MIAMI—Brazil’s hotel industry has seen ups and downs over the years, but being part of one of the world’s emerging economies and preparing for two major global sporting events during the next two years has it poised for another renaissance, according to panelists.
Panelists speaking during the “Opportunities in Brazil” session at last week’s Hotel Opportunities Latin America Investment Conference said the country is ripe for the development of more hotels.
Moderator Ricardo Mader Rodrigues, executive VP for JLL’s Hotels & Hospitality Group, said Brazil has experienced nine consecutive years of revenue-per-available-room growth.
“There’s still a very strong corporate market, so hotels are able to revenue manage their rates,” Mader said. “The bottom line is hotels are very healthy. This is attracting international investors.”
“We still believe in Brazil a lot,” said Felipe Gomes, business development director for Brazil Hospitality Group. “The numbers are going up. There are a bunch of cities that need a good hotel.”
Gomes said BHG’s portfolio comprises 53 hotels in Brazil, including 30 Golden Tulip-branded properties.
BHG and 2.0 Hotels are among the companies in expansion mode as the country prepares for this summer’s World Cup competition and the 2016 Olympics.
Julio M. Gavinho, 2.0’s CEO, said the domestic market is ripe for expansion as 92% of Brazilian air traffic is composed of domestic travelers. He is partnering a private equity firm to launch Zii Hotels—a chain he said will be based on technology.
Zii Hotels has eight projects under construction or in the approval process, Gavinho said.
“It’s a new generation of hotels for a new generation of Brazilians,” he said. “We are aiming for cities that you guys in the (United States) maybe can’t even pronounce. We are not aiming for the big cities.”
Gavinho said Midwestern and Northern Brazil are primary targets, with the northeastern part of the country as a secondary target.
“(Locations are) based on places we all need to go; we have huge mining and huge industrial plants,” Gavinho said. “We will supply that market with consistency and a little bit of technology.”
Gomes said Brazil Hospitality Group raised 400 million Brazilian real ($180 million) to build its hotel portfolio.
It acquired two hotels in Sao Paolo and one in Rio de Janeiro to form the foundation. In addition, it has secured a dozen management contracts and is participating as a minority partner in four developments. BHG plans up to three more development deals and up to 10 more management contracts before the end of the year.
Brands gain momentum
Branded hotels continue to become more common throughout the country, according to the panelists.
“The new cycle in Brazil … the hotels will be branded,” Mader said. “(The global brands) all have incredible pipelines. I do believe that Brazilians like brands.”
“There’s great opportunity for both domestic and international (brands), particularly in secondary and tertiary markets,” said Embree C. Bedsole, managing director and global leader for Alvarez & Marsal.
Make no mistake—major U.S. brands have taken notice, panelists said.
“Brazilians are getting to know more brands and are getting more demanding on the type of product they see abroad and want that same type of property in their own country,” said Salo Smaletz, VP of development in Latin America for InterContinental Hotels Group.
IHG signed five deals in Brazil and recently announced the development of a Holiday Inn and Holiday Inn Express complex that will put nearly 600 rooms in Rio’s Porto Maravilha area in time for the Olympics.
Smaletz said most brand expansion will come through new builds. Converting independent hotels into branded properties “is quite a challenge,” mainly because of life-and-safety issues, including a building’s structure not permitting a fire escape or fire sprinklers, he said.
Mixed-use popularity
Much of the new development will come as part of mixed-use projects. Seven of Zii’s projects are located within shopping centers. The company controls another eight sites—all of which are located in shopping centers.
“For select service, it’s an advantage if you place your hotel in the parking lot of a shopping center so we can offer you everything a mall can,” Gavinho said.
“Mixed-use projects, particularly in gateway markets, all make sense—particularly at the upper-upscale and luxury end,” Bedsole said. “But you need to underwrite each of the uses on a standalone basis.”
Gomes agreed.
“You need to look at (each of them) as a standalone project,” he said. “If it makes sense as a shopping center, an office building and a hotel, you can bring them all together.”
Gomes said 17 of the 22 hotels BHG has in the development phase are part of mixed-use projects.
The condo concept also has been a popular model in all asset classes, including hotels.
Smaletz said condo hotels have been considered competition to commercial and residential developments, but because of oversupply in those sectors, they are becoming more accepted as stable investments.
“As an international company, we had to educate ourselves and get to a comfort zone between our company and local laws and procedures to find a space where we could feel comfortable,” he said. “That’s something that we will definitely use to grow further.”
Some signs of caution
There is some caution about rushing into Brazil.
Bedsole said he has worked with a couple of private equity firms that were looking for hotel acquisition and development opportunities in Brazil, but both decided not to move ahead.
One, a South American company, decided against it because it could get better returns in the residential and retail sectors in which it was already active. The other was a U.S.-based firm that decided against it because of tax issues, repatriation of funds, the cost of doing business and the distance of the U.S. feeder market.
“Brazil was moved down the list in terms of priorities,” Bedsole said.
“We see American investors are not really happy with what’s happening in Brazil,” Gomes said, adding that higher interest rates are the big deterrent.
The lack of available debt is an issue for developers, too.
Bedsole said there are concerns from U.S. investors about currency fluctuation and the potential for inflation.
“There’s a little more caution and a little less optimism from those folks on the debt side,” he said.
Gomes said private banks are providing debt when a good project crosses their desks.