Mexico Drug Wars Don't Scare Hotel Investors: Real Estate
Mexico’s oceanside resorts and Mayan ruins are luring more visitors from abroad even as drug violence plagues parts of the country. The resurgence is spurring a wave of new investment in the hotel industry.
Hyatt Hotels Corp. (H) is opening two resorts in Mexico later this year, and Starwood Hotels & Resorts Worldwide Inc. (HOT) is planning to increase its luxury portfolio there by 50 percent. Blackstone Group LP’s La Quinta chain also wants to add hotels in the country to meet rising business demand as Toyota Motor Corp. (7203) and other companies open new factories.
Hoteliers and investors are counting on a continued surge in tourism across Mexico, where gains in hotel room rates outpaced increases in the rest of Latin America even as the economy slowed this year. Travel growth is being driven by a rising middle class, expansion by business and visitors from countries including China who are undeterred by the violent crime gripping northern Mexico.
“Security issues -- perceived or real -- travelers pay attention to, and they can impact travel,” Ricardo Suarez, a vice president of acquisitions at Stamford, Connecticut-based Starwood Hotels, said in a telephone interview. “But there is such strong economic growth in the country, it’s driving domestic travel and demand from the U.S. and, more recently, also from places like Europe, Russia and Asia.”
Hotel-room bookings for this year jumped 11 percent in Mexico as of July 25, compared with a 6 percent increase a year earlier, according to travel-services company Orbitz Worldwide Inc. (OWW) Growth in bookings in the Caribbean, Central America and South America, meanwhile, is slowing, Chicago-based Orbitz said.
Travelers are heading to Mexico in increasing numbers even amid little relief from a years-long crime epidemic. In August, police found the decapitated bodies of 12 people who had been kidnapped from a Mexico City nightclub three months earlier. The most recent Mexican government data available, released in 2011, shows at least 47,500 people had been killed in drug violence in the country since former President Felipe Calderon took office in 2006 and vowed to crack down on the drug trade.
The figure may be higher, with the total number of violent deaths probably surpassing 60,000 since December 2006, according to data from the U.S. Department of State. Mexico had 24 homicides per 100,000 people in 2011, compared with 4.7 in the U.S. and 1.5 in Canada, according to the latest data from the United Nations Office on Drugs and Crime.
“The number of kidnappings and disappearances throughout Mexico is of particular concern,” the State Department said in a July travel warning. It also cautioned tourists about gun battles between rival criminal organizations.
Resort areas and tourist destinations in Mexico generally don’t have the levels of violence reported closer to the U.S. border and major drug-trafficking routes, the State Department said. In the warning, the department focused on 19 states and areas primarily in the northern and central parts of the country. Tourist resorts tend to be in coastal areas, such as in Cancun on Mexico’s Yucatan Peninsula or Cabo San Lucas on the southern tip of the Baja California peninsula.
Violent crime has been one of a series of problems plaguing Mexico’s tourism industry in the past several years. Hotels, already affected by the U.S. and Mexican recessions as well as the drug wars, were hurt further by the outbreak of swine flu in 2009, said Fernando Garcia-Chacon, executive vice president at broker Jones Lang LaSalle Inc.’s Hotels & Hospitality Group.
In 2009, hotel occupancies in Mexico dropped to 50 percent and revenue per available room, an industry measure of occupancies and rates, fell to $49.73, the lowest level in at least seven years, according to data from research firm STR. In May of that year, occupancies slumped as low as 29 percent.
This year through July, occupancies recovered to an average of 61 percent, and revpar was at $74.49, according to Hendersonville, Tennessee-based STR.
Hotel demand in Mexico is increasingly coming from places not traditionally associated with travel to the country. Tourists from China are almost as numerous at Starwood’s Latin America properties as those with a longer history of visiting the region, including Germans, Italians and the French, Suarez said.
International visitors arriving in Mexico by plane rose 8.4 percent in the first seven months of 2013 from the year-earlier period, according to data from Mexico’s tourism ministry. Arrivals from China jumped 29 percent, while visitors from Russia increased 56 percent during the same period, according to the data. U.S. visitors made up 56 percent of total arrivals by air.
As travel demand has slowed in many parts of Latin America this year, “Mexico is helping mitigate some of this as it grows from increasing business activity as well as the return of the American vacationer,” Starwood Hotels Chief Executive Officer Frits van Paasschen said on a July 25 conference call.
In July, Hyatt announced plans to spend $325 million in partnership with Fairfax, Virginia-based Playa Hotels & Resorts on properties in Mexico, the Dominican Republic and Jamaica. The first two Hyatt-branded resorts in the partnership will open in Mexico later this year after a “multimillion-dollar” investment.
“We believe that the potential for growth in both the business and leisure segments is very strong in Mexico and, therefore, have chosen to invest in the market in order to establish a strong foundation for our brands there,” Patrick McCudden, Hyatt’s senior vice president of Latin American development and acquisitions, said in an e-mail.
Starwood, which has 24 hotels in Mexico, said in July that it expects to expand its portfolio in the country by 30 percent, with eight new hotels in its development pipeline. It’s planning an even bigger increase -- by 50 percent -- for its luxury properties, including its St. Regis and W brands, in the next three years.
New York-based MetLife Inc., the largest U.S. life insurer, and Thayer Lodging Group bought the 365-room Hilton Los Cabos Beach & Golf Resort in Cabo San Lucas for an undisclosed price, the companies said last week. It was Annapolis, Maryland-based Thayer’s first investment outside the U.S.
Mexico’s economy has slowed and is expected to expand as little as 2 percent this year, half of 2012’s pace and the slowest growth in four years. Hotels are getting a boost from a bigger, more affluent middle class and manufacturing expansion by foreign companies.
“Mexico is finally reaching an inflection point with its middle class,” Garcia-Chacon of Jones Lang LaSalle said in a telephone interview. “For 30 years, Mexico was the land of the have-nots and very few haves. Now you see more industrial jobs and service companies, which means there is business travel. There are salaries and paid vacations.”
Mexico’s gross domestic product per capita may rise 53 percent to $12,175 next year from $7,968 in 2005, according to a May report by Jones Lang LaSalle. GDP is being helped by jobs created at foreign companies expanding their manufacturing in the country, such as Mazda Motor Corp., which is building a plant in Salamanca City, about 190 miles (306 kilometers) northwest of Mexico City.
“So many more companies from Germany, Japan and America are moving their manufacturing to Mexico because it’s a great location, with low labor costs,” Rajiv Trivedi, chief development officer at La Quinta, said in a telephone interview. “Mexico is becoming a hub of business for Latin America.”
Mexican companies are seeking to capitalize on the growth through initial public offerings. In November, Concentradora Fibra Hotelera Mexicana SA (FIHO12), also known as FibraHotel, sold shares to become only the second publicly traded real estate investment trust in Mexico, after Fibra Uno Administracion SA, which had its IPO in 2011.
Hoteles City Express SAB, Mexico’s third-largest hotel chain, sold stock to the public in June. Grupo Hotelero Santa Fe, a Mexican hotel operator partly owned by private-equity firm Nexxus Capital SC, is planning an IPO for October, according to two people with direct knowledge of the plans.
“The transaction market going forth will be bigger than ever,” Garcia-Chacon said. Publicly traded companies “need to show growth and so they are looking for acquisitions, getting independent hotels branded and putting some money into them.”
Asesor de Activos Prisma SAPI, based in Monterrey and known as Fibra Inn, wants to buy properties using the 1.46 billion pesos ($111 million) it has in cash and an additional 2.5 billion pesos in planned debt following its IPO in March, said Lizette Chang y Garcia, the company’s director of investor relations. By 2015, Fibra Inn expects to have 38 hotels, up from 14 now, she said. The new properties will be operated under such brands as Hilton Worldwide Inc.’s Hampton Inn and InterContinental Hotels Group Plc (IHG)’s Holiday Inn.
As the economy improves, crime-related problems are likely to diminish, said Trivedi, the La Quinta executive. Mexico’s Interior Ministry said in May that drug-related killings were down 14 percent between December and April from a year earlier. Total homicides were down 15 percent in the first half of 2013 from a year earlier, according to an Aug. 9 report by Deputy Interior Minister Eduardo Sanchez.
“Investors are getting more comfortable with putting money into Mexico’s real estate market,” Trivedi said. “As business, employment and the middle class grows, so will travel demand and with it other nuisance problems will go away and take care of themselves.”
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