FocusOn: Strategic Spots for South American Hotel Investment. Market Insight

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1 FocusOn: Strategic Spots for South American Hotel Investment Market Insight The robust economic fundamentals in a number of gateway cities in South America are leading to substantial opportunities for hotel investors. Four of the top spots are Bogotá, Colombia; Buenos Aires, Argentina; Lima, Peru; and Santiago, Chile.

2 Contributors Ricardo Mader Clay Dickinson Manuela Gorni Liliana Ribeiro Lauro Ferroni Cover: Santiago, Chile Skyline Jones Lang LaSalle Hotels, the first and leading global hotel investment services firm, is uniquely positioned to provide the depth and breadth of advice required by hotel investor and operator clients, through a robust and integrated local network. In, Jones Lang LaSalle Hotels provided sale, purchase and financing advice on over $1.6 billion worth of transactions globally. In addition, advisory and valuation services were provided on nearly 800 assignments. The global team comprises over 200 hotel specialists, operating from 36 offices in 19 countries. The firm s advice is supported by a dedicated global research team, which produced 80 publications in in addition to client research. Jones Lang LaSalle Hotels services span the hospitality spectrum; from luxury single assets and large portfolios to select service and budget hotels, resorts and pubs. Services include investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator selection, management contract negotiation, consulting, industry research and project development services. Jones Lang LaSalle Hotels clients have access to the resources of its parent company, Jones Lang LaSalle (NYSE: JLL).

3 FocusOn: Strategic Spots for South American Hotel Investment 1 Table of contents Overview...2 Bogotá, Colombia...4 Economy is on solid ground...4 Reemerging tourism industry...5 Considerable supply pipeline through Primary lodging submarkets in Bogotá...6 RevPAR increases in first half of Favorable development environment...7 Future investment opportunities...7 Buenos Aires, Argentina...8 Considerable signs of economic recovery...8 Tourism arrivals to recover to levels this year...8 High-quality supply...9 Primary lodging submarkets in Buenos Aires...9 Hotel performance is coming back slowly...10 Investment opportunities...10 Lima, Peru Economic outlook is strong Tourist arrivals post strong increases Branded segment still relatively undeveloped Hotel demand beginning to rebound Further hotel development opportunities exist Santiago, Chile Economic growth to increase to 5.6% in Recovery in Santiago s airport arrivals...15 Well-established hotel supply...15 Santiago hotel performance...16 Favorable development environment...16 Market continues to support investment opportunities... 17

4 2 FocusOn: Strategic Spots for South American Hotel Investment Overview South America is one of the world s most favorable spots for hotel development. As many hotel markets across North America and Europe continue to struggle with weak demand, oversupply and challenging financing conditions, the robust economic fundamentals in a number of gateway cities in South America are leading to substantial opportunities for investors. Country Real GDP and GDP CAGR 2010F F 2010 F Country Real GDP (Billions of real 2005 dollars) Argentina Chile Colombia Peru which is resulting in real estate opportunities. Four of the key markets are Bogotá, Colombia; Buenos Aires, Argentina; Lima, Peru; and Santiago, Chile. Real GDP in these countries is set to increase by a CAGR of 4% or more through 2015 well above growth rate projections for most mature markets. The countries are experiencing increased Foreign Direct Investment (FDI) which will lead to an increase in hotel demand. The four markets have benefited from increases in real estate transparency levels over the past years. Chile and Peru both hold an investment grade sovereign credit rating from Standard & Poor s. The countries have made strides in The World Bank Group s Ease of Doing Business Ranking, with Colombia at the lead % 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% Country Real GDP Growth CAGR, 2010F-2015F Source: IHS Global Insight While Brazil, South America s largest economy by a wide margin and most populous nation, offers the largest array of opportunities for growth, a number of cities in other countries in the region boast strong demand fundamentals and a favorable investment environment Financial and operational indicators Colombia Argentina Peru Chile Country Sovereign Credit Rating (BB+) (B) (BBB-) (A+) Overall Ease of Doing Business Rank Dealing with Construction Permits Registering Property Getting Credit Enforcing Contracts Out of 183 countries ranked worldwide (1=Most favorable) JLL Real Estate Transparency Index rank Out of 81 countries ranked worldwide (1=Most favorable) Sources: Standard & Poor s; The World Bank Group; Jones Lang LaSalle

5 FocusOn: Strategic Spots for South American Hotel Investment 3 South America Class A & AB office market Office market Vacancy rate (%) Class A & AB Vacancy trend Class A rent/m² (US$) Rent trend Size of market (Millions of m²) Class A & AB Projected 2010 new supply (m²) Buenos Aires 12.0% k g Santiago 4.0% k g Bogotá 10.0% k m Lima 12.0% k g Source: Jones Lang LaSalle. Data as of July 2010 Class A and AB office markets are emerging alongside the hotel markets in these cities. All four cities are projected to see an increase of 100,000 or more square meters of new supply in Chile has long enjoyed the greatest macroeconomic stability and most open business friendly economies and, consequently, relatively large and sophisticated capital markets of South America s large economies. As such, Santiago has often served as the test market for the introduction of international brands to South America and today the city comprises the highest number of international-grade, four-and five-star hotel rooms of the four cities in this report. Former Colombian President Uribe s open market policies and tough stance on restoring stability have led to robust economic growth since This has resulted in Bogotá s hotel market being forecast to experience the highest growth rate of international-grade supply of the all four markets through While briefly interrupted by the global economic crisis, the consistent economic and policy positions of the new administration are expected to solidify Colombia s economic gains. Peru has also followed pro-growth policies which, together with its rich cultural heritage and tourism appeal, have resulted in additions of international-grade supply. The city s stock of international-grade, four- and five-star hotels spans is expected to grow to 3,400 rooms by City existing international-grade, four- and five-star room count Room count 2010F 5,000 4,000 3,000 2,000 1,000 Buenos Aires - 0% 10% 20% 30% 40% 50% Source: Jones Lang LaSalle Hotels Santiago Lima 2012F stock increase over 2010F Bogotá Domestic and international hotel investors should keep Bogotá, Buenos Aires, Lima and Santiago on their radar as the cities economic and demographic trends continue to strengthen, resulting in considerable real estate investment opportunities. Argentina presents a more mixed outlook, though economic growth is resurging. A positive economic environment in the late 1990 s led to additions in luxury, internationally branded supply in the early part of the decade. While a challenging business environment and uncertain outlook is being created by the left-leaning populist government, limited proposed new supply and the continued appeal of Buenos Aires as South America s preeminent tourist destination combine to produce respectable operating performance of existing supply.

6 4 FocusOn: Strategic Spots for South American Hotel Investment Bogotá, Colombia Bogotá, the capital of Colombia, has over seven million residents and is Colombia s principal commercial and financial center. Almost one third of the country s domestic companies are located in Bogotá. Bogotá is the main gateway to Colombia and the distribution hub for tourism within the country and as such is experiencing growing demand for hotels. Colombia: Foreign Direct Investment F FDI, Net (US$B) Economy is on solid ground 2.0 Colombia is among the largest economies in South America and has the continent s second-largest population. The country s security situation improved vastly since incumbent president Álvaro Uribe first took office in Source: IHS Global Insight F 2011 F 2012 F 2013 F 2014 F Colombia s successful political and economic policies have produced strong economic growth, averaging 3.9% per annum from 2000 to, among the highest growth rates in South America. Colombia escaped a contraction in and the country s economy is ready for a strong recovery with economic growth set to average 4.7% per year through Consumer inflation averaged 6.3% from 2000 to and is forecast to remain contained in the short term. A favorable foreign investment regime has made Colombia the second most sought after destination for FDI in South America after Brazil. FDI reached an estimated $8.3 billion in. FDI is forecast to recover to previous peak levels in 2011 and experience continued increases in subsequent years. Due to private investment, the latest positive commodity market trends, and the improving external sector, Colombia finds itself on a solid path of continued economic growth. Colombia Units F 2011 F 2012 F 2013 F 2014 F 2015 F Real GDP, Growth Rate, Y-o-Y % Real Gross Domestic Product Real GDP Per Capita Consumer Price Index, Y-o-Y Percent Change Billion real 2005 $ Real 2005 $/person , , , , , , , , , , ,596.3 % Policy Interest Rate % Exchange Rate, LCU per US$, Period Average LCU per US$ 2, , , , , , , , , , ,106.9 Population Millions Source: IHS Global Insight

7 FocusOn: Strategic Spots for South American Hotel Investment 5 Reemerging tourism industry Colombia s tourism industry is reemerging after decades of relative stagnation. Bogotá is improving its tourism image through enhanced urban redevelopment and attractions such as parks, museums, art galleries, and theatres. The country also holds a strategic location, offering shorter flight times to U.S. and Europe markets compared to Brazil and Argentina, for example. Bogotá: El Dorado International Airport Arrivals from South America comprise 40% of total international demand for Colombia. The main South American source markets are Venezuela, Ecuador, Peru, Argentina, and Brazil. The U.S. is the largest source country to Colombia, representing 21% of international arrivals. Spain accounts for the highest amount of arrivals from Europe. Considerable supply pipeline through 2012 Unlike other gateway cities in South America, such as São Paulo and Santiago, Bogotá did not experience a hotel construction boom during the past 15 years due to the country s previous political instability, which acted as a barrier for international chains entering the market. Total passenger movements (millions) Bogotá: Select international-grade new hotel development projects Hotel Rooms District Proj. opening year Hilton 72 Gran Hotel 245 Av. Chile 2011 NH Parque de la Chicó 2011 Capital Towers Luxury 268 Corferias 2012 Capital Towers Business 276 Corferias Source: DAS Sonesta Hotel 127 Usaquen 2012 BH Bicentenario 53 Centro Internacional 2012 Total Rooms 1,109 Source: Jones Lang LaSalle Hotels Bogotá s El Dorado Airport is Colombia s main international and domestic airport. The airport accommodates the fourth highest amount of passengers in South America. From 2000 to, total passenger movements at the airport increased by a CAGR of 8.4%. The year represented the highest growth rate of passenger movements (10%), even amid the global economic weakness. Colombia: Source of international travelers All others 29% U.S. 21% Local hotel brands, however, developed at a relatively faster pace with four major companies dominating the market: GHL Hoteles, Hoteles Estelar, Hoteles Dann, and Hoteles Royal. During the last ten years the majority of the hotels developed were owned by one of these groups, under their brands or a franchise from an international chain. The city s stock of international-grade, four- and five-star hotels spans 18 hotels, encompassing approximately 3,000 rooms. This segment is expected to grow to 4,100 rooms by 2012 with the opening of approximately six new hotels. In the near term, if all proposed projects are realized, the market could experience a temporary period of oversupply. But the presence of international brands will still be limited, despite the proposed supply increases. Brazil 4% Venezuela 19% Argentina 4% Mexico 5% Peru 5% Spain 5% Ecuador 8% Source: DAS,

8 6 FocusOn: Strategic Spots for South American Hotel Investment Bogotá: International-grade four- and five star hotel rooms 2010F F Rooms 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, F Source: Jones Lang LaSalle Hotels A significant number of upscale hotels were developed under the fiduciary condo hotel structure, which is a way to raise financing by selling rooms to individual investors. Some of Bogotá s main hotels such as the Sheraton, Radisson, and Embassy Suites were developed under this structure. This hotel development model is typically not favored by traditional hotel developers as management contracts tend to be shorter and less binding, and working with condominium associations can be complex and time-consuming. The Bogotá Marriott and JW Marriott, two of the most recent uppertier hotel openings, were developed by Real Hotels & Resorts with its own capital and not under the condo hotel structure. As condo hotels are generally a consequence of the lack of reasonably priced, longterm commercial mortgage financing, their popularity is expected to wane as such financing becomes more available. 2011F 2012F The Zona Norte (Santa Barbara, Usaquén and Chicó) submarket is a growing, trendy financial district with posh commercial centers and leisure offerings that have surfaced over the past decade. The district s hotels cater to corporate travelers and the district typically has the second highest ADRs in the city following Avenida Chile. Centro Internacional is proximate to government buildings and embassies. ADR and occupancy remain slightly below the broader market given the limited number of attractions, though there are initiatives in place to revitalize the district. The Avenida El Dorado/Salitre submarket is near the international airport and accommodates a significant amount of airport-related demand. The district also attracts corporate travelers from the industrial zones of Salitre and Fontibon, as well as from the office parks west of Avenida El Dorado. This submarket maintains an occupancy premium compared to the greater market, but ADRs tend to be below other submarkets due to lower-rated airline crew room nights. RevPAR increases in first half of 2010 Bogotá had a long period with almost no new hotel openings which allowed for a continued increase in occupancy rates through. Bogotá s limited lodging supply has allowed for high ADRs historically as compared to other South American cities. The global economic downturn, along with an increase in hotel development, put downward pressure on occupancies starting in the third quarter of. Bogotá hotel market performance - YTD , , % 70.0% Primary lodging submarkets in Bogotá Lodging supply in Bogotá is concentrated in the following four submarkets: Avenida Chile, Zona Norte, Centro Internacional, and Avenida El Dorado/Salitre. Colombian Pesos 240, , , ,000 80, % 50.0% 40.0% 30.0% 20.0% Occupancy Avenida Chile is Bogota s financial corridor, with numerous banks and modern office complexes located along Calle 72, also known as Avenida Chile. The district caters to higher-end corporate travelers and this submarket commands an ADR and occupancy rate premium. 40,000 - YTD July YTD July % 0.0% ADR RevPAR Occupancy Source: Cotelco

9 FocusOn: Strategic Spots for South American Hotel Investment 7 According to the sample of hotels in Bogotá tracked by Cotelco, RevPAR softened by only 1.8% in. In year-to-date July 2010, over the same prior-year period, ADRs have remained flat but occupancy levels increased despite the supply additions, resulting in a 4% RevPAR increase. Favorable development environment The hotel development environment in Bogotá has been open and welcoming to foreign investors since ProExport is a public investment promotion institution that supports international tourism and foreign investment to Colombia and provides information on tax incentives. Invest in Bogotá is an agency which promotes investments in the city. Colombia offers attractive incentives for hotel investments or renovations, including a 30-year property tax break for hotels developed or remodeled between 2003 and The average time for a project to obtain approval and start construction is generally between one and two months. Hotel development can be financed at 4% to 8% interest rates with local debt, arranged by ProExport. The average construction costs for quality construction in Bogotá range from $800 to $1,000 per square meter, excluding FF&E. 1 Future investment opportunities The addition of approximately 1,100 international-grade four- and five star hotel rooms will substantially increase competition amongst existing hotels, likely resulting in pressure on occupancy rates through Some investors will therefore wait out the projected oversupply period and plan on adding new product just prior to market recovery, expected in Compared to the U.S., the Colombian hotel transactions market is in its infancy stages and, given the traditional owner/operator structure and the prominence of condo hotels, it is unlikely that the market will see sizeable hotel transactions in the near term. While there will be opportunities for more entrepreneurial investors comfortable with cultural and emerging market risk, the primary opportunity for international investors remains the development of new hotels. Bogotá has a low representation of upscale branded select service hotels and this remains an investment prospect. There may also be opportunities for branded and independent management companies to differentiate and add value to some of the higher quality condo hotels expected to come under pressure due to a possible temporary over supply. As the city expands towards the north, suitable areas for hotel development are Calles 72 and 116 and Carreras 7 and Jones Lang LaSalle

10 8 FocusOn: Strategic Spots for South American Hotel Investment Buenos Aires, Argentina Buenos Aires is Argentina s principal business, commercial, cultural, and financial hub. The city is the second largest metropolitan area in South America after São Paulo. Though the hotel market experienced significant declines in, visitation trends and economic fundamentals are rebounding and investors continue to seek investments in Buenos Aires on a selective basis. Considerable signs of economic recovery Argentina: Foreign Direct Investment F FDI, Net (US$B) The strong economic expansion observed in Argentina since 2003 came to an end in when lower commodity prices, agricultural export restrictions, and weaker demand for Argentine goods reduced export and fiscal revenues. Concurrently, domestic-consumption expansion decelerated as consumer confidence shrank in response to the deteriorating political environment Source: IHS Global Insight F 2011 F 2012 F 2013 F 2014 F Fueled mainly by improved global conditions, Argentina posted a rebound during the first half of 2010 and is entering an expansion phase as the economy resurges. Real GDP is expected to grow 6.7% in 2010, followed by 4.8% in Foreign direct investment, relatively stagnant in, is forecast to rise to $9 billion in 2010, which will be accompanied by increased hotel demand. 3 Amid improving economic conditions, the government still faces significant hurdles. The country faces a resurgence of inflation compared to last year. The acceleration of inflation will lead to the appreciation of the currency, a potential risk for exports and tourism. The country has the lowest sovereign debt credit rating among its neighbors and the country has vast amounts of unpaid debt. But the Argentine economy will find a partial solution to restoring its standing once the administration succeeds in restructuring the debt and regains access to international credit markets at affordable rates. Politics in Argentina are becoming increasingly focused on the next general elections in Tourism arrivals to recover to levels this year Over the past decade, the country s tourism sector has been bolstered by the depreciation of the Argentinean Peso, which contributed to Argentina becoming a price competitive and attractive international tourism destination. Argentina s tourism arrivals reached a peak of eight million in. Tourism arrivals declined by 1% in, but are expected to recover to previous peak levels in Argentina Units F 2011 F 2012 F 2013 F 2014 F 2015 F Real GDP, Growth Rate, Y-o-Y % Real Gross Domestic Product Real GDP Per Capita Consumer Price Index, Y-o-Y Percent Change Billion real 2005 $ Real 2005 $/person , , , , , , , , , , ,100.6 % Policy Interest Rate % Exchange Rate, LCU per US$, Period Average LCU per US$ Population Millions Source: IHS Global Insight 2 IHS Global Insight 3 IHS Global Insight

11 FocusOn: Strategic Spots for South American Hotel Investment 9 Buenos Aires: Ministro Pistarini International Airport 10.0 Buenos Aires: International-grade four- and five star hotel rooms 2010F F 4,500 Total passenger movements (millions) Rooms 4,000 3,500 3,000 2,500 2,000 1,500 1, F 2011F 2012F 2013F 2014F Domestic International Source: Jones Lang LaSalle Hotels Source: INDEC Brazil is the main source of international demand for Buenos Aires, representing 24% of foreign arrivals in. Chile and the rest of South America represent 37% of Argentina s foreign arrivals. Arrivals from the U.S. and Canada account for approximately 13% of total arrivals, and European arrivals represent 20%. The city s stock of international-grade, four- and five-star hotels spans 14 hotels, encompassing approximately 3,200 rooms. This hotel segment is expected to grow to 3,800 rooms by 2014 with the opening of approximately five new hotels. Among the notable scheduled openings is a 150-room St. Regis project which is due to open in the Puerto Madero district in Argentina: Source of international travelers Europe 20% All others 6% Brazil 24% Buenos Aires: Select international-grade new hotel development projects Hotel Rooms District Proj. opening year Alvear Art Hotel 141 Retiro 2011 Live Hotel 80 Palermo 2012 Hotel Boca Juniors 89 San Telmo 2012 Chile 9% St. Regis 150 Puerto Madero Dock 4 Alvear Puerto Madero 140 Puerto Madero Dock Rest of South America 28% U.S. & Canada 13% Total Rooms 600 Source: Jones Lang LaSalle Hotels Source: INDEC/SECTUR, High-quality supply Buenos Aires is home to some of South America s best quality hotel supply in terms of the number of higher-end, internationally branded properties. The major hotel developments that have occurred over the past ten years have primarily been four- and five-star hotels. Primary lodging submarkets in Buenos Aires Hotels in Buenos Aires are concentrated in four main districts. Retiro/ Plaza San Martín, the area which surrounds Plaza San Martín is one of the city s most elegant districts with art deco architecture, plazas, landmarks, and Calle Florida, a shopping street. Retiro has the highest number of four- and five-star hotel rooms in the city.

12 10 FocusOn: Strategic Spots for South American Hotel Investment Recoleta is a traditional upscale neighborhood combining Parisian architecture, plazas, and museums with modern high-rises. This district has approximately 700 four- and five-star hotel rooms, including the Park Hyatt Hotel, Alvear Palace Hotel, and Four Seasons Hotel. Palermo is a trendy, vibrant neighborhood with restaurants, shops, and nightlife. The area is surrounded by parks and is undergoing significant revitalization. Palermo has seen the development of small non-branded boutique hotels. Puerto Madero is the newest neighborhood in the city, transformed from an old docklands area. Initially an entertainment area filled with restaurants, Puerto Madero is now becoming an upscale modern neighborhood filled with high-rises and is home to major developments in the city for luxury residential units, hotels and office space. The district is home to Faena Hotel+Universe, a luxury boutique property, and the Hilton Buenos Aires. Buenos Aires hotel market performance - YTD 2010 Argentine Pesos YTD July YTD July 2010 ADR RevPAR Occupancy Source: Smith Travel Research 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Occupancy Hotel performance is coming back slowly For most of the past decade, the Buenos Aires hotel industry benefited from the precipitous devaluation of the Argentine peso, leading to increased occupancy and investment in the city s tourism industry. RevPAR performance of Buenos Aires hotels peaked in. In, the global and Argentinean economic difficulties, lower commodity prices, and H1N1 virus had a strong impact on the hotel market, leading to a RevPAR decline of approximately 15%. The upper tier hotel segments were impacted most significantly, especially during the first three quarters of the year. The prospects for hotel performance have started to turn around, though the market still faces a long uphill climb. RevPAR has posted an increase of 14% in year-to-date July 2010 over the prior-year period. 4 The relatively moderate supply pipeline for the city, along with economic growth prospects will set the stage for further improvements to operating performance in the medium term. Investment opportunities Buenos Aires currently does not face an oversupply situation. Investors will again evaluate new hotel developments and conversion opportunities on a selective basis. Compared to other capital cities in South America, Buenos Aires has a more established base of business, leisure, and group demand and as such will increasingly be a favored hotel investment destination as economic prospects improve. Overall, the development environment in Buenos Aires is characterized by attractive land values and moderate construction costs. Developers are often seeking to anchor high-end mixed-use developments with an upscale hotel. Additionally, while the market is well-served in terms of luxury properties, the market has very limited representation of upscale branded select service hotels and, as evidenced by the robust recent entrance of Accor s Novotel and Ibis hotels, this remains a potential area of investment opportunity. Recoleta and Puerto Madero are among the most sought after districts for hotel development. Puerto Madero in particular is increasingly being built up and is home to large commercial real estate developments. While the city s hotel transaction market has not been very liquid, there may be an opportunity to acquire one of the city s branded upper upscale hotels in the future. Over the past two years, investors have generally taken a wait and see approach regarding new hotel development in the city. Political instability and the lack of local financing have been the two main challenges to investing in Buenos Aires. Unlike Brazil and Colombia, Argentina does not have a national development bank or other entity which provides financing for hotel construction. Furthermore, Argentina s debt market is the least developed when compared to Bogotá, Lima, and Santiago. 4 Smith Travel Research

13 FocusOn: Strategic Spots for South American Hotel Investment 11 Lima, Peru Lima, with a population of close to nine million, is Peru s commercial and financial center. Peru has the sixth largest GDP in South America. Lima has become an attractive city for foreign companies to set up offices in to expand their reach in South America. Lima s hotel market still lacks the depth of international hotel brands seen in other South American cities such as Buenos Aires and Santiago and the potential for new hotel development remains significant. Economic outlook is strong Peru returned to democracy in 2001 after a long period of political difficulties. Peru s GDP grew by a CAGR of 5.3% from 2000 to, outpacing the economic growth of other major South American countries. During the global downturn, Peru s economy was one of the least affected in South America. GDP growth is forecast to jump to 6.9% in 2010 and remain above 5% per annum through FDI has played a decisive role in Peru s economic expansion. The country s economy is largely based on mining, construction, fishing, textiles, tourism, and agriculture. Only a fraction of the country s mining potential has been exploited, which provides Peru with a significant capacity to increase exports as commodity prices remain relatively high. Peru: Foreign Direct Investment F FDI, Net (US$B) Source: IHS Global Insight Peru s inflation rate is among of the lowest in South America, having averaged 2.6% from 2000 to. Although inflation is expected to continue to remain under control, the monetary authority will likely increase the policy rate at least three more times in 2010 to avoid overheating of the economy. Peru holds an investment grade sovereign credit rating from Standard & Poor s F 2011 F 2012 F 2013 F 2014 F Peru Units F 2011 F 2012 F 2013 F 2014 F 2015 F Real GDP, Growth Rate, Y-o-Y % Real Gross Domestic Product Real GDP Per Capita Consumer Price Index, Y-o-Y Percent Change Billion real 2005 $ Real 2005 $/person , , , , , , , , , , ,638.6 % Policy Interest Rate % Exchange Rate, LCU per US$, Period Average LCU per US$ Population Millions Source: IHS Global Insight

14 12 FocusOn: Strategic Spots for South American Hotel Investment Tourist arrivals post strong increases Lima is the international gateway to Peru and the point of transit for destinations such as Cusco and Machu Picchu. From 2001 to, the number of total passenger movements at Lima s international airport increased by a CAGR of 10%. In the first half of 2010, passenger movements increased by 12% over the prior-year period. These favorable transportation statistics will continue to have a positive impact on Lima s hotel market. Peru: Source of international travelers Brazil 3% All others 31% U.S. 19% Chile 23% Lima: Jorge Chávez International Airport 10.0 Spain 4% Colombia 4% Bolivia 4% Argentina 5% Ecuador 7% Total passenger movements (millions) Source: Fraport Domestic Lima and the country as a whole still suffer from inferior infrastructure and the lack of a more developed transportation system continues to be a drag on the country s development potential. Peru s main South American source markets are Chile, Ecuador, Argentina, and Bolivia. Although Brazil is still a small source market, the number of Brazilians traveling to Peru has doubled in four years and is increasing by approximately 20% annually. North America represents 19% of the total incoming demand, while Europe represents 21%. International H1 H Source: MINCETUR, Branded upscale and luxury markets still relatively undeveloped Upscale and luxury hotels are located in two main districts: Miraflores and San Isidro. Miraflores is the main tourist destination in Lima due to its gardens, parks, commercial centers, and proximity to the beach. San Isidro is the prime office area in Lima, accommodating approximately half of the city s office stock. San Isidro is also home to Lima s main golf course and a number of parks and premier shopping. Overall, hotels in Lima have developed at a relatively slow pace and the city has not seen a significant influx of supply in the past decade; nor is a significant increase of hotels projected for the near term. The city s stock of international-grade, four- and five-star hotels spans 19 hotels, encompassing 2,700 rooms. This hotel segment is expected to grow to 3,400 rooms by 2011 with the opening of approximately three new hotels. Lima: International-grade four- and five star hotel rooms 2010F F Rooms 4,000 3,500 3,000 2,500 2,000 1,500 1, F 2011F 2012F Source: Jones Lang LaSalle Hotels

15 FocusOn: Strategic Spots for South American Hotel Investment 13 Notable future additions include the Westin Libertador, under construction in San Isidro. The landmark hotel is being developed by the Libertador Hotel Group and will be the tallest building in Peru. Hotel Atton is being built by a Chilean group which owns two properties in Santiago. Furthermore, there is a 216-room Hilton branded property under construction in the Miraflores district which is scheduled to open in Lima: Select international-grade new hotel development projects Hotel Rooms District Proj. opening year Westin Libertador Lima 301 San Isidro 2011 Hotel Atton 200 San Isidro 2011 Hilton 216 Miraflores 2011 Total Rooms 717 Source: Jones Lang LaSalle Hotels Hotel demand beginning to rebound Lima had a long period of almost no hotel openings, which allowed for a continued increase in occupancy rates. Occupancy rates for four- and five-star hotels peaked in. Subsequently, several new upscale hotels entered the market, causing downward pressure on occupancy rates in. In, the global economic downturn, and the H1N1 virus impacted Lima s hotel market, particularly in the upscale and luxury segments during the first three quarters of the year. The end of already showed signs of recovery in occupancy rates. In year-to-date June 2010 compared to the prior-year period, the occupancy rate for Lima s five-star hotels increased by ten percentage points. Lima does not have a main convention center and many events consequently take place in hotels. The city will benefit from a new event facility in the Westin Libertador when it opens. The addition of this space should enable Lima to attract more conferences. Lima: 4- and 5-star room nights and occupancy rate YTD 2010 Available room nights (annual) 1,000, , , , ,000 Source: MINCETUR star available room nights 5-star occupancy rate 4-star available room nights 4-star occupancy rate Further hotel development opportunities exist Peru offers a favorable investment environment for international investors. Foreign investments are supported by ProInversión, a private investment promotion agency. The estimated time for a project to obtain approval and start construction is generally between three to six months. As in other markets across South America, one of the key challenges to investing in Lima is the low amount of available debt financing. As Lima continues to experience a rising economic trend, there are still market opportunities for the development of new hotels across all categories. The hotel market still lacks the depth of international hotel brands as seen in Santiago, for instance. Hotels are generally experiencing robust performance which is expected to be sustained over the medium term as the city is not facing a boom in new supply. San Isidro, particularly the Golf area, a corporate district and Via Expressa, a financial zone, are among the most sought after areas for office developments and consequently for upscale and luxury hotel development. Miraflores remains Lima s primary entertainment district and is high on investors radars as well. New hotel development is also expected to occur near the airport and in El Polo, a corporate zone home to an increasing number of companies and embassies. Lima has virtually no representation of upscale branded select service hotels and this remains an investment opportunity. YTD June YTD June % 80.0% 60.0% 40.0% 20.0% 0.0%

16 14 FocusOn: Strategic Spots for South American Hotel Investment Santiago, Chile Chile is the fifth largest economy in South America. Santiago is Chile s principal business, manufacturing, and cultural center. Chile s economy is largely based on the exploitation of raw materials; particularly copper by national and international companies, most of which are based in Santiago. Increasingly known as the Latin American Silicon Valley, Santiago has attracted more 130 foreign businesses during the last several years, boosting hotel demand. Economic growth to increase to 5.6% in 2011 Economic and political stability have made Chile s economy the most solid in the continent. Since the return of the democracy in 1990, Chile experienced strong economic growth, averaging 6.4% annually during the 1990s. The country s real GDP posted a CAGR of 3.6% from 2000 to. Chile has the highest GDP per capita and the lowest inflation of major economies in South America. Inflation is estimated to stabilize at 3% over the medium term. Chile was the first Latin American country to achieve an investment grade credit rating and maintains the highest investment grade rating in the continent today. Chile recently signed an accession agreement to join the OECD as the first member country in South America. FDI has played a decisive role in Chile s economic growth and development. FDI peaked in at approximately $10 billion amid the boom in natural resources prices. While FDI slowed down in and 2010, investment levels are forecast to rebound by 36% in Chile: Foreign Direct Investment F 12.0 Public policies which have long generally promulgated tight macroeconomic management, economic openness and international integration have been substantially reinvigorated with the recent election of President Piñera, who had pledged to eliminate the bureaucratic red tape that had crept into the system, and again bring Chile economic environment in line with those of world leaders like Switzerland and Singapore. FDI, Net (US$B) Growth rates are projected to jump to 4.6% in 2010 and rise to 5.6% in 2011 as gross fixed investments provide extra thrust. Despite the vast damage of the February 2010 earthquake, the state of Chile s economy and robust infrastructural development assure a relatively fast-paced recovery Source: IHS Global Insight 2010 F 2011 F 2012 F 2013 F 2014 F Chile Units F 2011 F 2012 F 2013 F 2014 F 2015 F Real GDP, Growth Rate, Y-o-Y % Real Gross Domestic Product Real GDP Per Capita Consumer Price Index, Y-o-Y Percent Change Billion real 2005 $ Real 2005 $/person , , , , , , , , , , ,894.6 % Policy Interest Rate % Exchange Rate, LCU per US$, Period Average LCU per US$ Population Millions Source: IHS Global Insight

17 FocusOn: Strategic Spots for South American Hotel Investment 15 Recovery in Santiago s airport arrivals Total air passenger volumes at Santiago s international airport increased by a CAGR of 8% from 2004 to. Though volumes dropped by 4% in amid the global economic slowdown, passenger volumes already increased by 8% in the first half of 2010 over the prior-year period. Santiago: Comodoro Arturo Merino Benítez International Airport Total passengers movements (millions) Well-established hotel supply Santiago has a more well-developed hotel supply compared to other South American capitals. International hotel brands first established their hotel flags in Santiago as early as 1979, and the city has been a test ground for major international chains as a number of them made their first South American investments in Santiago. During the 1990s and through the mid-2000s, hotel supply in the city has increased continuously, particularly in the four- and five-star categories. Starwood, Accor, Marriott, and InterContinental each have two or more properties in the city. Hotels are distributed across four main districts in Santiago: Downtown, Las Condes/Bosque, Providencia, and Vitacura. Las Condes and Providencia are the most popular hotel districts, which, together with Downtown Santiago, accommodate 90% of the city s room nights. Las Condes and Providencia are home to most of the upscale and luxury hotels, while the majority of lower-tier hotels are located in Downtown Source: Aeropuerto de Santiago Domestic International H1 H Following a period of significant growth, Santiago s hotel market saw few four- or five-star hotel openings from to. Recently, however, the city saw an influx in openings again with the opening is the 196-room W Santiago in August, increasing competition for luxury hotels in particular. Another recent opening is the 151-room, four-star Best Western Premier. Arrivals from Argentina, Bolivia, Brazil, and Peru represented 63% of total international visitors in. Travelers from the U.S. account for approximately 8% of arrivals. Arrivals from Germany, France, Spain and the UK comprise another 9% of Chile s arrivals from abroad. Notable future openings include the 105-room Radisson La Petra La Dehesa, due to open in October Additionally, a 144-room Hilton Garden Inn is scheduled to open in 2011 near the airport. The property will be the first of the Hilton chain in Santiago and the first Hilton Garden Inn in South America and is being developed by a local investor to be operated by Hilton Worldwide. Chile: Source of international travelers Source: INE, UK 2% France 2% Spain 2% Germany 3% U.S. 8% All Others 20% Peru 9% Brazil 10% Bolivia 11% Argentina 33% Santiago: Select international-grade new hotel development projects Hotel Rooms District Proj. opening year Radisson Petra La Dehesa Boutique Alonso de Cordova 105 La Dehesa Vitacura 2011 Hilton Garden Inn Airport 144 Airport 2011 Hotel Costanera 250 Las Condes 2012 Indigo Hotel Santiago 50 Vitacura 2012 Total Rooms 629 Source: Jones Lang LaSalle Hotels

18 16 FocusOn: Strategic Spots for South American Hotel Investment The city s stock of international-grade, four- and five-star hotels spans 19 hotels, encompassing 3,800 rooms. This hotel segment is expected to grow to 4,400 rooms by 2012 with the opening of approximately five new hotels. Santiago hotel market performance YTD ,000 80, % 80% Santiago: International-grade four- and five star hotel rooms 2010F F 5,000 Chilean Pesos 60,000 40,000 60% 40% Occupancy 4,500 4,000 20,000 20% Rooms 3,500 3,000 2,500 2, YTD July YTD July % 1,500 ADR RevPAR Occupancy 1, F Source: Jones Lang LaSalle Hotels Santiago hotel performance RevPAR at Santiago hotels increased by a CAGR of 14% from 2004 to, with RevPAR increases peaking in at 28.7%. In, RevPAR declined by 16.1% when the upscale/luxury hotel market in particular was impacted by the global economic weakness. Occupancy rates have recovered by 1.2% in year-to-date 2010 over the prior-year period; though, due to further ADR softening, RevPAR is still down 2.7% for the year-to-date. The figures show that the market has bottomed out from a demand perspective and is poised for future growth. 2011F 2012F Source: STR Global Favorable development environment Chile has ample local credit available at favorable interest rates as low as 3.5% per annum which allowed for accelerated development of hotels. Foreign investments are supported by CORFO, an economic development agency. The estimated time for a project to obtain approval and start construction generally does not exceed three months a figure current government officials would like to measure in days in the near future. Land and development prices vary depending on the region and are generally higher in the northeast of Santiago. Premium prices are charged for locations closer to Mapocho River and the metro line. The most expensive districts are Vitacura and Las Condes. Average hard construction costs in Santiago for quality construction are approximately $950 per square meter. 5 5 Jones Lang LaSalle

19 FocusOn: Strategic Spots for South American Hotel Investment 17 Market continues to support investment opportunities Sound political and economic policies have resulted in Chile becoming a preferred destination for hotel investment due to the country s relatively sophisticated capital markets. Chile has one of the most favorable foreign investment environments in South America, evidenced by the high number of upscale and luxury internationally branded hotels in Santiago. Due to the country s stability and growth prospects, Santiago s market will continue to support opportunities for the development of new hotels. Las Condes, particularly the areas known as El Golf and El Bosque, are currently the most sought after for corporate developments and consequently the prime areas for upscale and luxury hotel development. There is also potential opportunity for acquisition and conversion in order to gain a foothold. As land becomes scarcer, commercial development is moving towards Nueva Las Condes. The concept and location will continue to be key factors for the success of a new hotel. The luxury market is already well-served and its average daily rates are currently unlikely to support a new luxury hotel in the near-term. There are opportunities to develop both limited service and upscale hotels in Santiago and will likely be select upscale hotels in the city available for acquisition in the future.

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