Editor’s note: The content in this article was gathered from panel discussions conducted during the recent Mexico Hotel & Tourism Investment Conference. The panels were conducted entirely in Spanish; the content in this article was collected through translators provided during the event.
MEXICO CITY—Tourists and investors look for different types of rewards from beach resorts in Mexico, but it’s clear they’re riding the same wave of excitement when it comes to committing their money to that type of asset.
More than 35 million international tourists visited Mexico in 2016, and with most heading for the sun, sea and sand, it’s no wonder investors also are scoping out the country’s coasts for opportunities, said speakers at the recent Mexico Hotel & Tourism Investment Conference.
Hotels in beach destinations have more financial success than hotels in cities, said José Luis Vega Palafox, director/partner for VP Capital and moderator of the “Capital markets overview: Investment trends in Mexico and beyond” panel.
“There should be more capital support to get more hotels in those destinations,” he said. “We have to keep pushing in that sector and get more hotels.”
Even FIBRAs—the hotel-ownership vehicles similar to real estate investment trusts in the United States that were launched in Mexico in 2004—finally have found a way to invest in the lucrative beach resort asset class. The big roadblock for FIBRAs had been that beach assets in Mexico tend to be all-inclusive resorts, which have trouble isolating rooms-only revenue—an important need for FIBRAs.
The issue was solved through the cooperation of groups and authorities to come up with a formula that defines fixed rental for all-inclusive properties, Adrián Cano, real estate managing director for Evercore Partners Mexico, said during the “Capital markets” session.
That could lead to more investment opportunities for domestic investors, according to Raúl Gallegos, managing director for Credit Suisse.
“There are more local investors because they want to invest in FIBRAs or other things and we depend less on foreign investors,” he said.
Magdi Tanamli, managing director for Grupo Tandevco, said financing is more readily available for beach hotels than it is for city hotels because the return on investment is higher for beach resorts (approximately 18% cash-on-cash returns) than it is for city hotels (8% to 10%).
On the other side of the coin, building beach hotels costs between $80 million and $100 million, while city hotels cost approximately $9 million to build, Tanamli said.
“You can invest in six or seven cities instead of one beach—it’s a very difficult question (for investors),” Tanamli said.
That doesn’t mean all resort projects are greenlit.
“It is easier to finance a hotel in the city than a beach hotel even though the beach hotel is very profitable,” Tanamli said.
Evercore Partners Mexico’s Adrián Cano told MexHIC attendees that Mexico’s FIBRAs have figured out a way to isolate room revenues at all-inclusive resorts—something that could lead to them buying those types of properties. (Photo: Jeff Higley)
Beach hotel owners, however, have financing in the form of resources from the hotel, according to Vega Palafox.
“They leverage one hotel to build another hotel,” he said. “The beaches have grown …. A large part of the hotels in the beaches … are from foreigners. They have brought capital from origin countries and Mexican banks and Mexican investors.”
Hotel owners and operators see the value of both beach and urban properties.
“We always wanted to be a company that balanced between city and beach,” José Carlos Azcárraga, director general for Grupo Posadas, said during a session titled “Industry priorities: Action plan.”
“We’re now in a good cycle for both segments.”
Panelists were direct in their belief that beach destinations represent big opportunities for Mexican investors.
“We need to create more Cancúns, more Cabos,” Braulio Arsuaga, director general for Grupo Presidente, said during the “Industry priorities” panel.
There is money available
Financing for hotels throughout Mexico is available, speakers said. Much of it tends to come from international sources—most notably Spain and the U.S.
Cano pointed to Playa Hotels & Resorts’ deal with Pace Holdings that closed in March as an example of how companies with deep ties to Mexico’s hotel industry are trying to attract domestic and international capital.
Gallegos said Credit Suisse is ready to launch a new debt vehicle for Mexico that will provide senior and subordinate financing positions to meet the needs of investors.
“We saw clear benefit of becoming (an) investment-grade country 10 years ago,” he said. “Investments in Mexico are still solid in the medium and long term. … We know there are going to be these types of cycles and they will be constrained by issues.”
Understanding the hotel operating model is a key component to financing, Tanamli said.
“We should not forget that the hotel is very different from other real estate investments,” he said. “We have to take into account what will happen in the following 30 years, not only the following five years.”
Another unique aspect of financing hotels is that it’s common to have a mix of pesos and dollars in the same project, said Santiago Juarez Lagos, director of corporate banking, real estate and hotel industry for Banco Sabadell, during the “Capital markets” panel.
For example, Arsuaga said Grupo Presidente is funding 30% of its pipeline with dollars.
People are willing to invest money because they are seeing the profitability hotels can achieve, Azcárraga said. Sixty percent of Grupo Posadas’ pipeline is funded by FIBRAs—the other 40% is funded by families and individuals.
“There is a lot of appetite to invest in the country,” Grupo Hotelero Santa Fe CEO Francisco Zinser said during the “Industry priorities” session.
“There are good projects, and there is a lot of money in the market,” he said, adding that many large funds have approached his company to talk about investment opportunities.
Arsuaga concurred: “There is interest, there is a will and there is money.”
The government’s “Connection to Tourism” program will further stimulate hotel development because it promotes travel within the country, panelists said.
The hotel executives said there is some potential competition for funding from Cuba, but that country isn’t a major threat to Mexico’s hotel industry even though there are more relaxed regulations for U.S. visitors.
“I believe that is not the biggest threat … it is just another competitor,” Azcárraga said.
Zinser said the Dominican Republic has more to be worried about than Mexico. He became knowledgeable about Cuba, he said, while working for Spain-based NH Hotels—which has multiple hotels in Cuba. He said it will take 10 to 15 years for Cuba to develop an infrastructure that compares to the infrastructure of Cancún.
But that doesn’t mean it’s not an attractive destination for investors.
“When I remove my Mexico hat and put on the Posadas hat, that would be a great place to put a hotel,” Azcárraga said.