International Brand Hotels in São Paulo & Rio de Janeiro
Thanks to all of those who responded to our initial newsletter about an “Upside of a Downside” here in Brazil. We welcome the discussions and enjoyed meeting you virtually as well as face to face in NYC, Dallas, and Sao Paulo.
The purpose of the “Upside of a Downside” newsletter series is to provide exposure for international investors to investment opportunities and important changes that exists at this particular moment in the Brazilian real estate cycle.
Importantly, our focus is income producing assets that may become substantially more valuable once Brazil exits the downturn. In our last article, we talked about Sao Paulo & Rio de Janeiro’s value added commercial opportunities. What other opportunities are available currently?
A Change in Perspective
Historically, during Brazil’s recent economic expansion, and particularly now, substantial permanent financing for non-for-sale assets has not been available. In a more mature economy such as the United States, a developer builds an income-producing asset and funds the development and construction costs with equity capital and a construction loan. Upon stabilization, the construction loan is replaced with a permanent loan which is underwritten by the stable cash flow the property generates. This type of construction and permanent financing is severely limited in Brazil.
How does the above influence the behavior of market participants? Due to the lack of permanent financing, developers orient their efforts and capital towards for-sale residential condos or commercial buildings. Commercial properties are often sold floor by floor to large angel investors. However, the current market slowdown has altered this behavior. Developers with prime land banks and well located prospect land sites are now actively considering new options. This shift creates unique opportunities for contrarian investors at this time in the cycle.
International Brand Hotels
Over the past decade, particularly in Sao Paulo, there has been very little hotel development. Why? Local real estate developers were totally focused on residential and commercial for sale development. This focus was tied to a market environment where these types of projects generated large IRR returns due to a very rapid sales velocity.
Why the Opportunity Exists in International Hotels
No Financing – Brazilian banks have been reluctant to lend money to fund construction of income producing assets. Banks instead focused their lending on “self-liquidating” for-sale real estate.
Market Timing – Most foreign investor interest in Brazil occurred during the recent expansion. During this period, almost no developer was interested in a international brand hotel development. The opportunities with for sale product were plentiful and also the developers had an experience base in for sale product.
Operating Partner with existing Branded Hotel JV and Experience – To form a Hotel JV, an institutional investor requires a development partner with a franchise management agreement and experience with a large major brand name hotel management company.
In a best case scenario, the developer is vertically integrated with in house design and construction capabilities combined with a world-class hotel brand with a great reservation system.
In Brazil, this combination has not been available.
On the Ground Management – The international brand hotel company must have a strong commitment to the Brazilian market and have an on the ground presence locally.
Experienced Investors Start Executing on the Hotel Opportunity
GTIS, a long-term player in the Brazilian market, just made a large investment in the hotel sector under the assumption that now was the right moment to make a purchase in this sector.
For contrarian investors, the Upside of a Downside for international branded hotels includes:
- High demand and limited supply of Internationally branded hotels.
- Well capitalized developers and construction companies invested in the sector.
- Financing Gap – Brazilian banks in general shy from the sector as a whole.
- Condo Hotel Sales, the traditional source of hotel financing, is less available and has become highly regulated.
- The opportunity to build income producing assets and potentially benefit from projected cap rate compression.
- Internationally branded hotels are one of the few opportunities that offer a currency hedge because up to 50% of an international branded hotel’s customers book their sales through the US reservation system priced in dollars
Similar to our Brazil Commercial Opportunity, with international branded hotels there is an upside to the downside.
InDev Capital will be in NYC the week of June 22nd
InDev will be in NYC with one of the largest most successful Brazilian vertically integrated dev
elopers interested in a JV partner to build out his existing international branded hotel platform.
Please let us know if you are interested in learning more.
