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News Release

São Paulo

R$2.4 billion of Hotel Investments for the World Cup

Consulting company predicts construction of 92 new hotels by 2014

Projects indicate optimism about business travel segment and expansion of the domestic market

In Rio de Janeiro

With all eyes set firmly on 2014, the year when Brazil will host the FIFA World Cup football competition, the industry is forecasting investments of R$2.4 billion to build 92 new hotels in the 12 cities that will host the tournament.

The figures come from a study carried out for the Folha de S.Paulo by Jones Lang LaSalle Hotels, and could still increase substantially. Plans announced so far in São Paulo, for example, call only for the renovation of a 126-room hotel. The recovery following the 2008 crisis means that the city has raised hotel occupancy rates and is once again attracting the attention of investors.

"When the economy is growing, people travel more and companies send employees for training,” said Chieko Aoki, president of the Blue Tree chain. “That’s what’s happening in São Paulo.” Blue Tree wants to expand operations into the city of Rio de Janeiro and is looking for land in the South Zone or in Barra da Tijuca (West Zone).

Forecasts by the Brazilian Hotel Industry Association (ABIH), based on estimates and registered projects, point to even faster expansion. In some cities, however, the growth will be more modest. "Cities such as Curitiba already have a well established hotel network, and there would not be a market for a large number of projects," says ABIH President Enrico Fermi. The decision to build a new hotel takes into account the potential for economic growth and the projected increase in demand. "The World Cup is a 45-day event, but investment in a new hotel is paid over 10 years," said Rafael Guaspari, vice president for development at Atlântica Hotels. The group expects to invest between R$200 million and R$250 million in 12 new hotels.
What the industry is betting on 
The new projects show that the sector is betting on the business travel segment and the expansion of the domestic market, with a focus on economy and midrange hotels. Accor is investing R$522.5 million for 23 new hotels in World Cup host cities.
According to Peter Vader, president of BHG, Brazil’s third largest hotel group, the most attractive cities are São Paulo, Rio de Janeiro, Belo Horizonte and Fortaleza. Company plans for the coming years include investments of R$300 million of its own capital plus about R$400 million in loan financing to build 40 hotels. The list includes the 12 cities that will host World Cup matches plus other medium-sized cities. According Guaspari, the guidance given by FIFA via the match consultancy is that cities need a number of beds equal to 30% of their stadium capacity. In a stadium with 60,000 seats, this would mean having 18,000 beds. Each room has an average of two beds, implying 9,000 rooms.
Hotels reach peak occupancy in SP
High occupancy rates attract investors, but rising real estate prices put the brakes on new developments. The latest developments in São Paulo were in 2002; occupancy rates rose from 26% in 2003 to 68.5% in 2010

In São Paulo

The São Paulo hotel market has bounced back after years of oversupply, reaching peak occupancy rates in some months of 2010. As a result, investors are once again showing interest in buying existing hotels and land for construction. However, rising real estate values have inflated prices and are making it difficult to complete deals.

Another factor that complicates negotiations to buy hotels in São Paulo is that many of them are in fact condominiums of fully-serviced short-let apartments, where possession is distributed among several owners. "There has been great demand by funds to buy economy-class and midscale hotels with more than 200 rooms but there are no properties for sale," said Bruno Omori, president of the São Paulo chapter of the Brazilian Hotel Industry Association (ABIH-SP).

According to Caio Calfat, coordinator of the hotel section within Secovi-SP (the real estate professional association), São Paulo experienced in a boom in construction of fully-serviced apartments between 1994 and 2002. The supply of rooms increased from about 11,000 to more than 50,000, and the result was a sharp drop in occupancy rates, he said.
The worst year was 2003, when São Paulo had an occupancy rate of 26%. Last year, that rose to 68.5%, and in some periods between October and November the average exceeded 90%, according to SPturis (the city’s official tourism promotion agency).
Regions where the demand is
Occupation in the South Zone of São Paulo now reaches 100% during the week. Calfat sees a shortage of two and three star hotels in neighborhoods like Mooca, Limão e Jabaquara, but says that national and foreign groups want to buy in prime areas, where nothing is available. "No hotel has been built in São Paulo since 2002," he said. José Ernesto Marino Neto, president of BSH International, an hotel management and consulting company, said: "The market is at a standstill. There’s a big distance between the plans (of the investors) and reality."

For Marino, the main factor motivating investors has been business travel, rather than the World Cup. Omori said he agreed: "If the World Cup opening match takes place in Itaquerão (a planned new stadium in São Paulo), that could stimulate construction in the region, because there are currently no hotels there. But investment depends on financial viability after the event. There would have to be incentives for commercial centers and factories to move into the region.”

The ABIH-SP forecast is that room supply will grow by 2,500 through 2014 and then somewhere between 5,000 and 8,000 through 2020. Today there are between 44,000 and 45,000 rooms.

Salvador may have excess supply after 2014
From Rio de Janeiro

Despite the apparent optimism, the hotel industry is already worried about occupancy rates after the World Cup. Salvador is the city with the greatest risk of excess supply, especially budget and mid-size hotels, according to a study entitled "Placar da Copa" (literally, World Cup Scoreboard), conducted in partnership by the Brazilian Hotel Operators Forum (FOHB) and HVS, a consultancy.

Industry calculations project a city occupancy rate of 66% in 2015 by, lower than forecasts for Rio de Janeiro (85%) and São Paulo (84%).FOHB President Roberto Rotter said Salvador needs to create a calendar of events that can attract more visitors. According to Jones Lang LaSalle, a consultancy, Salvador has 20 confirmed projects.

Cristiano Vasques of HVS said that hotel construction will tend to pick up speed but will remain modest in 2011. “This year, supply will grow by less than demand. For developers it is still more advantageous to build commercial and residential properties." Belo Horizonte and Manaus also face the risk of oversupply.

Luxury adapts to the lack of space in the South Zone of Rio

From Rio de Janeiro

Hotel chains are now fighting over Rio de Janeiro, where investment is at its highest level in 40 years and there is a scarcity of available land. According to Jones Lang LaSalle, a consultancy, the city will receive at least 17 new hotels, with investments estimated at R$707 million.

Major chains are looking for deals in the South Zone, but given the scarcity are starting to discover Barra da Tijuca in the West Zone. In late 2010 the Hyatt chain announced the purchase of land in the region to build a five star hotel.
According to Alfredo Lopes, president of the Rio de Janeiro chapter of the Brazilian Hotel Industry Association (ABIH-RJ), the Hilton chain is also looking for land.

While there is a shortage of areas for the major chains, there is a proliferation of boutique hotels that offer a small number of rooms and exclusive services, aimed at foreign visitors.
The visit to Rio de Janeiro last month by singer Amy Winehouse drew attention to hotels like the one she stayed in, the Santa Teresa in the neighborhood of the same name. The region has others in the same mold, for example the Mama Ruisa and the Casa Amarelo. These have an average of five suites and rates priced in Euros. The city also has investments in new hostels, with facilities and prices that differ from the traditional. One such is Z.bra, which opened at the end of last year in Leblon (in the South Zone). In the collective dormitories the beds have places to recharge laptops and iPods.

Lack of space has prompted the acquisition of existing hotels. Last year, BHG bought the Intercontinental and Sofitel, while Host Hotels & Resorts acquired the JW Marriott in Copacabana.

Professional investors likely to stay out of the sector

Special for Folha de S.Paulo

Many people wonder about the real reason why the Brazilian hotel industry has developed slowly. There are several reasons. The first is the fact that it is a capital-intensive business, and capital is much scarcer in Brazil, which is why we have the highest interest rate in the world.

The second is a consequence of the first: the lack of adequate funding. No business can be sustained on borrowed capital if the cost is greater than the return on the business.
Nevertheless, some people point to professional investors, major investors in hotels worldwide. In this sense we must distinguish between two cases, the first being pension funds. These are seeking lower rates on long-term business, but have not done well in Brazil since the 1990s.

Perhaps they did not price assets properly at the time of purchase, or maybe they have not been successful in managing their assets. Either way they have taken a beating and do not appear willing to return to the market. Private equity funds, on the other hand, seek high rates of return, usually above 20% per year, over a shorter period. Generally they want to exit an investment in five years.
This requires "financial leverage", in other words loans at a very low cost, with very long terms – usually 25-year financing at interest rates of 4% per annum.

Additionally, the market must be active, with liquidity that allows for ease of sale, which should happen in about five years. We do not have this environment in Brazil. Therefore, professional investors are likely to stay out of this business, at least for the next few years. What we have seen is the hotel industry in Brazil developing since the 1980s and 1990s with capital from small and medium investors.

Mid-sized investors are successful businessmen who have opted to put R$10 million or less into budget hotels run by management companies. Many of them have achieved their goals. However, it is small investors who have been and possibly will continue to be the drivers of new investment. They put capital into low-value properties that can provide a monthly return and where there is liquidity in a developed secondary market.

Small investors put their capital into businesses that yield more than banks are offering. This compensates for the lower liquidity, compared to financial instruments such as Bank Deposit Certificates. The real interest rate in Brazil is around 4% per annum, while the rate used by these investors to price these assets is around 7.5%.
Brazil lacks hotels and only time will tell how they will be financed.
JOSÉ ERNESTO MARINO NETO is founder and president of BSH International. He is professor of hotel investment at the Getúlio Vargas Foundation and an emeritus member of the advisory board of the Center for Hospitality, Tourism and Sport at the University of New York.