Latin America Hotel Investor Sentiment Survey December 2012 Market Insight Jones Lang LaSalle Hotels Latin America Hotel Investor Sentiment Survey highlights investors hotel performance outlook, reveals investors targeted investment yields and investment strategies, and ranks the key constraints to investment for 18 markets across Latin America. Jones Lang LaSalle Hotels know how
Contributors Clay B. Dickinson Executive Vice President Latin America Region +1 202 719 6225 clay.dickinson@am.jll.com Ricardo Mader Executive Vice President South America +55 11 3071 0747 ricardo.mader@am.jll.com About the survey: Jones Lang LaSalle Hotels survey is targeted toward 500 top investors active in Latin America. The survey is directed towards investors and does not include the opinions of advisors or analysts. Results are averaged across all respondents and not weighted by any factors. Responses for this survey were collected from October 12 to October 31, 2012. Fernando Garcia-Chacon Executive Vice President Mexico/Caribbean/Central America +1 305 529 6342 fernando.chacon@am.jll.com Santiago Berraondo Vice President +54 11 4893 2600 santiago.berraondo@am.jll.com Juan Paredes Vice President +54 11 4893 2600 juan.paredes@am.jll.com Lauro Ferroni Vice President Americas Research +1 312 228 2566 lauro.ferroni@am.jll.com Jones Lang LaSalle Hotels is a global real estate services firm focused exclusively on hotels & hospitality. We provide acquisition and financing advice, valuations, investment sales and asset management for luxury hotels, select service and budget hotels, smaller hotels and pubs, from single assets to large portfolios and mixed-use developments. In the last five years we completed nearly 4,000 advisory and valuation assignments and more sale, purchase and financing transactions than any other hotels real estate firm in the world, worth over $30 billion. With 44 offices in 20 countries and 265 hotels real estate experts, no other firm is better connected. Through our depth and breadth of research and experience, with 75 Research Reports each year, we know the market at every level, we know the players and we know how to get results. www.joneslanglasallehotels.com
Latin America Hotel Investor Sentiment Survey December 2012 1 Latin America Hotel Investor Sentiment Survey Highlights from the survey Investor sentiment for markets in Latin America is at one of the highest levels of all regions globally, though it has softened slightly from the last survey, attributable to more global economic pressures, along with weaker sentiment for and also Bogotá. Sentiment for, on the other hand, increased and now leads the cities in the survey. Surveyed cap rates remained steady at 10.2%; unleveraged IRR requirements decreased from 20% to 17%. Buy intentions increased slightly since our last survey, indicating on-going strong investor interest. Barriers to investment are largely unchanged from our last survey, with investors often citing lack of debt financing as a key constraint. Following Brazil, Chile ranked second highest in short-term sentiment. Furthermore, Chile experienced the highest sentiment growth of the markets in the survey in both the six-month and two-year time frame over the previous survey. This growth in both short-term and mediumterm sentiment is primarily due to the fact that the country is one of the most advanced economies in South America, driven by its stable democratic government and vast network of free-trade agreements. Investors also have an overwhelmingly positive performance outlook for hotel assets in Peru, driven by the positive performance outlook for Lima. Peru ranked third in short-term sentiment (48.6%), and the net balance of investors with a positive medium-term outlook measured 62.4%. Figure 1 Net balance of investors' of investors hotel hotel performance performance expectations expectations Mexico Hotel performance outlook exceedingly positive Hotel investors have a positive outlook for hotel performance across the majority of Latin American markets as the region s strong macro-economy is leading to healthy hotel demand. Jones Lang LaSalle Hotels computed the net balance of investors responses to measure respondents sentiment with regard to the outlook for hotel performance, as defined by revenue per available room (RevPAR). Net balance methodology defined Jones Lang LaSalle Hotels surveyed respondents on whether they have a positive, negative, or neutral outlook for RevPAR across 18 Latin American hotel markets. Responses which indicated a positive outlook were given a score of 100; responses indicating a negative outlook were assigned a score of -100; and responses expecting no change in hotel RevPAR were provided a score of 0. The scores were then added together to compute a net balance. A higher net balance figure implies a more optimistic investor outlook, while a negative net balance indicates that more investors expect performance to decline than to increase during the given time period. Responses show that among countries in Latin America, investors have the most optimistic hotel performance outlook for Brazil, both for the next six months and two-year time frames due to robust business demand amid a constrained supply environment and upcoming events such as the 2014 FIFA Soccer World Cup. Central America Colombia Peru Brazil Chile -60% -40% -20% 0% 20% 40% 60% 80% Next six months Next two years In Mexico, though the sentiment showed some softening for the short-term, possibly attributed to the the uncertainty associated with the new PRI government administration which has not been in office since 2000, the medium-term sentiment remains very optimistic, in line with the country s improving economic outlook. Colombia recorded the largest decreases in both short-term and long-term sentiment primarily due to supply pressures. Despite the decreases, responses still indicated a positive hotel performance outlook for hotels in Colombia, yet the positioning is notably less favorable when compared to other major economies in South America. Investors responses for were the most negative of the markets in the survey, in particular for the next six months: The net balance of investor performance outlook sentiment was -46.6%, meaning that a greater share of respondents expects RevPAR to decline than to increase.
2 Latin America Hotel Investor Sentiment Survey December 2012 RevPAR in U.S. dollars through year-to-date October declined 7.2% over the same time last year, according to Smith Travel Research. For the two-year time frame, was the only country that witnessed negative sentiment. The responses for reflect that the country s economy is marking a slowdown, and there is risk that political uncertainty and elevated inflation will hamper business investment and consumption. Capitals and large secondary markets command most favorable performance outlook The country by country performance expectations summarized in the previous section represent an average of the responses for each market within the respective countries. Figure 2 details the responses for each individual market contained in the survey. Net balance of investors' hotel performance Figure 2 Net balance of investors expectations hotel performance expectations Mexico Guadalajara, Monterrey Los Cabos, Cancun/Riviera Maya All Other Mexico Central America Panama City Resorts - Costa Rica/Panama Colombia Bogotá Cartagena All Other Colombia Peru Lima All Other Peru Brazil Rio de Janeiro, São Paulo Brazil Metros 3-6 Million Residents All Other Brazil Chile Santiago All Other Chile All Other -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Next six months Next two years Of the 18 markets in the survey, exhibited the most optimistic outlook. The net balance of investor sentiment for Mexico City is 69.2% for the next six months and 83.3% for the two-year period. This means that nearly every respondent to the survey expects hotel RevPAR to grow in during the next two years, attributable to strong business demand amid a relatively constrained supply pipeline due to the high barriers to entry in the city s prime hotel submarkets. Furthermore, investors were enthusiastic about Los Cabos, Cancun/ Riviera Maya over the medium-term; Mexico s resort destinations have seen notable RevPAR increases in 2012. Investors are also bullish on the RevPAR growth potential for Brazilian urban centers, with sentiment for all three geographic regions in the survey equally positive. Summarizing investors responses by type of market also yields a compelling picture. While investors have optimistic performance expectations for hotels across the board, the highest medium-term sentiment results on a net balance basis were garnered for the respective countries large secondary markets. While the growth potential for Latin American capital cities has been much talked about, as is evident in their strong short-term outlook, respondents anticipate that secondary cities should outpace these key gateway cities in a two-year time frame. As expected, capital/key gateway markets ranked highest in short-term hotel performance expectations. Net balance of investors' hotel performance Figure 3 Net balance of investors expectations hotel performance expectations Capitals/key gateways Large secondary cities Rest of country 0% 20% 40% 60% Next six months Next two years Furthermore, there is a considerable spread between the six-month and two-year outlook for the large secondary cities category the net balance of performance expectations in the two-year time frame is 28 points above the six-month outlook. This suggests that investors expect hotel RevPAR to grow at a comparatively higher rate outside of the large primary Latin American markets over the medium-term, implying the feasibility for branded limited-service hotels in a number of markets.
Latin America Hotel Investor Sentiment Survey December 2012 3 Cap rate expectations lowest for gateway markets Survey respondents indicated their yield requirements for 18 markets across Latin America markets. Respondents targeted capitalization rate (initial yield) for the acquisition of an international-grade hotel over the next six months averaged 10.2% according to the survey; this capitalization rate remained the same over the most recent survey, implying stability in the region. Investors unleveraged IRR requirements soften, reflecting decreased risk perception Survey respondents average unleveraged internal rate of return (IRR) requirements are lowest in large urban centers and highest in nonurban areas of Colombia, Mexico and. Figure 5 Investors Investors' lowest unleveraged rate rate of return of return by market by market Figure 4 Investors lowest capitalization rate (initial yield) by market Investors' lowest capitalization rate (initial yield) by market 25% Unleveraged internal rate of return (IRR) Latin America average 22.3% 23.1% 16% Lowest capitalization rate (initial yield) Latin America average 15.3% 20% 13.9% 14.3% 14.6% 15.3% 15.7% 15.7% 16.0% 16.3% 16.6% 17.0% 17.0% 17.7% 17.7% 17.8% 17.8% 18.0% 14% 12% 10% 8.4% 8.6% 9.1% 9.3% 9.4% 9.6% 9.8% 9.9% 9.9% 10.0% 10.1% 10.2% 10.2% 10.5% 10.5% 11.2% 12.4% 15% 10% 8% 5% 6% 4% 2% 0% Santiago Rio de Janeiro, São Paulo Guadalajara, Monterrey Cabo, Cancun/Riviera Maya Cartagena Bogotá Panama City Attributable to the sound economic environment of Chile, Santiago exhibited the lowest cap rate expectations, at 8.4%, or 180 basis points below the Latin America average. followed Santiago with a surveyed cap rate for international-grade hotel acquisitions of 8.6%, while São Paulo and Rio de Janeiro averaged 9.1%, or 110 basis points below the Latin America average. Other cities in Mexico rank next, with the average targeted cap rate for acquisitions in Guadalajara and Monterrey at 9.3%. garnered among the highest cap rates due to a higher level of perceived risk. All Other Colombia The survey data allows for the relative benchmarking of cap rates and comparisons among cities, clusters of cities, or countries. For example, survey responses suggest a 180 basis point cap rate premium in Santiago compared to the rest of Chile. Similarly, investors target an 80 basis point cap rate premium for a hotel acquisition in versus the resort markets of Los Cabos and Cancun/Riviera Maya. Costa Rica/Panama Resorts Lima All Other Mexico All Other Chile Brazil Metros 3-6M Residents All Other Peru All Other Brazil All Other 0% Rio de Janeiro, São Paulo Santiago Lima Brazil Metros 3-6M Residents Bogotá Cabo, Cancun/Riviera Maya Panama City Owed to their international gateway status, depth of investor interest and relative market transparency, the lowest return requirement indicated by survey respondents averaged 13.9% for São Paulo and Rio de Janeiro; Santiago ranked next at 14.3%, followed by at 14.6%. Amid some continued political uncertainty, was the only market to witness an increase in rate of return requirements over the previous survey, garnering the second highest IRR at 22.3%. Guadalajara, Monterrey Resort markets in Costa Rica and Panama are still associated with a greater degree of risk as tourist demand levels remain below previous peak levels; investors therefore require a return of at least 17.8% to invest in these markets according to the survey. The responses imply that investors have a 3.8 percentage point lower unleveraged IRR requirement for São Paulo and Rio de Janeiro versus non-urban areas in the rest of the country, indicating that there are large spreads even within countries. Other comparative data points of note include, for example, that investors say they require an unleveraged IRR of 7.9 percentage points higher in as compared to Santiago due to the additional tier of perceived market risk. Cartagena All Other Chile All Other Peru All Other Brazil All Other Colombia Costa Rica/Panama Resorts All Other Mexico All Other
4 Latin America Hotel Investor Sentiment Survey December 2012 Capitals/key gateway and large secondary cities are buy targets Survey respondents were asked to indicate their primary investment strategy (buy, build, hold, sell) across markets applicable to them. The compilation of responses allows for an assessment of forces currently driving hotel investment. Investors intentions to buy assets are highest in the capitals/key gateway and large secondary markets, both with 21% of respondents indicating this as their primary investment strategy. At the same time, investors sell intentions were lowest in the large secondary markets. This distribution of responses implies that additional investors are looking to enter key markets by buying assets, and that existing investors are seeking to hold onto their existing assets in large cities given expected future asset appreciation. The imbalance in the number of likely buyers and sellers in Latin America s capitals/key gateway cities also suggests that prime assets that do come to market will garner a considerable amount of interest. Figure 6 Respondents primary investment strategy by market type Capitals/key gateways Large secondary cities Rest of country Respondents' primary investment strategy by market type 0% 20% 40% 60% 80% 100% Buy Build Hold Sell Secondary markets tied for first place in the buy category with capital/key gateway markets. Within secondary cities, the most popular sentiment was build, at 39%, as there is limited existing international-grade hotel stock available for purchase. The proportion of hotel investors seeking to develop hotel properties in secondary markets exceeds the build intentions in the capital cities where the playing field is already more crowded and barriers to entry are higher, notably in markets such as and Rio de Janeiro. Brazil s next-largest urban centers such as Fortaleza, Recife, Manaus and Curitiba have a far lower proportion of institutional-grade hotels and the appetite to expand the depth of the hotel stock is ripe. Figure 7 Respondents hot picks by investment strategy Buy Rank Market 1 2 Rio de Janeiro, São Paulo 3 Brazil Metros 3-6 Million Residents 4 Los Cabos, Cancun/Riviera Maya 5 Panama City Build Rank Market 1 Bogotá 2 Lima 3 All Other Colombia 4 Resorts - Costa Rica/Panama 5 Cartagena Hold Rank Market 1 2 Guadalajara, Monterrey 3 All Other 4 5 Panama City Sell Rank Market 1 All Other 2 3 Guadalajara, Monterrey 4 Santiago 5 All Other Chile South America s most populous countries such as Brazil will warrant significant hotel supply increases over the medium term. While there are a number of development opportunities in the region s gateway cities, the potential to deepen the stock of institutional-quality supply outside of the key cities is substantial, and the survey responses support this concept. Respondents' primary investment strategy by market Figure 8 Respondents primary investment strategy by market Guadalajara, Monterrey Los Cabos, Cancun/Riviera Maya All Other Mexico Panama City Resorts - Costa Rica/Panama Bogotá Cartagena All Other Colombia Lima All Other Peru Rio de Janeiro, São Paulo Brazil Metros 3-6 Million Residents All Other Brazil Santiago All Other Chile All Other 0% 20% 40% 60% 80% 100% Buy Build Hold Sell
Latin America Hotel Investor Sentiment Survey December 2012 5 Constraints to hotel investment vary by country In order to quantify and contrast common constraints to hotel investment, the survey asked respondents to rank five constraints related to development and market entry from most negative/significant to least negative/significant for seven countries in Latin America. Figure 9 Mexico 1 Security concerns/violence 1 Availability of credible partners (developers/operators) 3 Availability of debt financing 3 Concern over new supply absorption 3 Political/economic stability Central America 1 Political/economic stability 2 Availability of debt financing 3 Availability of credible partners (developers/operators) 3 Concern over new supply absorption 5 Security concerns/violence Colombia 1 Concern over new supply absorption 2 Availability of credible partners (developers/operators) 3 Availability of debt financing 3 Security concerns/violence 4 Political/economic stability Peru 1 Availability of credible partners (developers/operators) 2 Political/economic stability 3 Availability of debt financing 4 Concern over new supply absorption 4 Security concerns/violence Brazil 1 Availability of debt financing 2 Concern over new supply absorption 3 Availability of credible partners (developers/operators) 4 Political/economic stability 4 Security concerns/violence Chile 1 Concern over new supply absorption 1 Availability of credible partners (developers/operators) 3 Political/economic stability 4 Availability of debt financing 5 Security concerns/violence 1 Political/economic stability 2 Availability of credible partners (developers/operators) 3 Availability of debt financing 3 Concern over new supply absorption 5 Security concerns/violence Note: Markets where the same rank appears more than once indicates a tie In Mexico, security concerns/violence, availability of credible partners and availability of debt financing were cited as most significant impediments. On the other hand, concern over political/economic stability is less applicable in Mexico, while it was the biggest constraint in Central America. In Colombia, the greatest restrictions to hotel investment were cited as being the concern over new supply absorption, availability of credible partners, and availability of debt financing, implying that investors have begun to look past Colombia s rocky political past. In Peru, availability of credible partners also ranks as the biggest concern, while political/economic stability ranks second. Respondents reported that the most significant hindrance to hotel investment in Brazil is the lack of debt financing. Chile, which has more sophisticated debt capital markets, marked a contrast from most of the other countries, whereby the lack of debt financing was cited as the second least significant constraint. Investors responses thus confirm the notion that Chile is ahead of its neighbors with regard to availability of financing. However, investors biggest deterrent is the concern over new supply absorption as Chile experiences robust growth. In, uncertainties regarding political tensions with labor unions and long-running concerns over possible political interference in official statistics bureaus are the primary drivers for political/ economic stability to be at the top of the list of constraints. Security concerns/violence rank lowest, implying that despite the political uncertainty, investors believe that security and safety will continue to be less of a limitation. Latin America s hotel investment landscape undergoing transformation A geographically diverse region, Latin America has begun to enter a new era. With an expanding middle class, increasing household incomes, and decreased inequality, Latin America has shown radical growth. Furthermore, with government reforms and strengthening macroeconomic principles, Latin America was able to further bolster its economic strength. Latin America boasts a population of nearly 600 million, and the region s hotel investment market is expected to transform itself over the next decade. Through continued economic growth and vast strides in economic reform, demand in this region of the world is expected to dramatically positively enhance the performance of the lodging industry, creating an attractive environment for growth.
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