GLOBAL REPORT—A recent HVS report claims that South American countries are rife with opportunities as local currencies lag behind the U.S. dollar, but some hoteliers who work in the space say the situation might not be that simple.
Cristiano Vasques, managing director for HVS South America, said a combination of weak local currencies and economic issues is pushing down development and acquisition costs in South American markets.
“We’ve seen a portfolio of 15 properties that would be sold for $75 million three years ago, after you convert to local currency, now going to be sold for $25 million,” Vasques said. “I’m not saying the difference in price will be the same (everywhere), but the way of thinking is the same.”
He noted that a strong dollar versus South American currencies has the dual benefit of pushing down asset values and driving up rates in local currency.
Vasques said at the same time local investors aren’t tracking this phenomenon, so there would be less competition in the marketplace.
But Arturo Garcia Rosa, chairman of the South American Hotel Investment Conference, said viewing today as an opportunity to cash in would be an oversimplification.
“Dollar currency, inflation and interest rates going up, the GDP going down, and the fiscal situation (is) very complicated due to the decrease of domestic consumption and … the impact of the fall of commodity prices and its impact on the exports revenues,” he said. “On the other hand, two of the major regional economies, Brazil and Venezuela, are involved in huge political crises with no certainty of when it will be controlled.”
Varies from country to country
The recent “Trends and opportunities South America” report from HVS and HotelInvest, based on data from HNN’s parent company STR, indicates that the opportunities within the continent might be more attractive than perception might lead many to believe.
Vasques said the devaluation of currency is actually driving up rates in local currency, which could benefit foreign investors in the long term. But he noted opportunities vary from market to market.
Brazil’s ongoing political turmoil, as the country’s legislative body is still working to impeach President Dilma Rousseff, casts a long shadow over the country.
“We don’t have the light at the end of the tunnel to say in a couple years we’ll be fine,” Vasques said. “It’s a bet, and it’s a risky bet. But I think in a couple of years (Brazil’s) economy will be much stronger.”
He said Argentina is “in better shape than Brazil” after a wave of political and economic reforms after Mauricio Macri’s election as president in 2015.
“I think next year you will start seeing some recovery,” Vasques said, noting it’s a market ripe for new properties.
Santiago, Chile, and Lima, Peru, already have strong economic fundamentals, Vasques added.
“They’re in better shape than the rest of South America with economies growing at a very fast pace,” he said. “And the local markets are performing quite well in terms of occupancy and rate.”
He said Bogota, Colombia’s hotels have seen strong growth recently, bolstered by tax incentives for new development.
While he believes investment in Brazil might still be premature and Argentina is on the verge of becoming attractive, Vasques said hoteliers probably have a three- to five-year window to act in Chile, Peru and Colombia.
Francisco Pérez-Egaña, CFO for Libertador Hotels, Resorts & Spas in Lima, Peru, which has several Starwood-branded properties in the country, including two recently announced Aloft hotels, said things are going well in Peru by and large, but the impacts of shifting currency are felt less dramatically there because business is done both in U.S. dollars and the Peruvian nuevo sol.
“The impact of currency won’t be so high, but it also reduces our risks,” he said.
Uncertainty in Brazil
Vasques is optimistic Brazil will soon be a good target for outside hotel investors, possibly as soon as 2017. But Paul Sistare, CEO of São Paulo, Brazil-based Atlantica Hotels, said he doesn’t believe that is realistic.
Sistare, who has worked for 20 years in the country and now has 88 hotels in 43 Brazilian cities, said Brazil’s political issues are deep seated and unlikely to be resolved even with Rousseff’s impeachment.
“The economy is at its worst in recorded history,” he said. “That’s going back 80 years. And we don’t see the bottom. … At this point, when you talk to economists about what will happen, they just shrug and say, ‘I don’t know.’”
Sistare said he gets why currency fluctuations could spell opportunity from an outside perspective, but he believes the fluctuations have been so rapid and common that it makes investment in the country worse than impractical.
“Because of the political instability, you get economic instability and the currency continues to fluctuate wildly,” he said. “So you could get a deal at 3.50 (Brazilian reals) to the dollar but then close at 3.90 to 4.10 (to the dollar). … That fluctuation really happened in a matter of a week.”
Sistare warned that it would be at least 18 months until Brazil’s political turmoil saw any resolution even in the best-case scenarios, and he doesn’t expect things to die down much even at that point because of the country’s long history of political corruption.
And Sistare said there’s another obstacle to entry in Brazil and many other Latin American countries that many outside investors might not even consider: a general unwillingness to sell by local owners.
He said many see income-generating real estate as something to hold on to through highs and lows, because it’s reliable in a way the local currencies are not. He said Latin American owners tend to be more optimistic even during more turbulent times, and he noted that they typically arrive at very different valuations than companies from the U.S. and Europe.
“They really have no pressure to sell,” Sistare said. “Currency fluctuation has nothing to do if they’re willing to sell or not.”
Operational impacts
Pérez-Egaña said his hotel has seen some operational impacts from shifting currency. He said many South American hotels will offer on-property currency exchanges that charge a premium in order to generate revenue. Since Peruvian hotels are able to charge in both sol and dollars, he said it becomes a balancing act of what currency guests prefer to pay in and which would be the most profitable. He said hoteliers also have to weigh perceptions of repeat customers when manipulating currency to their advantage.
“A lot of guests come again and again, and we don’t want them to feel like we’re taking advantage of that,” he said.
He said roughly 70% of the companies’ costs are paid in sol while 60% of sales revenue comes in through U.S. dollars. He said services like food and beverage are charged exclusively in sol, which can be an opportunity for guests to get things cheaply when the dollar is strong.
Pérez-Egaña said the most difficult thing about currency in Peru is picking which to report financials in, because fluctuations can show wild differences in a company’s performance if not handled wisely.