Investors, financiers confident in Caribbean
Investors, financiers confident in Caribbean
26 NOVEMBER 2018 8:50 AM

With economically strong feeder markets, investor interest and availability of capital, the Caribbean remains an opportunity for a variety of buyers and financiers. 

HAMILTON, Bermuda—Despite the region’s catastrophic 2017 hurricane season, banks, private equity companies and other lenders say they have high confidence in investing in the Caribbean right now. And although airlift and insurance issues remain factors in the economic stability of a project, the pros outweigh the cons.

Speakers on several investment- and finance-related panels at the recent Caribbean Hotel Investment Conference & Operations Summit said their confidence in the region never really left.

“I feel the confidence level here has been consistent over the last 10 years,” said Ronald Sutherland, president and CEO of real estate advisory Hemisphere Group. “I saw no reluctance of capital coming into the region and didn’t see any projects that stopped because of a hurricane.”

Nick Hecker, senior principal and chief investment officer with Och-Ziff Real Estate, agreed, calling the driver “capital markets environments in the U.S. and North America, where you just have unprecedented volume of capital raise for real estate equity and debt. Anywhere someone can find a little more yield, capital is rushing to it at this point in the cycle, and the Caribbean is benefiting from that.”

Panelists agreed that the economic health of the Caribbean’s top feeder market—the United States—is a big driver behind the factors that lead to investment confidence. 

Who the buyers are
When it comes to a Caribbean investor profile, conference speakers agreed it’s diverse and changing.

“The type of buyer we see runs the gamut,” said Christian Charre, SVP of CBRE Hotels. “We have U.S. (real estate investment trusts), U.S. private equity, high-net-worth individuals and family offices, all competing for the same assets. The competition for assets in the region has been very strong, in essence because it’s so competitive in the U.S. and there are so many bidders there. Now to get yield, many of those (U.S.) groups are looking outside their borders and that’s driving interest in the Caribbean.”

Matt Norton, real estate practice area leader for law firm K&L Gates, said his firm sees U.S. and European institutional investors, but they operate more “deal by deal.” Still, there’s no shortage of money.

“This year and last year have been the best we’ve seen in the Caribbean in terms of being able to find capital on the debt and equity side since the recession,” he said.

Who the lenders are
As with many geographically and economically diverse regions comprised of multiple countries and governments, the Caribbean is full of regional lenders who tout their deep knowledge of the market and its quirks.

“The profile is often small investors and family offices—long-term investors,” said Joan Bertran, global head of commercial real estate and hotels for the Miami branch of Spain’s Banco Sabadell.

Salim Damji, principal with Solid Rock Group, said “there’s still plenty of opportunity” for owners and investors to partner with regional banks.

Rebecca Cocchiola, VP of Singerman Real Estate, cited a hotel acquisition her company recently made in the Cayman Islands that drew some diverse interest with varying results.

“There were some banks not interested in that,” she said. “We did have interest from Canadian banks and we went with one of those at a very attractive rate. There were some debt funds interested, but the incremental cost of those additional proceeds made it not attractive at all. It’s very dependent on project, location and the business plan.”

Damji said his company does see U.S. equity investors, but they often have trouble penciling an exit plan for a more short-term investment. On the other hand, he said sources like Jamaican and Dominican Republic pension funds have promise because they’re longer-term plays.

Opportunity Zone opportunities
Speakers talked about the impact U.S. Opportunity Zones may have on Caribbean investments. These programs, created at the end of 2017, make new investments in designated economically distressed areas eligible for some preferential tax treatment.

Of the Caribbean region, Puerto Rico and parts of the U.S. Virgin Islands fall into Opportunity Zones.

“This has a direct implication on the Caribbean and we expect to see pools of capital,” Hecker said. “Given all the focus, you’ll see a lot of people devoting time and resources. It’s something out there competing for dollars in a crowded marketplace.”

Andro Nodarse-León, managing partner of private equity and investment firm León, Mayer & Co., said Opportunity Zone investment will be a positive for Puerto Rico, where his company has done a lot of projects.

“They’re another layer of stimulus and fuel for growth, by attracting that third layer of capital—private capital,” he said. “Puerto Rico historically has had tax abatements for tourism that are still available, and there’s a new tax credit program (that came out in 2016) that a lot of people still don’t know about. It’s yet another mechanism to fuel capital flowing into the island above and beyond Opportunity Zone programs, and the U.S. Virgin Islands have similar programs.”

Insurance lessons learned
While dealing with hurricanes and other storm damage in recent years, hotel owners have learned valuable lessons when it comes to insurance, speakers said.

Nodarse-León, whose company renovated a hotel in Puerto Rico prior to 2017’s storms and had to essentially do the same renovation again post-hurricanes, shared advice on dealing with the insurance process.

“First, model out what your losses really can be,” he said. “We’ve seen people underinsured because they didn’t think through just how bad a (Category) 5 storm is. On the business interruption (insurance) side, you need lots of it. And once you actually have a program, you must be proactive from day one.”

That proactivity was his No. 1 piece of advice.

“Insurance companies take a really long time to pay, particularly in the Caribbean,” he said, adding it’s a difference from many U.S. insurance carriers who get ahead of potential issues to save money in the long run. In the Caribbean, he said, insurance companies often make people wait longer, even if the cost to them is greater in the long run.

“As an owner, if you’re not proactive (with your insurance company) from day one, if you don’t go and attack that claim, you’re going to have a hard time,” Nodarse-León said. “You have to grab the bull by the horns and go fight.”

Hecker said mounting an offensive against insurance companies is a team effort.

“It’s not just your property manager,” he said. “It’s your operating partner, developer partner, the lawyers and consultants. Put together an all-star roster and proactively run it and it’ll make a huge difference” when it comes to going after claims.

Success factors
Speakers answered the question, “What makes a successful Caribbean tourism project?” with answers ranging from airlift to labor:

Nodarse-León: “The location filter for us has to do with lift and diversity of the lift.”

Cocchiola: “It’s also the availability of labor, which is usually correlated with the availability of permits. We’ve seen investments in places where labor isn’t expensive but there’s no permits to bring in the people you need.”

Hecker: “The consumer is so sophisticated today and has so many options. We saw it with Zika virus—it’s not that demand vanished; it just went somewhere else. What that means is that for new projects, it’s not sufficient to check some boxes. You have to check all boxes. You can’t have perfect airlift but lousy service and (food and beverage). You can’t have the most perfect beach but have to take two flights and a boat to get there. On the investor side, we have to be mindful of putting capital in the places that check the boxes.”

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