Why investors are lured to Central America
21 APRIL 2015 6:29 AM
Central America’s hotel industry is getting a lot of attention these days from investors who are willing to look past infrastructure and security issues in the region.
The Central American hotel industry is getting an upgrade. From business-centric accommodations to trophy resorts, hotels throughout the region are being modernized. Sustainable development, coupled with increased competitiveness, has arrived to this tropical destination.
During the past decade, multi-national corporations and cash-rich buyers seeking entry into these closely-knit markets have engaged in significant mergers-and-acquisitions activity, resulting in company buyouts and extensive liquidity.
Following in the footsteps of El Salvador’s influential Poma family, these Central American power players are investing in hotels and diverse real estate platforms in their home countries—a unique and impactful approach to preserve family wealth and further develop their region’s hospitality market.
Who are they and what are they investing in?
In Central America, most hotel owners are large family enterprises with diversified conglomerates and backgrounds in agriculture, manufacturing and other industrialized sectors. In the mid-2000s, many of these families sold their closely-held operating businesses to global strategic acquirers in multi-million dollar deals. Proceeds were channeled via family offices into different holdings, including operating real estate such as hotels, as part of succession plans, multi-generational shifts in management and strategic growth opportunities in the tourism industry.
For example, the Paiz family of Guatemala and the Uribe family of Costa Rica sold CARHCO, a regional supermarket holding company, to Wal-Mart Stores in a multi-billion dollar transaction.
Following the sale, the Paiz family formed various entities such as Latam Hotel Corporation to develop regional mixed-use real estate projects, including 10 Hyatt Place-branded hotels in Central America and Mexico that will be managed by Colombia’s Grupo GHL Hoteles. Similarly, the Uribe family formed Cuestamoras, a family office to invest in diverse business sectors such as private equity, energy, real estate and hospitality.
The largest Central American hotel group by far, however, is controlled by El Salvador’s Poma family. A subsidiary of the Grupo Poma, Real Hotels & Resorts is a hotel company with 27 owned and franchised properties in more than nine countries, under the InterContinental Hotels Group, Choice Hotels International and Marriott International brand families.
Inspired by the Poma model, these patrimonial groups are active hotel owners and operators that share several commonalities.
First, the companies are structured as integrated platforms, with scalable advantages, thereby increasing competition in the market.
Real Hotels & Resorts, Grupo Agrisal, Latam Hotel Corporation and Grupo Santos, among others, are mostly integrated platforms as hotel real estate investors, developers, operators and owners. However, and contrary to other similar family-controlled hotel companies in Mexico and Latin America, there are no Central American-based hotel licensors. Most regional owners are licensees and operators of the major international hotel brands.
Most of these owners enjoy “exclusive rights” over the brand’s development in the region and act as master licensors or have multi-unit development agreements, which provides them with economies of scale and advantages, such as key commercial, political and financial relationships and access to prime real estate in hermetic markets.
As operators of their hotel real estate, these owners leverage their scale, creating efficiencies such as:
- centralizing purchasing activities;
- clustering management and sales;
- providing intra-regional corporate agreements;
- offering proprietary loyalty programs; and
- identifying and developing human capital.
Undoubtedly, these sophisticated and well-capitalized new market entrants present intense competition to legacy Central American hotel groups such as Guatemala’s Camino Real Corporation, Panama’s Bern Hotels and Resorts, and Costa Rica’s Enjoy Group, among others. They have been obliged to consolidate, innovate and renovate their assets to defend their market positions and diversify their investment strategies with higher-yielding opportunities.
The style of supply
Most of these new hotels in Central America are part of mixed-use real estate projects with office and retail components that offer security, food-and-beverage options and entertainment to travelers and locals.
While some regional hotel markets such as Panama City, Panama, and San Jose, Costa Rica, have experienced large rooms supply increases, others have yet to feel the impacts of over-building.
Overall, area-wide hospitality stakeholders have embraced this new wave of supply, citing the increased product competitiveness of these branded hotels that will hopefully help boost rates, raise media awareness for the destinations, and create a stronger service culture with more job mobility and training in the region.
All of the aforementioned new players are attracted to the increased profitability and shorter return on investment of select-service hotels. They strive, however, to conduct business with a strong commitment to corporate and social responsibility, and often look to invest in hotel and real estate projects that are economically, socially and environmentally sustainable.
For example, Caribe Hospitality, a Costa Rica-based hotel development and investment company, has implemented a sustainability policy for all of its properties, some of which are also certified Leadership in Energy and Environmental Design.
And, as many of these groups have generated significant wealth in the region over multiple generations, they are deeply rooted and committed to helping their countries by creating employment, attracting foreign exchange, strengthening national identity and increasing social and economic development and competitiveness.
Companies capitalize on cross-border growth
As a result of the 2006 Dominican Republic-Central America-United States Free Trade Agreement, regional trade has increased. Many of Central America’s leading business groups have trans-nationalized through international strategic partnerships, thereby creating unified economies and countless cross-border collaborative relationships.
For example, Nicaragua’s Grupo Pellas has partnered with General Electric and IBM; El Salvador’s Grupo Poma has linked with Carlos Slim’s Grupo Carso of Mexico; and, Guatemala’s Grupo Castillo has allied with PepsiCo and AmBev, all of which generate strong corporate travel in the isthmus.
These large, diversified enterprises and powerful family offices are accustomed to volatility in the region. Thus, they are able to employ their unique ability to operate under adverse and fluctuating conditions and, in fact, grow their assets to significant scale and attract cross-border acquirers, particularly from the U.S. and neighboring Mexico and Colombia.
Interestingly, Colombian firms have been actively acquiring companies in Central America’s airline, banking, hospitality and other industries. Reciprocally, various regional family enterprises, seeking growth, stability and geographic diversification, also have made bi-lateral investments in Colombia’s hotels and other important sectors.
Many of these powerful Central American families are investing in trophy assets located within keynote master-planned residential resort communities in their respective countries.
Some of the most notable and recent regional development projects include:
- The Pellas family in Nicaragua’s Mukul Luxury Resort & Spa in Guacalito de la Isla;
- the Uribe family in Costa Rica’s Andaz Peninsula Papagayo Resort in Guanacaste; and
- the Vallarino family in Panama’s JW Marriott Panama Golf & Beach Resort in Rio Hato.
Besides Mukul, the Pellas family and their investment partners, including AMResorts, also developed the Dreams Las Mareas Resort in Guanacaste, Costa Rica, helping grow the region’s upper-tier all-inclusive segment. Since then, AMResorts acquired the Secrets Papagayo Resort & Spa and plans to grow further in the isthmus.
Central America is also renowned for established hospitality niches such as ecotourism—with leading properties such as Costa Rica’s Lapa Rios and Honduras’s Lodge at Pico Bonito—and the luxury boutique resort offerings of Belize, including the Coppola Resorts and the luxe adventure outpost Ka'ana Resort & Spa. Most recently, Leonardo DiCaprio announced plans to build a luxury eco resort on Blackadore Caye.
Nevertheless, leisure travel to Central America, aside from that to Costa Rica and Panama, is still small in scale and remains an area prime for growth.
What challenges lie ahead?
Despite its hotel boom, Central America still faces macro challenges affecting its competitiveness. Crime and violence, weak infrastructure and social issues, among others, hinder economic progress.
Consequently, the U.S. government, the United Nations and global NGOs are combating these systemic problems through capacity-building and development assistance. Their work also creates incremental hotel demand in the region.
Additionally, the growing influence of Asia in the isthmus, especially by the Chinese in key infrastructure projects, should not go unnoticed.
Beyond investment concerns, these regional issues also present operational challenges like high logistics costs due to poor infrastructure, difficulties in ensuring a sufficient supply of water and the high costs of energy, which in some places is three times higher than in the U.S. In fact, in Central America, utility costs account for about 12% of all hotel revenues. Comparatively, utility costs in the U.S. are about 4%, and in the Caribbean, they are about 9.5%, according to Sion Capital’s analysis.
In an effort to stimulate economic growth and benefit from increased capital investment, the public real estate investment fund model in Central America began in Costa Rica in 2000 and then expanded to El Salvador and Panama. With Central America’s volatility and smaller scale, these funds have mostly attracted regional investors, but they also have created an active secondary market in the region.
Furthermore, to institutionalize and open Panama’s commercial real estate industry to foreign investors, the publicly-traded real estate investment trust model is being implemented. Although sound investment theses, married with appropriate transparency and strong corporate governance, could bode well for these Panamanian REITs, these vehicles will only succeed through sufficient scale and liquidity.
While both regional REIFs and REITs present potential exit strategies for some of these illiquid hotel assets, these familial investors typically prefer to hold onto the cash flow and not sell.
Indisputably, many of these prominent Central American families are now proven long-term investors, seeking to preserve their capital; put their money to work for subsequent generations; improve their communities; and, fuel hotel, resort and real estate developments in the region. But ultimately, they are enjoying a crash course on the hospitality industry and its capital intensive and competitive subtleties.
Jonathan Kracer is Managing Principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions, with offices in Miami and Mexico City. Mr. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. In particular, Mr. Kracer has advised numerous family enterprises with their hotel and real estate projects in Central America. Mr. Kracer’s columns primarily cover hotel asset-related subjects, with a specific emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at email@example.com. More information about Sion Capital LLC can be found at www.sioncapitalco.com.
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