Is Brazil a smart investment?

Brazil has always been a tough nut to crack for hotel investors. Seemingly, the largest South American country, with its cosmopolitan cities, beautiful beaches and sophisticated population, would be a haven for hotel investment and development. Even more so when you count the 2016 Olympic Games in Rio de Janeiro, but the question remains: Is the country a smart investment?

Recent research from JLL paints a sturdy hotel operating climate in Brazil. In 2014, and for the tenth consecutive year, Brazilian urban hotels and condo
hotels posted positive RevPAR growth, reports JLL. However, the rate of growth was slightly lower in 2014 than levels seen in previous years, blamed partially on slow economic growth in the country.

In 2014, occupancy averaged 64.9 percent, a decrease of 1.5 percent compared to the prior year. Average daily rates, on the other hand, increased
2.9 percent compared to 2013 levels. Brazil hosted the World Cup in 2014, which could account for these numbers.

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Occupancy in 2014 was negatively affected by hotel supply growth. The number of rooms increased by 3.1 percent, but key markets such as Belo Horizonte and Rio de Janeiro—both World Cup venues—experienced greater supply increases.

Brands also had an impact. The rise in branded hotels—both domestic and international flags, grew 7.9 percent in 2014.

Despite rather flat economic growth in Brazil, 2014 Brazil saw the highest level of transaction volume in the country’s history, as HM reported on back in August. Three major transactions, which involved private equity funds include, are highlighted:

  • The Quantum Fund acquired Atlantica Hotels, one of Brazil's major management companies, with George Soros as one of the main investors.
  • The GTIS Fund bought a majority of Brazil Hospitality Group’s (BHG) shares, including its hotel assets, and took the company private.
  • The HSI Fund invested in two projects through a platform called 2.0 Hotéis. The first deal includes the ongoing development of 20 hotels under its own Zii brand in several cities throughout the country. The second is the acquisition of Arco Hotels, which spans 12 hotels in the state of São Paulo.

Another cross-border investment of note was Switzerland's Acron AG purchase of Rio de Janeiro's Hotel Gloria from Brazilian businessman Eike Batista for US$83 million.

Meanwhile, U.S. brand expansion into Brazil was in the news, with the announcement that Red Roof Inn was partnering with Brazil-based Nobile Hotéis to develop 35 to 40 properties in Brazil through a mix of new construction and conversions. The first property, a conversion of an existing hotel, is slated to open in Brasília, Brazil’s capital, this year.

There is some cause for concern, however. The poor performance of the economy in the first half of 2015, JLL notes, indicates the possibility of a decrease in RevPAR following the 10 consecutive years of RevPAR growth. JLL expects both occupancy and average daily rates to decline in 2015 compared to 2014 levels. In addition to reduced hotel performance, inflation and increases in energy costs are expected to have a negative impact on hotel margins in 2015. However, the expected spark to the country’s economic recovery, and the staging of the Olympic Games in Rio de Janeiro, will likely bring better prospects for hotel performance in 2016.

In terms of hotel transactions, JLL expects several significant investments, similar to those seen last year, to be announced in 2015. As the real estate market continues to be negatively impacted by the slow pace of economic growth JLL writes investment by institutional groups in search of yield will increase. At the same time, as the sector becomes more institutional, JLL writes developers will move away from condo hotel ownership structures with potentially hundreds of individual owners to ones that are more centralized.