Latin Hospitality: Room to Grow

BY TAYLOR BARNES
Latin Trade Magazine

RIO DE JANEIRO – – Pecking on a Blackberry during the Rio Investors Day conference at the beachside Copacabana Palace Hotel, New York financial media-relations adviser Liz Cohen laughs when asked about her lodging options.

“If one conference fills the hotel and doubles the prices of nearby ones, it means something,” Cohen says. When reserving for the event earlier this year, Cohen was limited to the most exclusive suites at the Copacabana Palace. She booked a room at another property.

Visitors like Cohen are transforming the Rio hotel market. In a city known for sun and samba, business trips account for an estimated 50 percent of hotel stays — and half of the business visitors are from São Paulo. These travelers lend further support to expansion of the hospitality sector in Rio, which is preparing for two major sporting events.

“The focus is on South America” for Latin American hotel investment and activity overall, says Scott Berman, principal and U.S. industry leader, hospitality & leisure, at PwC US, the assurance, tax and advisory services firm. “Eighty percent, maybe even more, is in Brazil, in advance of the World Cup [in 2014] and the Olympics [in 2016].”

For the hospitality industry in Rio, the stakes are high. “We understand that [these events] are a lever so that we can put Rio de Janeiro in the worldwide tourism scene in a more consistent way,” says Pedro de Lamare, president of SindRio, a syndicate of hotel, bars and restaurants. Tourism already has been on the rise, a trend de Lamare attributes in part to recent anti-crime initiatives by the city and state governments.

“Security really affected this sector,” he acknowledges. He adds that the government’s “Choque de Ordem” program, which focuses on keeping beaches clean and regulating street vendors, has helped, too.

Rio welcomed 1.6 million international visitors last year, according to government agency Riotur, which expects 2.3 million people by 2020, an increase of 50 percent.

To stimulate hotel development, the Rio city government in December sanctioned a generous package of incentives that opened some residential areas, offered tax breaks for converting residential buildings and, in areas such as Copacabana, eased zoning restrictions.

Rio already has about 25,000 hotel rooms that meet International Olympic Committee standards. The IOC requires that the host city have 28,000 rooms in place for the games, which begin August 5, 2016. By 2015, the hotel sector expects to have 34,000 rooms ready, according to SindRio.

But in less than two years, in June 2014, soccer fans will descend on Brazil for the FIFA World Cup, whose 32 matches will be played in 12 cities, including Rio, which also will host the international broadcast center.

“My impression is that Rio will neither lack nor have excess hotels,” says Antônio Ruótolo, a real estate analyst with market research firm IBOPE Inteligência in São Paulo. “The hotel market is balanced and is going to stay balanced.”

Securing a local partner has long been a big challenge for foreign hotel brands in Brazil, says PwC’s Berman, but it’s essential. “It’s hard if you are sitting in New York, London or Dubai without a stakeholder on the ground watching out for your investment,” he says.
A number of recent deals suggest an evolution in Brazil on that point. And he sees potential in the mid-range segment, given the fragmented nature of the lodgings market. “Brazil is full of limited service one-star hotels and luxury and upscale hotels, which are concentrated in São Paulo and Rio,” Berman says. “There’s very little in the middle.”

Some 17 new hotel projects in Rio have been approved by authorities; eight of them are under construction.France’s Accor, the leading international chain in Brazil, plans to add six more hotels in Rio, where it currently has 10, from the luxury Sofitel to the budget ibis. The local Windsor chain, with 10 properties in Rio only, intends to open three more, says SindRio.Windsor also is investing in renovations: The upgraded Atlantica Windsor in Copacabana reopened in December, and, in April, the Windsor Miramar, also in Copacabana, closed for a two-year overhaul.

Brazil Hospitality Group (BHG), which operates the Golden Tulip brand in South America, bought the Hotel InterContinental in São Conrado and plans to invest 25 million reais (nearly $16 million) to renovate the 418-room property and reflag it as a Royal Tulip.

New hotel construction in Rio is concentrated in Barra da Tijuca, a heavily residential area often compared to Miami. The city’s first Hyatt, a 408-room Grand Hyatt Rio de Janeiro, is among the various projects there.

But hotel industry representatives question the potential of Barra, given the lack of metro access. A trip to Copacabana by taxi can encounter delays in heavy traffic.

However, soaring real estate prices are making construction increasingly difficult in popular districts such as Ipanema and Leblon, says Alexandre Sampaio, president of the Federação Brasileira de Hospedagem e Alimentação (Brazilian Federation of Hospitality and Food). He is optimistic that Rio will soon see improvements — and hotels — in its decrepit port zone, an area close to many downtown businesses that has been targeted for revitalization by the municipal government.

“In a city where it’s difficult to build, everyone wants to build,” Sampaio says.
Otavio Barros, president of a residents association in a favela in the Alto da Boa Vista, says his community has gotten informal warnings that developers are eyeing the land on which their unofficial homes sit.

Areas around Rio have been targeted for redevelopment related to infrastructure improvements and urban renewal.

PERU REDEFINED
As in Brazil, tourism continues to propel Peru’s rapidly-growing hotel industry, and the country’s economic growth in recent years has created a robust market for business travel. Investments geared to lure both sets of travelers are on the rise in Lima — most notably, the $130 million Westin Lima Hotel & Convention Center. The May opening of this five-star luxury hotel in the heart of the San Isidro business district was an important milestone for Starwood Hotels & Resorts Worldwide, the owner of the Westin brand, Peru’s Libertador group, the city and the hotel industry at large.

Libertador, owned by the Brescia conglomerate, had previously partnered with Starwood on two luxury resort properties. “The introduction of hotels like the Westin helps raise the bar for the quality of hotel offerings and therefore the prices of rooms and the type of visitors,” says Jorge Melero, CEO of Libertador Hotels, Resorts & Spas. “It helps attract visitors with higher purchasing power and companies looking to organize conventions and other large international events.”

The 301-room Westin is the chain’s first in South America. It is not only the city’s tallest building, at 30 floors, but the modern tower also houses the largest meeting and convention facilities in Peru and a restaurant headed by a renowned Peruvian chef, Rafael Piqueras, among other amenities.“The next hotel that enters the market is going to have to make a substantial investment, as our numbers are very hard to replicate,” Melero proclaims. “We have set off a revolution in Lima’s hotel sector.”

The inauguration of high-end hotels like the Westin is an important first step to redefining Lima for business and leisure travel, says Joelma Galdós, co-general manager of Continental Travel, one of Peru’s largest travel agencies. “A modern city needs to lodge its visitors and also offer them facilities to carry out conferences, conventions and other large events. Travelers consistently demand better hotel services,” she says.

Owners and operators are responding. Casa Andina, a leading national chain, has unveiled plans for the business-oriented Casa Andina Select. The first will open in Lima in November, according to Juan Stoessel, general manager of Casa Andina.

Stoessel says that efforts to tap the business traveler are in part related to the restrictions that the Cultural Ministry has placed on daily visitors to Machu Picchu, rules that effectively cap tourism spending around the popular historic site. “This has created a bottleneck in the leisure travel segment,” Stoessel explains. “On the other hand, corporate tourism is growing impressively, at about 15 percent year-over-year.”

The business travel segment already generates 30 percent of Casa Andina’s total sales, he says. “Clearly, the demand for four- and five-star hotels in Lima is on the rise. Peru is ‘in’; more and more people are coming here to conduct business or attend some regional event,” says Oscar Caipo, head of KPMG’s office in Peru and head of the firm’s advisory practice for Latin America. Caipo travels twice a month on average and welcomes foreign visitors about 20 times a year. “Although hotel options in Lima are increasing, if you compare Lima with other large cities in the region, we still have a long way to go,” he says.

Travel agency professional Galdos concurs. “Available choices for the corporate traveler are still insufficient — demand continues to be greater than supply,” she says. More projects are in the pipeline, such as a Hilton Hotels & Resorts that is due to open next year in Miraflores, where Hilton already has a Doubletree.

The hotel and tourism consulting group HVS calculates that Lima had fewer than 1,000 luxury and upscale hotel rooms at the end of 2010. The number of high-end rooms should double by 2014, bringing the Peruvian capital on par with cities such as Santiago and Bogota, according to HVS data.

MEXICO ENDURES
Nothing appears to keep the business hotel market down in Mexico. Not the global recession of 2009, nor the H1N1 flu epidemic of the same year, nor the negative publicity generated by drug trafficking violence far from business centers.

“The impact of the violence has been only to shorten the stays of foreign business travelers,” says Roberto Zapata, chairman and chief executive of Hoteles Misión. “They are visiting Mexico just as frequently, but for less time.”

Hoteles Misión has 35 hotels in Mexico, plus one in the United States. Zapata is preparing to open a hotel in Apodaca, the town closest to the international airport in greater Monterrey, Mexico’s third-largest metro area and its leading industrial city.

The resilience of the growth in hotels for the business traveler in Mexico is not hard to explain, says Richard J. Katzman, managing director of HVS in Mexico City: “Years of sound financial management, a growing middle class and [location] right next to the U.S. market.”

A wave of development of Class A office space and high-end hotels in Mexico City tracked confidence in sustained foreign direct investment., which hit a near peak of $27 billion in 2007, then fell sharply in 2008 and 2009. FDI began to rebound last year, rising 16 percent to $17.7 billion. Government and independent analysts are predicting that FDI will reach $20 billion in 2011.

Beyond the influx of new and renovated properties in the capital, the emergence of industrial and commercial centers in smaller cities has been important for the hotel industry, Katzman says. “Many of these places had no hotels that offered modern facilities for the business traveler,” he says.

Unable to support a five-star property, Mexico’s secondary markets represent first-rate opportunities for mid-scale and limited-service brands.

“We saw a niche,” says Blanca Herrera, director of franchise services at City Express, a national chain. “You could find independent hotels at 500 pesos [just over $40] a night, and the business-class ones were charging about 1,100 pesos.”

When the chain launched nearly a decade ago, the market was wide open, says Misión’s Zapata. “City Express has set the pace in the affordable segment of the individual business traveler, as distinct from conventions and the like,” he says.

The chain today has 55 hotels nationwide and has diversified its portfolio to include City Junior, where prices are as low as $40 a night. City Junior attracts a significant proportion of the national business travel market, Herrera says. City Suites is a more upscale option of furnished apartments.

Herrera says City Express keeps a close watch on the competition, which has been heating up. In 2010, IHG alone opened three new properties: the Holiday Inn Poza Rica Aeropuerto, in the state of Veracruz, and both a Crowne Plaza and a Staybridge Suites in the bustling manufacturing city of Queretero, in central Mexico.

Marriott is expanding its limited-service Courtyard brand. Projects include a 292-room Courtyard Mexico City Airport that is due to open in early 2012.

And more high-end hotels are coming. Starwood will open the Westin Guadalajara in October and its second W hotel in Mexico City next year.

PANAMA TRANSFORMED
Cranes are stacking floor after floor on the residential, office and hotel towers that continue to transform Panama City’s skyline. Boosted by the $5.25-billion expansion of the Panama Canal, foreign direct investment and government infrastructure spending, Panama’s economy expanded at 7.5 percent last year ­— a rate government and independent economists expect the country to maintain in the coming years — and one that has attracted significant investments in the hospitality sector.

Based on projects under construction, the Panamanian Hotel Association expects the country to end 2012 with 28,000 available rooms, an increase of 60 percent compared with 2009, with much of the expansion coming in the bustling capital.

Some hotel industry executives wonder if the market has expanded too quickly, especially given a tight labor market and limitations on bringing in more visitors.

Occupancy rates are currently at about 70 percent, up 5 percent so far in 2011, says association president Sara Pardo, who also is general manager of Le Méridien Panama, the 111-room luxury boutique hotel that debuted in late 2009. Association statistics showed that national occupancy rate growth had been flat the two previous years, reflecting the economic downturn and the increase in supply, Pardo says.

The supply will keep expanding, with about 4,900 new rooms in 2011 alone. Mega-projects include the Hard Rock Hotel Panama Megapolis, a 66-floor tower that will boast 1,499 rooms, a spa, eight restaurants and bars when it opens by year-end. A casino is nearby.

Hard Rock executives are bullish. “Panama is the crown jewel of Central America,” Michael Shindler, executive vice president of hotels and casinos, says of Hard Rock’s inaugural hotel venture in Latin America. “There is an economic engine in Panama that doesn’t really exist in the rest of Central America at this moment.”

Compared with other Latin American cities, Panama is principally a leisure market and one that still has potential for hoteliers, says Berman of PwC. “Panama seems to have absorbed [the rooms] it has,” he says. “It’s all about controlling development costs, which appear to be on the rise compared to four to five years ago.”

In addition to competition for customers, hotel operators face the challenge of finding trained, English-speaking staff — the type of workers coveted by other sectors of the booming local economy. Once fully operational, the Hard Rock might need more than 2,000 employees.“The big players enter the market this year, and this is where we’re going to see if we have to take other alternatives” to find skilled labor, Pardo says. “But, definitely, every day it is harder for us to find qualified bilingual people to work in hotels.”

Another big player is the Trump Ocean Club International Hotel and Tower, a $400 million luxury development that has designated more than one-third of its 1,000 apartments as condo-hotel units. Doubts persist that all the buyers will close on the tower’s pricey units, payments the developer, Newland International Properties, needs to meet debt obligations, as noted by Fitch Ratings.

Trump Ocean Club expects to close the sale of about 70 percent of the units, says Mark Stevenson, vice president and managing director.

Stevenson says he has been surprised to find enough skilled people — including housekeepers conversant in English — in spite of bleak warnings. He credits the Trump name and brand to attracting staff.

But others foresee an increasingly tight and expensive labor market. “They will be able to find [employees], but they will have to pay them higher wages, which many of these hotels might not be able to (handle) because of the cost structure,” posits David Saied, an independent economist in Panama. “There is a shortage of people with hotel skills and even a larger shortage of people that speak English.”

Current tourism programs are not entirely in English, an issue that needs addressing, Saied says. Another hurdle to filling thousands more hotel rooms is limited airline capacity. “Let’s say I want to bring 100 (people) on a tour — I cannot bring them through Copa,” says Saied, referring to the dominant carrier Copa Airlines. “I have to charter a plane.”

Copa has positioned Panama as a regional hub, and its flights typically are packed with travelers en route to other destinations, he says. “The airlines do not have excess capacity.”

Panama lags its regional neighbors on chartered flights, agrees Pardo of Le Méridien Panama. But she hopes that the expansion of the international airport and a government campaign to promote international tourism will attract more charter services.

Tourism authorities are planning an airport in central Panama for charters to deliver tourists quickly to Pacific beaches.

Panama also needs to entice visitors to extend their stays, Pardo says. She cites the Biomuseo, the new museum devoted to biodiversity designed by renowned architect Frank Gehry, as a high-potential attraction. Positioning Panama as a destination for conventions could generate another boost, she says.

“Definitely, the coming years are going to be difficult unless we can take advantage of something new or have a new product that can increase volume,” Pardo says. “It’s a concerning situation.”

With reporting by Lisa K. Wing in Lima, Ronald Buchanan in Mexico City, Sean Mattson in Panama City and Mary Sutter in Miami.

This article originally appeared in the July/August issue of Latin Trade magazine.

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