadísticas, Cuba’s national statistics office, tourist arrivals to Cuba increased from 2.5 million 2010 to 2.7 million in 2011. During the first quarter of 2012, foreign arrivals grew 5.3% over 2011. Ashby said he believes overall tourism growth during 2012 will end up rivaling or surpassing 2011.

Cuba also could see an increase of outbound travelers with the recent easing of Cuban president Raul Castro’s Travel Rule. As of 14 January, Cuban citizens will no longer need exit visas or invitations from a resident of a foreign country to travel abroad, according to an article on Bloomberg.com.

For their part, foreign parties who have invested in the hotel sector to help aid such growth are reluctant to move forward with projects without knowing the future of the U.S. and Cuba’s relationship, Ashby added.

“There’s a lot of money waiting outside of Cuba,” he said. “There’s about $2 billion in funds to go into development in Cuba.”

A challenge that will make it difficult for U.S.-based hotel brands unable to develop is Article 15 of the Cuban Constitution, which states that virtually all land in Cuba is “socialist state property,” with the exception of a number of carve outs.

Ashby said he knows of several brands that are still evaluating the possibilities, but he declined comment on which ones.

Requests for comment to several global hotel chains were not returned by press time.

Development hurdles
The American embargo notwithstanding, regulations from the Cuban government makes development particularly difficult for all foreign investors, who can only participate in the real estate sector in one of three ways, explained Hemingway Capital’s Tang:

  1. Separate entity/joint venture: Foreign investors form a Cuban commercial company and joint venture between themselves and a Cuban partner.
  2. Economic Association Contract: Foreign investors participate in individual contracts between themselves and Cuban investors in which a joint venture is formed but without the “establishment of a legal entity distinct from the parties.”
  3. Wholly-owned foreign company: Foreign investors form a commercial entity capitalized by their own foreign capital and without the involvement of a Cuban partner.

Most foreign investors choose to go the joint-venture route, which involves working with the Cuban government and leasing the land, Ashby said.

“It’s not illegal to actually own the property, but you have to set up a Cuban corporation that owns the land,” Ashby said. “(It’s) less risky to move ahead with the lease and get through the bureaucratic stuff.

“On one hand you have members of the Cuban government, and on the other hand you have old communists who are resisting foreign investment,” he continued. “I think the pro-development force will win out because the economy (in Cuba) is in bad shape.

The Cubanacán Group, the largest Cuban hotel and resort operator and owner—70 properties including 15,000 rooms—and Gaviota, a hotel group that is part of the Cuban military and an arm of the Cuban government, are the two main players making significant strides in hotel development, Tang said.

“They have quite an excessive build up of hotels in the pipeline,” he said. “They have traditionally been in the all-inclusive market, but they are now trying to move into the 5-star market.”

Gaviota opened The Ocean Varadero El Patriarca, a 5-star all-inclusive beachfront resort located in Varadero, in December. In 2013, the group plans to open Marina Gaviota.

Aside from Gaviota’s projects, Tang said he knows of one other hotel that was opened in the past year in Trinidad.

“There's not a lot to show for the blood, sweat and tears,” he added.

Ashby reiterated there’s hardly any construction going on, but he knows of a few projects involving golf course hotels that have been approved but have yet to break ground.

Cuba and the Caribbean
If Cuba’s reemergence rolls out as anticipated, it likely will do so at the expense of many other Caribbean countries, sources said.

“(Cuba) offers a much more complete experience than other Caribbean destinations,” Ashby said. “Cuba has everything: mountains, beaches, cultures, nightclubs and restaurants. It’s also a 45-minute flight from Miami, a two-hour flight from New York City and one-and-a-half-hour flight from Atlanta.”

Trinidad, in particular, attracts a lot of tourists, Ashby said. The Cuban government has developed heavily within this area, operating five hotels in Playa Ancon, a beach in Trinidad, and plan to develop a total of 20.

Tang said that some of the better 4- and 5-star properties are running above 80% occupancy.

“I’ve been going to Cuba for 20 years, and I’m finding it difficult to book a hotel,” he said.

Tang offered praise of the country too, adding that it’s the only well-rounded country in the Caribbean.

“In a day you can go fishing, go to museums, go watch a ballet and listen to some great jazz,” he said.

“Cuba has been the forbidden fruit for 55 years now, and people are curious about it,” Ashby said.

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