Brazil could be ready for huge rebound after recession
 
Brazil could be ready for huge rebound after recession
24 MAY 2018 8:38 AM

Political uncertainty and the deepest recession in the country’s history have made things difficult lately for hoteliers in Brazil, but experts speaking at the Hotel Opportunities Latin America conference believe the country is ready to turn around.

MIAMI—With Brazil coming out of a historically deep recession, experts on the country’s hotel industry believe it is now poised for a turnaround, although some uncertainties continue to linger in the most populous country in South America.

Speaking during the “Opportunities in Brazil” session at the Hotel Opportunities Latin America conference, panelists said Brazil is a country with considerable upside for hotels.

“The market has started to recover,” said Diogo Canteras, managing partner for HotelInvest and HVS South America. “I think there’s going to be a very steady recovery period in the coming months and years. It’s going to be slow growth—not strong growth—but it’s going to be steady.”

Salo Smaletz, VP of development for Latin America at InterContinental Hotels Group, said his company currently has 13 properties in the country. He now believes “the worst is over” following the 2014 economic crisis, which sparked the deepest recession in the nation’s history, and the 2017 impeachment of President Dilma Rousseff. That doesn’t mean there aren’t still threats on the horizon, though.

“There are signs of a pickup already, but I think there’s a next phase, which are the next elections,” he said. “Those are going to determine the direction the country is going to go and could give peace of mind for those thinking of investing in the country.”

Terry Sanders, CDO for the Americas at Radisson Hotel Group, said since late 2017, the outlook in Brazil has been much more positive, leaving him less pessimistic than some of his counterparts.

“For me, I’ve only seen the upside,” he said. “I didn’t see the downturn.”

He pointed out his company is poised for significant growth in the country and has long leveraged its relationship with Atlantica Hotels to grow in the country, which is typically regarded as difficult for foreign brands and investors to penetrate.

Supply issues
In recent years, Brazil has survived some well-chronicled supply issues, as the country’s inventory grew to accommodate the 2014 FIFA World Cup and the 2016 Summer Olympics in Rio de Janeiro.

But Canteras pointed out the country’s supply issues have been much more systemic than just the oversupply in connection with large events.

He said longstanding practice within the country of building condo hotels and selling residential units to finance projects has led to the construction of countless properties that wouldn’t make financial sense if viewed solely as a hotel play and not a more broad real estate investment. This, in turn, has led to the construction of “hundreds of condo hotels … (and) vast oversupply in many markets),” he said.

But new regulation on that type of property by the country’s financial oversight body is expected to curb that type of development, he said. As a result, the country’s supply-demand dynamics will be “much more predictable than in the past and much more convenient for people wanting to invest in the country,” he said.

“There are only two factors that can affect hotel investment: the demand and the supply,” Canteras said. “And the problem was the supply was unpredictable, leading to a very strong risk to investors. It’s not that way anymore.”

The lending environment in the country has changed lately, with a steep decrease in interest rates likely to spur more commercial banks to become active lenders in the country, said moderator Ricardo Mader, managing director for JLL.

Differing market outlooks
Brazil is an expansive country with varying dynamics within its borders, meaning some markets are more poised for a bounce back, while others are dependent on factors outside the country, such as the international commodities market.

Panelists agreed the country’s financial epicenter of São Paolo currently holds the most upside and has been perhaps the first harbinger of a widespread turnaround in the country.

Canteras pointed out the market was one of the hardest hit by the country’s recession, losing about a quarter of its total roomnights from before the recession, but panelists now feel the market’s dynamics are much more positive.

Smaletz believes the market is poised for a new type of hotel product.

“With cities like São Paolo, I do think it would be very receptive to more lifestyle brands, both soft brands and lifestyle hotels,” he said, noting he believes there’s room for Kimpton Hotels & Restaurants to grow in the market.

He said he also believes there are opportunities for select-service brands in gateway markets, and there are “some markets that don’t have a proper (extended-stay) product.”

Panelists also were bullish on growth prospects in the country’s secondary and tertiary markets.

Rio de Janeiro continues to cope with its supply growth, but Mader said the silver lining in that hotel boom is it refreshed the city’s otherwise stale inventory.

“If not for the Olympics, Rio would have the same inventory as four years ago,” he said.

Room for resort growth
The panelists said they see potential for long-term growth particularly in the country’s resort destinations.

“This will be a great opportunity for the coming years,” Canteras said. “The (Brazilian) middle class has been growing for the last 20 years.”

Smaletz agreed that Brazilian resorts have huge potential, both because the country has a “huge domestic market” and because it could represent a more convenient destination for travelers from countries like the United States that are currently spending as much as 12 hours in the air to get to similar resorts in places like Thailand.

With that said, he still believes the country will need to do a significant amount of groundwork to turn that potential into reality.

“Work needs to be done in increasing and securing constant airlift,” he said. “We’ll also need more infrastructure—better airports and better roads.”

Mader said the logistical challenges to growing in the resort space might ultimately prove to be too much.

“There’s great potential for demand, but I just don’t see the supply (being built),” he said. “It’s impossible to develop anything by the ocean because there are so many regulations.”

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