MEXICO CITY—The ability for investors to reach the hotel industry through two relatively new vehicles is helping solidify hotels as a valuable asset class in the country, according to speakers at the recent Mexico Hotel & Tourism Investment Conference.
The most pronounced platform, called fideicomisos de inversión en bienes raices (FIBRAs), has been a game changer, speakers said. Meanwhile, certificados de capital de desarrollo (CKDs) have plenty of potential to help reshape Mexico’s hotel landscape. Both burst onto the investment scene in 2013.
Michel Montant, director of corporate development for Grupo Posadas, said during the sixth annual event’s “Hotel opportunities: Mexico and beyond” session that the FIBRA model has been a boon to Mexico’s hotel industry. FIBRAs—which are the equivalent to real estate investment trusts in the U.S.—are required to distribute at least 95% of their financial returns to investors, and a minimum of 70% of holdings must be in real estate.
“They became the institutional instruments international investors needed to enter the market,” Montant said through an interpreter. “Without any doubt, the FIBRAs have generated a big chunk of the hotel development in Mexico. It has also created a secondary market in hotels, which didn’t exist before.”
Two FIBRAs operate in the hotel space:
- Fibra Inn had 41 hotels comprising 6,800 rooms in its portfolio at the end of 2015—up from eight hotels when it placed its IPO in 2014, said Fernando Rocha, director of acquisitions and development, during the “Capital markets: FIBRAs, CKDs and other investment trends” session.
- FibraHotel concentrates on owning business-class hotels, said Guillermo Bravo, head of corporate development & investor relations, during the “Capital markets” session. The company has 63 hotels open and 17 in various stages of development.
“Part of the whole FIBRA idea is so people can invest in hotel assets,” Bravo said through a translator.
Nikolaj Lippmann, Mexico equity strategist for Morgan Stanley, said FIBRAs overall have grown a great deal and now represent 1% of Mexico’s GDP.
“Like anything, we need to make adjustments, but it is the biggest success in capital markets in the last 20 years,” Lippmann said through an interpreter during the “Capital markets” session.
José Villarreal (right) of Orange Investments discusses the current state of Mexico’s hotel industry with Richard Katzman, conference chair and managing director of HVS, during the sixth annual Mexico Hotel & Tourism Investment Conference. (Photo: Jeff Higley)
While much of the capital in both FIBRAs and CKDs comes from Mexico’s local pension plans, at least 30% of investors in FIBRAs are from outside the country, according to Blanca Rodriguez, managing director of Banyan Tree Mexico Hospitality Fund and the moderator the “Capital markets” session.
The benefits of FIBRAs
The appeal of FIBRAs for investors is that they can determine investment length, but the trend thus far has been to view the commitment as a lengthy one, speakers said.
“It is very important to see these as a long-term investment,” Bravo said.
That doesn’t mean everyone has bought in to the FIBRA model, according to panelists.
“In general terms, FIBRAs are undervalued with respect to what reality says,” Rocha said. “We need to carry out the objective we are relaying as clearly as possible.”
In the meantime, FIBRAs have served as a way for developers to exit a hotel asset—something that can be underestimated because exit strategies were much rarer prior to the arrival of FIBRAs, said Vanessa Quiroga, director for Credit Suisse, through an interpreter during the “Capital markets” session.
Despite the success, there isn’t an urgent movement for more FIBRAs to join the fray, according to speakers.
“The market isn’t ready for another FIBRA for a couple of years,” Lippmann said.
CKDs aren’t as active in the hotel industry, but they are gaining momentum, Quiroga and Lippmann said.
“The structure works well,” Lippmann said. “There will be more CKD type of structures for development.”
Payments to CKD holders come from income earned by the project or business, including the amortization of principal and interest, dividends or sale of the project or firm.
Mexico outlook
While the emergence of these two platforms has been important to Mexico’s hotel industry, other capital sources need to emerge, too, speakers said.
“The bigger-size investment is resorts … that’s where the bigger foreign investors need to come in,” Montant said.
U.S. investors who are being squeezed out by the low cap rates and returns in their home country are beginning to show interest in hotels in Mexico, Montant added.
It also means there needs to be continuing education for investors in Mexico.
“Part of this challenge is to talk about the hotel business,” Rocha said. “It is true we have a financial investment tool but at the end everything is sustained by a business model that has operated for centuries, which is a hotel.”
The short-term rental and long-term operational aspects of the hotel business make it a complicated business to understand for investors not engrained in the sector.
“Education is the key,” Bravo said. “We are exposing people to it more and more. The hotel industry is very profitable, but this is a cyclical product.”
There could be cracks in the current cycle as the global economy, the strength of the U.S. dollar and geopolitical unrest are beginning to take their toll, speakers said. Quiroga said the industry has faced a recent challenge as valuations have been down because of the global economic uncertainty.
But optimism still exists.
“We’ve taken some very important steps, particularly with very complicated situations,” Lippmann said. “I personally hope there is more (mergers and acquisitions).”
“Everything is up in hotels in Mexico—they are at their top,” Bravo said.
“A good project will always find capital,” said Federico Martin del Campo, director general of Walton Street Capital Mexico, through an interpreter while sitting on the closing “Industry priorities: Action plan” session. “Underwriting and getting to know the market, this is what the investors are looking for. Local expertise is what we’re seeking.”
José Villarreal, VP & senior partner for Orange Investments, said during “Industry priorities” session that there is more capital interested in Mexico’s hotel industry that there are projects to acquire. However, that doesn’t mean money is easy to secure.
“Margins in hotels are tighter than other product types,” Villarreal said through an interpreter. “We have a challenging time. We have to get out of the box. We need to think of projects as they do in other countries that are ahead of us.”