The industry outlook for Mexican hotels in 2019 looks to be somewhat difficult and perhaps volatile at times, as political, economic and other industry-specific challenges are present; however, there’s still room for optimism for Mexican owners and investors.
2018 proved to be a difficult year for Mexican hotels. And while 2019 might still have some recurring economic, political and industry-specific challenges, some positive themes within them are showing there’s still room for optimism.
Now is the time for Mexican hotel owners and investors to take action, and those who are able to deftly ride rough waters ahead will emerge the most victorious.
Below I highlight five themes to watch in 2019:
1. Political changes and their effects on tourism
On 10 March 2019, Mexican President Andrés Manuel López Obrador completed the first 100 days of his six-year term. Much has already occurred, but the three main policy impacts to the tourism industry in Mexico include: cancelling the construction of Mexico City’s new international airport; eliminating the Mexico Tourism Promotion Council (CPTM) and redirecting these important marketing funds to finance a Mayan Train route; and closing the Mexican Investment Promotion Agency (ProMexico) offices and redirecting these efforts to the embassies and consulates.
Promoting Mexico as a destination for high-spending international travelers is critical to maintaining the positive tourism growth rates that contribute importantly to Mexican GDP, employment and competitiveness. Eliminating the CPTM is very concerning and its efforts must be replaced with appropriate promotional strategies to sustain international visitation growth.
Although it remains to be seen whether nationalistic economic policies with a social inclusion focus will actually benefit the majority of Mexicans, as of today, AMLO’s public popularity and consumer confidence remains high.
Certainly, positive public policies concerning improved services and livability conditions in key tourism destinations like Los Cabos will help social integration.
Yet, corporate confidence remains low.
The domestic business community and foreign investors appear to be losing confidence in the Mexican economy, and private investment remains stalled.
2. Economic headwinds and their links to business demand
Besides political uncertainty, economic headwinds usually lead companies to postpone important decision-making and investments.
Slower business investment and tighter discretionary spending affects lodging demand and revenue per available room growth. According to STR, parent company of HNN, political and economic uncertainty hampered performance in 2018 with RevPAR down 3.2% in U.S. dollars.
Furthermore, international credit-rating agencies and global financial institutions are concerned about the lower expected economic growth levels in Mexico, and the IMF recently lowered its 2019 economic growth projections from 2.5% in October 2018 to 2.1% in January 2019.
Although the signature of the T-MEC, which replaced NAFTA, in December 2018 eased commercial tensions between the U.S. and Mexico, it still requires ratification.
Consequently, business tourism to key industrial cities in Mexico is being affected pending further clarity on the new legislation and the reactivation of stalled investment projects.
The recent U.S. government shutdown also affected lodging demand in Mexican border cities like Ciudad Juárez and Tijuana.
The shutdown, however, as well as U.S. trade issues with China, have weakened the U.S. dollar and positively helped the Mexican peso to appreciate more than 2% since the beginning of the year.
3. Safety, security and seaweed—all softening leisure demand
Safety and security concerns and the seaweed outbreak have also affected U.S. leisure visitation to key resort markets like Cancún and the Riviera Maya.
Since lower U.S. visitation to these key markets has been offset by more price-sensitive domestic and regional Latin American visitors (primarily from Colombia), lower ADRs have been achieved. Moreover, differences in seasonality and shorter booking windows for local travelers have limited the ability of operators to maximize rates, which ultimately affects profitability.
Additional softening effects in Cancún and the Riviera Maya are being felt due to lower visitation from the United Kingdom, an impact of Brexit; fewer tourists from Argentina, due to their economic weaknesses; above-average hotel supply growth; and greater competition from alternative lodging options.
According to the Cancún Hotel Association, it took more than 40 years for Cancún to reach 30,000 hotel rooms and Airbnb reached the same level of available supply there in only seven years.
4. Other financial impacts on hospitality businesses
Other financial effects that hospitality businesses will feel in 2019 include higher labor costs from minimum wage increases (raised 16.2% for the year), energy prices, interest rates and credit risk spreads.
To combat reduced operating margins from rising utilities prices, various Mexican publicly traded hospitality companies recently engaged external experts to find long-term savings solutions.
Interest rates continue to rise. In December 2018, the Mexican central bank increased its base interest rate to 8.25%, due to the uncertainty of AMLO’s economic policies as well as to reduce the risk of higher inflation.
As a result, Mexican peso-denominated lending rates for hospitality developments are now about 250 to 300 basis points higher than the TIIE interbank rate (presently around 8.5%), yielding a total loan cost of about 11% to 12% per year, depending on other project attributes.
To compensate for this higher cost of capital and risk, investors now require higher returns, but as mentioned above, operating performance has decreased.
Therefore, cap rates have increased and reduced implied values and will likely slow transaction volumes.
5. Slow lodging transaction volumes that will soon favor buyers
Last year was a seller’s market with multiple, larger ($100 million or more) hotel sales that took place in primary cities like Mexico City, Los Cabos and the Riviera Maya, whereby sellers mostly involved U.S. public companies and buyers were private Mexican families or funds. Examples include:
- Hyatt Hotels Corporation’s sale of the Hyatt Regency in Mexico City for $365 million
- Host Hotels & Resorts’ joint-venture sale of the JW Marriott in Mexico City for $183 million
- Brookfield’s sale of the Hilton in Los Cabos for $167 million
- Marriott International’s joint-venture sale of the W in Mexico City for $112 million
Although various key ownership groups are looking to divest in 2019, disconnects in expected valuations between sellers and buyers will keep transaction volumes slow in the short term.
The medium term, however, will present good buying opportunities, particularly for private investment groups with longer holding periods and greater tolerance for volatility.
Notably, since AMLO cancelled the construction of Mexico City’s new international airport in late 2018, Mexican lodging investors have begun seeking safer acquisition and diversification opportunities in the Caribbean, Europe and the U.S.
For example, Mexico-based RLH Properties recently acquired the luxurious Villa Magna hotel in Madrid for € 210 million ($236 million), and is seeking other investments in Spain and Europe. The reported purchase yield was less than 2%, which demonstrates the flight to safety into international premium assets.
2019 should continue to be an active year for management changes, brand conversions and product renovations, as owners will seek to strengthen distribution and product positioning in both urban and resort markets at this point in the Mexican lodging cycle.
AMResorts, for instance, recently signed two new resort conversion deals in the Riviera Maya with the Oasis Hotels & Resorts following the trend of strategic partnerships in the all-inclusive resort sector that I wrote about a few months ago.
2019 outlook summary
I believe that Mexico’s hospitality industry will benefit from strong support and resources from the private sector. Indeed, Mexico’s hospitality industry benefits from strong private-sector leadership and influence, led by the important National Council of Tourism Enterprises, which is comprised of 15 important national chambers and associations that collectively represent over 90% of the tourism activities of the country.
As the multiple interviews at the recent 2019 Mexico Hotel & Tourism Investment Conference revealed, the country’s hospitality sector still has whitespace for new brands, operators, products, niches and innovation.
Country-wide and sector-specific business conditions, however, must improve for all stakeholders to thrive. With Mexico’s hotel industry facing political changes and economic slowdowns, and its sector’s performance declining, the evaluation of investment strategies and operating tactics proves critical.
Ultimately, 2019 should reflect, as they say in Mexico, “A río revuelto, ganancia de pescadores.” Translation: There is always somebody ready to take advantage of a chaotic situation.
Who do you believe will catch the most fish in 2019?
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. He is a recognized expert on the hospitality sectors of South Florida, Latin America, the Caribbean, and Mexico. He has been a columnist with HNN since 2012 and can be reached via email at firstname.lastname@example.org. More information about SION CAPITAL LLC can be found at www.sioncapitalco.com.
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