Finding development opportunities in Latin America
 
Finding development opportunities in Latin America
28 SEPTEMBER 2018 7:55 AM

A panel of hotel developers and an investor talked about hot markets for hotels, and the influences government, legal issues and more have on real estate development in Latin America.

MEDELLÍN, Colombia—Wrapping your arms around the intricacies and differences of hotel financing in Latin America is tricky, but investor and lender speakers on a panel at the South American Hotel Investment Conference said there are opportunities everywhere if you have a solid strategy.

Still, speakers on the “Investors and lender’s real intentions in Latin American markets” panel said factors like political leadership and economic stability definitely do influence those hotel investment opportunities.

“What you have to find is the right timing for those opportunities; you’ll find opportunities in every city or market, but perhaps the timing isn’t there yet,” said Cristián Roberts Castro, president of private equity firm Prime. “That’s when governments can play a role in accelerating that timeframe a little or decelerating it, so the cycle catches up.”

Countries with open trade policies are attractive, he said, but tend to cycle with presidential elections.

Francisco Andragnes, CEO of mixed-use project developer Metro Buildings, said he also looks at a country’s legal framework when determining which development projects make the most sense in Latin America.

“All countries will have commodity (pricing) going up and down and they can’t do anything about it, but it’s the legal framework that’s a key issue for me,” he said. “Mexico, for example, transformed their leasing laws to make them more favorable and that opened up the market.”

The other legal element Andragnes said he looks at is permitting, which can also play a role in determining whether a project is feasible or not.

“Even within Mexico, there’s parts of Mexico City where we would develop, and other parts we wouldn’t even touch, even if they gave me the land for free, because I know I would never get a permit if I tried to do it in the right way,” he said.

That’s why Andragnes said legal factors play a bigger role for him than even market cycle or currency.

“They go up and down and we invest in the long term, but the ability to run your business without interference from the government makes the difference,” he said.

For Alejandro Krell, managing director of Central and South America for Paladin Realty Partners—whose company invests U.S. pension fund money into real estate—said it can be challenging to educate investors on the differences in Latin American countries.

“Our large institutional investors don’t always distinguish Brazil from Peru or Argentina or Mexico,” Krell said.

Priority countries
Krell said that if he had to rank the countries where his company likes to invest in Latin America, it’s Mexico, Brazil and Colombia, with Peru “a close second.”

Roberts said his company focuses on finding cities with “organic need” for hotels, and ones with lots of leisure demand. That makes Costa Rica, Panama and Colombia top of his list.

“By leveraging on each other, (this block of countries) is becoming a very interesting part of the world, creating an interesting marketplace,” Roberts said.

Andragnes identified four cities his company is focusing on: “Mexico City; Santiago—because we think Santiago (Chile) is doing very well; Lima because it’s a city with infinite opportunity and very little competition; and finally Bogotá, because we feel that for our asset class it’s a good place and there’s a future there.”

Most of the speakers agreed that Argentina this year is lower on their list.

“I would love to do business there, but our investors would be worried to go there,” Krell said.

Andragnes agreed: “Last year, Buenos Aires would have been in my top three, and things change very quickly in Argentina. Today it’s very hard to go to an investor.”

The one lender on the panel, Rogerio Basso, principal investment officer and head of tourism for IDB Invest, said that his bank is a bit of a “contrarian” lender, in that it tends to fund projects in countries where lending isn’t readily available.

“That’s where we need to come in to satisfy the needs of the market to continue to support development,” he said. “There are specific destinations where the appetite from local banks is not as great, and that’s where we can step in and close that gap,” he said, citing places like Ecuador and Bolivia.

The attraction of mixed-use development
Most panelists agreed that mixed-use projects with hotel elements can be a good bet in Latin America because of financing benefits.

“We like (mixed use) because typically you could get financing to build the hospitality portion or the office portion, providing you with 60% to 70% of the entire project,” Krell said.

Andragnes, who is working on a large mixed-use development with hotel elements in Mexico City, said hotels are a key element to success in mixed-use development.

“The hotel may not be the highest-yielding part (of the development), but it brings lift to the project; it creates the lifestyle,” he said. “People buy into the lifestyle because of the hotel. For us, the hotel is the soul—it’s what gives the message to what we’re building with the project. And of course, you need a hotel that matches the lifestyle you want to attract.”

At the end of the day, though, hotels need to pencil out on their own as part of a mixed-use development, Basso said.

“From a lender perspective, in most cases, mixed-use projects have different investors and separate legal entities getting leverage off different rates,” he said. “As a lender, for me it’s critical the hotel can stand on its own and isn’t subsidizing the other elements. If there’s going to be a strong residential component with a high return, there’s a way to do an allocation of that lot price so the residences can take more of that burden, so the returns of the hotel can be a little higher.”

Those factors help the hotel element of mixed-use development have a more clear return.

Final thoughts on investment and development
Panel moderator David Larone, senior managing director with CBRE Hotels, asked the panelists to leave the audience with one key takeaway when it comes to investing and developing in Latin America.

Basso: “We are looking at transactions that have a very strong impact. We’re telling our developers that they have a responsibility to look at the area of influence where that project will be, and they have a responsibility to try to ameliorate or improve a situation—whether that’s working with vulnerable groups, or thinking about social and environmental sustainability.”

Andragnes: “The markets are changing very quickly. The demands are changing for every asset class in real estate. For me, the test is, I ask whether this project would have made sense five years ago. If the answer is yes, then I’m doing the wrong project. There’s a lot of rethinking that needs to be going on. Don’t develop chapter one—what’s working today. Develop chapter two—what’s happening years from today.”

Krell: “I appreciate what I’m seeing in modern asset classes—I see active adult and lifestyle-driven (projects) with a sense of hospitality. And why not? Hospitality has so much to contribute to the other asset classes.”

Roberts: “Plan well, but more importantly, plan through. A lot of people plan well, but it’s like starting a race without tennis shoes, then in the middle of the race asking, ‘Who will lend me their tennis shoes?’

“Most people think they’ve planned but they start running without having the necessary equipment—the equity, the debt aligned. You need all of the parts in place to do whatever you’re going to do and I would say 90% of the people we interact with are not in that position,” he said. “That puts pressure on the process and the structure and you start taking unnecessary risk.”

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