How would you describe investor appetite in the region? Are there specific regions that stand out?
Investor preference is for Sun & Sand destinations. For example, several the markets in Mexico such as Cancun and Cabo are recovering nicely along with some markets in Costa Rica which are benefitting from domestic and international tourism. Additionally, there is interest from investors in distressed assets, but to date, we have yet to see many distressed assets as lenders have been willing to work with owners and provide temporary relief while they await the recovery.
Costa Rica and Columbia are the two markets in Central and South America with the strongest investor appetite. Investor interest is strongest in the luxury segment and short-term rentals (Question – is this interest from institutional investors or what do we mean here by investor interest in Airbnb?) This is around minute 37:30.
2. Do you see a difference in preferences or willingness to invest between domestic and international funds?
International investors are looking for two things, Sun & Sand destinations and leisure markets that are tied to US travelers because the recovery is well underway. There is less interest in markets under stricter government regulations like Argentina and until recently Chile, and as a result investor interest has been muted.
The focus of hotel owners has been on reducing costs; however, it is worth noting that in some markets, for example in Costa Rica, hotel rates are higher than they were prior to the pandemic thanks to the recovery in domestic and international travel.
The interest in travel is strong in Latin America. Those that can, traditionally travel abroad and now with the restrictions, they are traveling domestically. Keep in mind these are travelers that are used to paying in Euros and Dollars and are willing to pay higher rates when it comes to domestic and regional travel. This has contributed to the relative strength in ADRs that we are seeing in certain markets.
3. How do you see inflation impacting the hotel industry and tourism in general?
Many countries like Brazil, Argentina, Columbia, Chile, and Venezuela are accustomed to operating and navigating in an environment of inflation and devaluing currency. It could be that these periods represent an opportunity for international capital. This could be a win/win, as in many markets except for Chile, it can be difficult to secure funding.
4. Looking into 2022 what is your outlook with respect to transactions and development?
We expect the purchase/sale and reinvestment in existing assets to lead the way as it can be challenging to find great “shovel ready” locations and financing new development requires a lot of creativity. We have already seen the recovery in many leisure destinations in the US and Mexico, and investors are on the look out for opportunities that follow a similar theme in Latin America.
In markets that are reopening, we are seeing an improvement in occupancy levels and ADRs and the most efficient way for investors to capitalize on these trends is to purchase and reposition an existing asset. We expect to see assets trading hands and potentially rebranding before a resumption in the new development pipeline.
Approximately 14% of the hotel projects in STR’s pipeline were abandoned and roughly 7% were conversions. In a region, where nearly 70% of the hotels are independent there is a tremendous opportunity for the global hotel brands to grow throughout the region, particularly given the breadth of their distribution channels.
What is changing is that historically we had seen the global hotel brands focus on more traditionally branded hotels and now we are seeing expansion focused on soft brands, for example a Tapestry or a Tribute, where the property can be tailored more to local and regional preferences.
There is also interest from overseas investors in regional or domestic brands focused on capturing the recovery in domestic business travel.
Over the last five years we have seen a trend toward mixed used development and COVID has not changed that. The highest and best use of many development sites continues to be “Live, Work, Play” development. If the project has a significant hotel component it is often necessary to include the hotel development in one of the later phases of the project to secure financing. There is strong demand for multi-family housing as developers prefer to construct the residential component first so that they can access that capital early in the project as the homes are sold. There are examples of luxury residential developments paired with high end hotels in attractive beach destinations.
One thing that is clear is that the number of brands and choices are expanding. Travelers are once again rediscovering their local and regional leisure destinations. Hotels have an opportunity to win over these guests as they shift their habits and preferences and potentially make their demand sticky for years to come.
We will have to see what happens with the Omicron variant and how the different countries throughout the region react to its potential spread. That will likely determine at least for the near-term the pace and trajectory of the recovery.
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