MEXICO CITY—Mexico’s burgeoning hotel industry is benefitting from growth in the business sector, and industry leaders said during the recent Mexico Hotel & Tourism Investment Conference that they expect the trend to continue well into the future.
“Business travel seems to be organized in regional economies, some with deeper demand for the short run,” said Richard Katzman, managing director of HVS-Mexico City and the conference’s chairman. “While opportunities are numerous, discipline remains important.”
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Ricardo Zorrilla, director general of IGS Hotel, said via interpreter during a panel focused on business travel that there is a need for more hotels that provide the standard services business travelers are seeking.
Those types of hotels have attracted the attention of the two hotel-oriented FIBRAs that entered the market in 2011. FIBRAs, officially known as “fideicomisos de infrastructura y bienes raices,” are the equivalent to REITs in the United States. The structure provides developers access to the public-equity market and enables small investors to buy commercial property. Fibra Inn and Fibra Hotel are focusing on the hotel market in Mexico.
Fernando Rocha, director of acquisitions and development for Fibra Inn, said the REIT targets branded hotels that are underperforming because they lack the correct owner-brand-operator combination. The company works with 12 international brands and two national brands in its 71-hotel portfolio. He said the company places capital from its own resources but does have approved credit lines it has yet to tap.
“Our first priority is acquisition (over construction) because we can give immediate return to our investors,” Rocha said via translator during a panel focused on capital markets.
Guillermo Bravo, head of corporate development and investor relations for Fibra Hotel, said during the capital markets panel that it’s important for the existing FIBRAs to maintain an open dialogue to help future FIBRAs evolve.
“The access to the capital, the access to institutional investors that FIBRAs have given us is unbelievable,” Bravo said via translator. “A great number of investors have seen the potential in the market.”
Secondary market took time to develop
“Part of what we are creating is a new secondary market that didn’t exist before,” Rocha said. “What we have found is, you go to the market and have to be disciplined and serious in the approach to maintain the robustness of FIBRAs.”
Vertex Real Estate Investors is one example of a company using FIBRAs as a secondary market. Ricardo Zúñiga, Vertex’s managing partner, said during a panel focused on industry priorities that the firm prefers to acquire stabilized assets, then invest money to create more value that makes the asset more attractive to a FIBRA to acquire.
Charles El-Mann, director of construction for Fibra Uno, said during the industry priorities panel that it took eight years to try to change the laws to make FIBRAs a reality. Fibra Uno launched in 2011 and has 6,800 hotel rooms in its portfolio—although hotels are a secondary focus behind other asset classes.
Fibra Hotel has capitalized on the environment. Bravo said his firm has built a portfolio of 100 hotels using a business plan that focuses on business-class hotels and doesn’t plan to venture into resorts any time soon.
Panelists agreed that FIBRAs tend to prefer branded, business-oriented hotels as investments, but said they’re missing some opportunities by not being more inclusive.
“The coming of the Mexican REITs has dramatically changed the scenario for Mexican investments,” said Michel Montant, director of corporate development for Grupo Posadas, during a panel focused on leisure travel. “But their focus is on business hotels. Hopefully they will start entering the resort area markets. That’s where today’s best markets exist.”
Pablo Gonzalez, VP-development for Hyatt of Latin America & Caribbean, said during the leisure panel that FIBRAs should note that the highest occupancy rates, average daily rates and revenue per available room are in resort destinations.
“Once the opportunities in the cities get too expensive they’re going to start to move to the resorts,” Gonzalez said.
“Diversifying by geography and product type is essential,” added Blanca Rodriguez, managing director of Banyan Tree Mexico Hospitality Fund, during the leisure panel.
Meanwhile, Bravo said during the capital markets panel that many independent properties don’t qualify for a FIBRA’s portfolio because of things such as fire and life safety issues.
“We are in the part of the cycle where we are requiring quality products to continue the consolidation,” Bravo said via translator.
A strong lending environment
Mexico’s hotel growth goes beyond the REIT segment, panelists said.
Gerardo Corona González, director of finances-tourism sector for central bank Bancomext, said during the capital markets panel that the government complements commercial banks to encourage more players to enter the market.
“We see a fragmented market in hotels; it has a lot of opportunity to grow,” Corona said via interpreter, adding that non-institutional-grade assets comprise up to 70% of the existing market.
Guillermo Yasutake, director of development and new business for Grupo Presidente, said via translator during the business travel panel that the aggressive lending stance by Bancomext has helped keep the development pipeline moving forward.
“We see a very healthy debt market.” added Banyan Tree’s Rodriguez. “Bancomext has been very healthy for our sector.”
Sebastian Chirulnicoff, sales manager for GE Capital, said during the business travel panel that there is a lot of equity in the market, and as a lender he is optimistic—GE Capital has expectations of double-digit growth every year for the foreseeable future.
“Capital markets have evolved positively in Mexico, especially with the entrance of the Mexican pension funds as institutional investors,” Rodriguez said. “That has made a big, big difference to the real estate sector.”
Bravo said the hotel market in Mexico is in an interesting state, and the current opportunity could last for years as emerging and secondary cities are beginning to need lodging services.
Zorrilla said there’s a great appetite for international funds to invest in hotels in Mexico, but a key element for growth is paring that investment money with the right credit vehicle.
“There’s optimism that the more traditional foreign investors are coming into the country,” Rodriguez said.
Katzman said he wonders if Mexico’s investor market understands that the hold on an asset sometimes needs to be longer than expected to maximize returns.
“Everybody wants immediate results, but this happens when you improve the product,” Rocha said. “There is a road map that is marked.”
“We see it is only going to increase and grow,” added Rodriguez. “We see an increasingly liquid market on the debt and equity side.”