Investors in Latin America look for diversification
Investors in Latin America look for diversification
21 OCTOBER 2016 8:24 AM

Investor sentiment for hotel projects in Latin America is growing, but deals must be the right fit for the right location and with minimal risk, said speakers at the South American Hotel Investment Conference. 

GUAYAQUIL, Ecuador—The hotel transactions and investment climate in Latin America is more varied these days, with a growth in private equity investments and renewed interest among investors in midscale hotel products.

Clay Dickinson, managing director of the Latin America region for Jones Lang LaSalle’s Hotels & Hospitality Group, moderated a panel on investment in South America at the recent South American Hotel Investment Conference. He said that transaction sentiment in the region is coming back, following a low period from 2014 to 2015.

Since 2010, all of Latin America has seen about $2 billion in hotel transaction volume, according to Dickinson, with the vast majority going to Mexico, followed by Colombia, Chile, Brazil and Argentina.

Investors tend to have a mixed outlook for the region, but there are reasons to be optimistic, he said.

“Private equity funds have been investing in regional platforms; we see examples recently in Brazil and Argentina,” he said. “There’s a steadier political landscape on the horizon, the region is attractive for international tourism, and there is modest improvement in macroeconomic variables.”

Who are the investors?
Cristián Roberts, president of real estate investment bank Prime, and Rogerio Basso, chief investment officer of Miami-based investment company Key International, both work with high-net-worth family investors who are seeing the longer-term benefits of hotels in Latin America and its neighbors, such as Miami.

“Our owners have more of a diversification-type of strategy … they look for cross-border investment around the region,” Roberts said. “A lot of families see hotels as a long-term allocation of capital, and in that sense (hotel investment) aligns quite well with the family.”

Prime also works with development companies that use hotel ownership to “fill the gap structurally and financially in their portfolios, where branding is part of the strategy,” as well as other companies that are establishing their own hotel ownership platforms in Central and South America. While hotels are not the only real estate asset classes Roberts’ and Basso’s clients invest in, both said the generally longer-term ownership commitment for hotels is appealing, particularly when risk can be minimized.

Global currency market consultant Jason Leinwand, founder and CEO of FirstLine FX, said currency risk in particular must be assessed from the beginning of a potential transaction.

“At the initial stage, it’s vital to the success of the project to quantify the risk,” he said. “Evaluate the project based on its merits independent of currency risk, then overlay (the currency risk) and you’ll find there are some strategies to protect against fluctuation.”

What makes for an attractive hotel investment?
Regardless of the type of investor, both Roberts and Basso said the key lies in finding the right asset in the right market that can offer the right returns.

In Latin America, country-specific economic and infrastructure issues can play a big role.

“Some smaller Latin American countries have a problem with their debt. Some banks step away from hotels now and then,” Roberts said. “There are other markets like Mexico, Colombia, Peru and Chile that make it easier for the equity structure part of the hotel development.”

Digging deeper, he said other local factors can come into play.

“Our markets are much more shallow than other comparative markets,” Roberts said. “You need to analyze airlift here, and local legal structures—things that apply only to that local project, which normally people don’t dive that deep into.”

Analyzing guest trends also helps investors direct their money better, Basso said. In Latin America, that increasingly means focusing on midscale hotel products that appeal to a growing middle class of domestic travelers.

“Where we see the most opportunity is midscale, which caters to domestic demand,” Basso said. “If you’re able to go to certain destinations where you don’t necessarily need to build a luxury asset, but you can build a product that’s competitive and can attract international demand as well, (that’s good). … If it’s a good product with (good) standards, you’ll attract international and domestic travelers, and that demand reduces some of the volatility in your projects.”

Roberts said his company asks three questions when deciding whether to pursue a particular hotel investment.

“How much money are we going to make? What resources do we have to deploy? And what is the likelihood the deal is going to get done?” he said. “That last one is the most concerning in our region; sometimes it can take six months for a deal to close, or 12 or 18, or it may not close at all.”

Basso said that in addition to looking at the fundamentals, like the quality of the asset and its location, it’s also important to consider the exit.

Still, he said that as the Latin American market matures and investors get more comfortable with hotels as an asset class, transactions will go up.

“We’re seeing a proliferation of local private equity groups over the past few years that can raise capital and that want to invest in real estate, particularly hotels,” he said. “Even though you’re not seeing a lot of transaction activity of these local funds buying hotels now, I have to assume that in the next two to three years there will be more. Fast forward and you should see a much more mature market, similar to that in Chile—with strong capital markets and good investment activity.”

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