Hotel asset managers hold unique job in Brazil
07 JANUARY 2015 7:29 AM
In Brazil, asset managers' lives are made more fraught by complicated business models starting from initial development all the way through to operations.
In Brazil, hotel asset managers have to face a reality different to that of the rest of the world. Why? Because there are no adequate sources of funding available to develop hotels in Brazil. As a result, almost all hospitality products are structured as condo-hotels with 100% equity devoid of any debt financing.
This peculiarity means that hotels are funded by various individual investors, generally laypeople. As a consequence, the asset manager has to deal with a vast group of people, resulting in a complex and slow decision-making process.
These investors are grouped and organized in a condominium structure, with condominium general assemblies and board of directors meetings. They are represented by a trustee or administrator and a board of directors, both of which are elected by the owners’ general assembly.
A poll of 100 hoteliers in the city of São Paulo demonstrated that board of directors can be classified in three different groups, each one encompassing the same number of hotels:
- Organized boards: groups of dedicated people that on average spend two to four days a month on hotel business. This is beneficial to the hotel, even when complicated by the fact that these members are not specialists in hotel administration and have little bargaining power with operators.
- Absentee boards: inactive members who do not challenge policies and decisions made by operators, and so often diminishing the potential property performance by not stimulating best practices.
- Agitated boards: unorganized members who generally misunderstand each other. They frequently enter into conflict with the management arm, therefore disrupting hotel operations. This category is susceptible to infiltration by persons who might dishonestly take advantage of any agitated situation.
It is important to highlight that even though these investors do not have appropriated knowledge in hotel management, they are the decision makers, form opinions and deliberate on investment plans, operational budgets and hotel-operator contracts.
Decisions are debated and made in the board of directors’ meetings and then taken annually to general assemblies for ratification. Especially during periods of low financial returns, these meetings can be extremely inefficient and contentious, slowing down the decision process and generating risky legal liabilities for all the players.
Brazilian asset management companies have invested heavily in developing communication tools with investors and incurred elevated, additional costs—a result of hiring lawyers to participate in board meetings and general assemblies to guarantee the use of operational best practices.
Without a doubt, an excellent relationship with investors and the creation of contractual clauses to maintain this relationship are extremely important to secure the conditions necessary for asset managers to perform their roles.
The condo-hotel model
Even though it is not the most desirable path, the development of properties through the condo-hotel model has been adopted by the majority of developers in the market. The main problem asset managers have to face with this model is that the hotel, before being a hospitality business, is a real estate business in which all the players have different objectives.
During the hotel development process through the condo-hotel model, there is a flagrant conflict of interests between the participants of the first phase of the project, in which the developer wishes to maximize profits, and the second phase, in which the end investor wants the highest return on investment possible.
This conflict of interest is especially aggravated by the fact that the final buyers are not qualified investors but individuals who buy more on impulse than on any type of technical or rational analysis.
Developers know that earnings are the main objective of the condo-hotel investor and, therefore, seek to deliver an investment product that guarantees through the best means possible the profitability desired by target investors. For this reason, reputable developers do everything possible to guarantee results.
Curiously, the developer’s responsibility seems to end when control of the property is turned over to the investor and not through the entire lifecycle of the investment product.
This anomaly is being discussed by the Brazilian equivalent to the U.S. Securities & Exchange Commission, the Comissão de Valores Mobiliários, because the development and sale of condo-hotels are, to a certain extent, comparable to offering stock in businesses on the open market.
This unbalance, together with condo-hotel structure, is the main reason why the asset manager’s job in Brazil is so specific and essential.
At the end of the day, both Brazilian and American asset managers aim to increase short- and long-term hotel profits while preserving the maintenance of the asset. However, the means to that end differs regarding communication tools and emotional aspects in the relationship between investors and asset manager.
Mrs. Perfeito received a B.A in Hospitality Management from SENAC-SP and an MBA from Getulio Vargas Foundation (São Paulo – Brazil). Mrs. Perfeito has a specialist degree in Hotel Asset Management, Hospitality Pricing and Strategic Hospitality by the Cornell University (Professional Development Program – PDP). Also took courses of International Business and Valuation at Erasmus University – Rotterdam (The Netherlands). Mrs. Perfeito has worked at the Revenue Management division for Marriott Brazil and is currently a partner at HotelInvest consultancy, being the leader of the Hotel Asset Management division.
The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Columnists published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.