South American condo-hotel market returns

By Brendan Manley – – 10 December 2012

REPORT FROM SOUTH AMERICA – The condo-hotel concept is alive and well in South America, despite the rampant oversupply these hybrid properties created in Brazil roughly a decade ago. As the model is employed again to drive new growth in developing markets such as Colombia, Uruguay and Argentina, experts say developers must either learn from the past or suffer the same mistakes.

Hilton Worldwide recently announced a new-build condo-hotel in Pilar, Argentina, that will feature 170 guestrooms and 130 residential units. It is expected to open in March 2015

Employed primarily as a means to obtain financing for deals, condo-hotels are still a favorite among capital-challenged South American developers. The structure of such properties has evolved somewhat since the mid-1990s and early 2000s, when a glut of new construction (and unsold units) in Brazil caused demand to plummet there. But now, with that nation currently undergoing a strong recovery and sustained double-digit growth anticipated for the entire region, hoteliers are once again bullish on the potential for condo-hotels on the continent.

“Condo-hotels are back in Brazil,” said Salo Smaletz, regional VP of development for InterContinental Hotels Group in Latin America. “In the past, there was a disconnect between unit owners and developers as to viable returns. Development was not truly regulated, and consequently, condo-hotels were overbuilt. Supply exceeded demand and occupancy expectations were not realized. The model ostensibly ‘crashed.’ Today in Brazil, things are different.”

For starters, the type of developer, and the types of products real estate investors choose to build shifted notably since the last condo-hotel boom in South America. Many previous projects were doomed from inception.

“Brazil was a disaster,” said Arturo Garcia Rosa, president of HVS Argentina. “Many condo-hotels were built by developers who were not in the hotel industry: They had been building offices or residences, and one day discovered that there were opportunities in the hotel industry, and began to develop these condo-hotels. This was a problem for several reasons.”

Rosa said during the Brazilian boom, non-traditional hotel developers were constructing the new condo-hotels more like residences with added amenities and services. Further, the structure of the resident ownership arrangements led to difficulties in managing the properties; for example in a 200-unit condo-hotel, if the management needed to take action on an issue, it had to get approval from the 200 unit owners, as well.

That’s now changing, with smarter ownership structures that allow management to operate effectively. Rosa said property owners are also tapping skilled asset managers with true hotel experiences this time around, and aligning themselves with well-known brands, which already is making a huge difference.

“They’ve learned, because all the key people understand how to structure it now,” Rosa said. “They understand that they need to shape, to develop a hotel property, and then … do the market study, do the concept design. After that, they go to one of the hotel brands and structure a hotel property in combination with the market, with the right hotel company and hotel asset management.”

“Development is more regulated now in Brazil; there is clearly more demand as Brazil evolves as a global economy; plus, expectations about (return on investment) are more realistic,” Smaletz said. “In countries like Colombia, this model is also quite sustainable because development is more regulated, providing increased assurance that a project will be built. And the fact that most of this new construction is branded hotels brings an exponential breadth of credibility to the process.”

Emerging markets
Brazil has been undergoing an economic boom in recent years, driving demand in key cities like Sao Paolo and Rio de Janeiro, which has helped the nation’s hotel market recover. Developers and brands are once again targeting new projects, including IHG, Marriott International and Accor. The latter enjoys a dominant position in Brazil, where it has grown its Novotel and Ibis brands; it also acquired 11 Brazilian hotels from Grupo Posadas in July, as part of a 15-hotel South American portfolio acquisition.

“The RevPAR in Brazil has increased more than 100% over the past seven years and is still growing above the inflation rate,” said Eduardo Camargo, development director for Accor Latin America. “Considering the stable economy and new demand for branded hotels, we still face lack of infrastructure in the majority of the Brazilian business cities.”

As developers eyeball sites for new projects in Brazil (which can be hard to come by) or conversion projects, other South American nations like Colombia, Uruguay and Argentina are on the uptick as well. Once again condo-hotels are the favorite product, but the structures of the deals tend to vary between nations, driven by cultural elements.

“In Brazil, every room is a unit that is sold to the market. But in the case of Colombia, it’s structured under a trust (called a fideicomiso). They sell a percentage of the company; this is very different,” Rosa said. “In Uruguay and Argentina, it’s more like Brazil: You don’t easily find buyers that like to buy a piece of the company. They say, ‘I am very comfortable because I own a unit; I own a property.’ The reason is culture.”

Rosa cautions, however, that the per-unit ownership approach as once employed in Brazil could lead to disaster in Uruguay and Argentina down the road, unless hoteliers in these nations are careful to avoid Brazil’s past mistakes.

“There’s a lot of opportunity, and the hotel business is really growing so much. Unfortunately, at the moment, there is a problem in Uruguay and Argentina, because the developers don’t know how to manage this,” Rosa said. “Nobody is going ahead with this kind of condo-hotel structure in Chile and Peru—there are a lot of hotel developments there, but all are structured in a typical way, because there is no problem with the banks in Chile and Peru.”

Products, branding are key
Many of the major hotel brands are active in South America at the moment; in addition to the longstanding presence of companies like IHG and Accor, there have been several high-profile recent condo-hotel projects, like the 245-room Hilton Bogota that opened earlier this year, and the recently announced 167-room Hyatt Montevideo, Uruguay, being developed. Accor is focusing almost exclusively on condo-hotels, and Camargo points to the company’s proprietary variable leasing structure and branded brain-trust as main causes of success.

“We have brought the country the right hotel model, with smaller room counts and great operation performance figures,” Camargo said. “This means a new generation of condo-hotels with the very best practices of the real estate market, combined with hotel operation. Hotels have very positive feasibility and real estate price is always established in accordance with future hotel results. Most of the investors are also much more prepared to identify good and profitable investments. All these facts, combined with Accor brands, can be a good point for condo-hotel model sustainability.”

“A milestone (in South America) was the realization that the properties need to be flagged with a strong brand. Being a singular, un-branded property in global hospitality is ineffective,” added IHG’s Smaletz.

HVS’ Rosa believes the greatest branded growth potential in South America at the moment is within the midscale select-service segment. He sees strong potential for applying the condo-hotel model to these properties, provided the hotel portion is distinctly run as such, with a capable asset manager and the proper condo ownership structures in place. Hopefully, the days of the unbranded, pseudo hotel/condo hybrid are over.

“A condo-hotel is not like in the past, when some developed them and called them ‘apartment hotels.’ That was something very strange; it’s not a residence, not a hotel,” Rosa said. “You need to structure a hotel and be sure that some professional will manage that hotel. With the right hotel manager, it will be a successful property, and you can repeat a lot of new properties after the first one. There are huge opportunities, and not enough new developments in the pipeline to cope with the demand.

“I don’t see problems of oversupply in the mid-markets in the South American region in the coming years,” Rosa continued. “What the numbers say is the market continues growing, and the occupancies and rates are growing with it.”

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