South America economies prove resilient

LIMA, Peru—While the problems of the world—from the European debt crisis to political uprising in the Middle East to unemployment rates in the United States—keep hotel investors cautious, South America economies appear to be  resilient.

By Jason Q. Freed – News Editor-Americas – HotelNewsNow – 12 September 2012

Less capital is required to build hotels in South America and operating costs are approximately 5% less than in the U.S., according to experts at the South American Hotel and Tourism Investment Conference this week at the Westin Lima Hotel & Convention Center. Meanwhile, a middle class is emerging in many regions of South America, leading residents to take their first vacations or first business trips.

Marcelo Loffreda, former head coach for the Los Pumas rugby team, delivers the keynote address at SAHIC

The culmination of all those factors, experts said, leaves an emerging region of the world ready for surging hotel demand and high returns on investment.

“We’re kind of worried with the European crisis and how this may impact tourism and total business,” said Arturo Garcia Rosa, chairman of HVS South America. “However, from January to April of 2012, and up until now, we don’t see any impact; business still growing.”

Gross domestic product in South America grew at a 4% rate in 2011 and HVS expects it to grow 3.7% for 2012. In addition, a growing domestic tourist market is emerging, Rosa said.

“In reality, we are expecting about 25 million tourists in 2012,” Rosa said. “That’s up 2% year over year.”

Experts weigh in
Christopher Froome, VP in Marriott International’s development planning and feasibility department for the Caribbean and Latin America regions, confirmed the high return-on-investment opportunities in South America.

“Investors are looking for a return on capital,” he said. “If you have a 12% conversion rate but the country risk is 12%, your prospective return is not very attractive. Peru and the rest of Latin America are low-risk countries.”

On top of the risk-reward equation, Froome said hotel investors are looking for the respect of private property and the confidence that contracts are fulfilled. He said that respect isn’t attained in every region of the world so it’s important developers, owners, operators and brands regularly honor contractual agreements to allow South America to capitalize.

He said higher earnings before interest, taxes, depreciation and amortization is easily attainable in South America, but it comes with higher risk.

“Governments are complicating the businessman’s lives because bonds are high risk,” he said.

Because hotel demand is directly correlated to GDP growth, executives at Terranum Hotels keep a close eye on local economies when evaluating expansion opportunities in Latin America. The company also looks at population size, according to Rogerio Basso, executive VP of acquisitions and development for Terranum.

“What is the demographic, and is there a rising middle class? That seems to be they story of Latin America, which is a true positive,” he said.

Terranum executives outlined three countries on its short list: Colombia, Peru and Chile.

Market specific
Brazil is clearly the hottest region in South America, but there are other markets beginning to emerge.

GDP in Brazil is expected to remain muted, but economic measures are in place to encourage hotel investment, as well as upcoming demand drivers such as the FIFA World Cup in 2014 and the 2016 Summer Olympics.

“Brazil is going to be a hot spot,” HVS’s Rosa said.

Because of solid economic policies, Peru and Colombia are emerging as solid hotel investment options, Rosa said. Tourism in those countries also is growing at a solid clip.

“You may have some other options (outside of Brazil), and we need to take advantage of all the investment opportunities,” Rosa said.

Argentina and Brazil are leading tourist growth numbers, according to HVS. The second tier of cities experiencing the fastest tourism growth includes Chile, Colombia, Uruguay and Peru.

“When talking about (tourism) growth over the last 10 years, the entire world is up 44.9% and South America is up 108.2%,” Rosa said.

Where are the tourists coming from?

In Brazil, travelers are coming from Argentina, Europe and the U.S.; Chile’s main tourism driver is Argentina and Peru; Colombia’s is the U.S.; and Peru sees most of its inbound traffic from Chile and the U.S., according to HVS.

Only a few markets in South America are able to sustain the luxury and upper-upscale markets because of the high returns needed to sustain capital costs, experts said. Buenos Aires, Sao Paulo and Rio de Janeiro are markets ripe for top-segment growth, Rosa said.

“In some of these cities, maybe there is room for one (luxury hotel), but if you look at the size of that segment—in Lima, Santiago, etc.—there isn’t much space for four to five truly luxury hotels,” Terranum’s Basso said. “We’re not there yet. Sao Paulo is an anomaly.”

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