Mexico, the most developed hospitality market in Latin America, is poised for continued growth in 2016. A favorable exchange rate that will boost international arrivals, an increase in new-build hotels, overall healthy demand and strong revenue per available room growth are all strengths of the market, according to new research from JLL. In fact, the “Hotel Destinations Mexico” report shows that the country has enjoyed record-breaking visitation levels for the past four years.
In addition, foreign direct investment is projected to total $30 billion in 2016 and grow 6 percent annually to $38 billion by 2020, according to JLL.
All of this served as a backdrop to the Mexico Hotel & Tourism Investment Conference, which was held recently in Mexico City. Alexi Khajavi, EVP of the Questex Hospitality Group, moderated the panel titled “Hospitality Industry Opportunities: Mexico and Beyond,” during which participants exchanged points on view on how hospitality brands need to understand the local market and identify trends in order to achieve their business goals in the region.
The panel started with a presentation from each participant on the current situation of their company in Mexico and Latin America.
According to George Massa, VP and managing director of Mexico development for Hilton Worldwide, the company has 106 hotels in Mexico, only six of which include a lease on the property. Hilton has a thriving future in Mexico, with 42 projects under construction and 42 more in the pipeline. These include all brands and type of locations.
Massa said that in terms of room investment versus price, in general a company can expect an average daily rate of 1,000 pesos per 1 million pesos invested. Technology expectations are increasing, he said, and brands tend to offer a better price at a lower rate than in other regions in North America.
Wyndham Hotel Group has 157 properties in Latin America and 22 more in the pipeline, according to Luis Mirabelli, VP of development for Latin America and the Caribbean for Wyndham Hotel Group. In Mexico, it has 38 properties under 11 brands, the most popular of which is a midscale brand, Wyndham Garden. Mirabelli said Wyndham investments have halted in Brazil, but in general it has developed a successful business model in the region, partnering with a local developer and management company. “Locals know where to go and how to invest,” he said.
La Quinta currently has eight hotels in Mexico and 18 more in the pipeline. Monica Artigas, development director for La Quinta Inns & Suites, said that the brand has adapted its U.S. business model to meet local needs through a combination of family and business clients. Its concept has been successful among investors because of the quick return on investment it offers, but in terms of communication to the public, the brand found the need to evolve in order to connect with local perceptions, she said. The solution was to generate the LQ Hotel brand for Mexico while still keeping La Quinta in its tagline.
Grupo Posadas, the largest local hotel chain in Mexico, currently has 142 hotels in the country, with 24,000 rooms and 38 more hotels with 5,000 rooms in the pipeline. The Group has an ambitious goal of reaching 250 hotels by year 2020. According to Michel Montant, development director for Grupo Posadas, the hotel business in Mexico is a game of scale, where market share is the main factor to drive results.
Paris-based AccorHotels has been in Mexico for 15 years, according to James Erlacher, VP of development for North and Central America and the Caribbean for AccorHotels, and business is an even split between business and leisure. The company's business hotels are focused on the north and central parts of the country, where manufacturing plants are based, as well as on the Gulf of Mexico, though this area's economy has slowed down since the fall of oil prices according to Erlacher. On the leisure side, the focus is on upscale and luxury, especially Los Cabos and Riviera Maya.
Panelists agreed on drivers of demand in Mexico. First, location, which also implies the convenience of access to the property. Secondly, it is imperative to look at the demographic of visitors, the attractiveness of the destination for leisure or demand generators from business activity in the city, any plans for investment and, very importantly, any urban development plans, which may change the conditions of the best spot when a bridge is built across the road.
Panelists observed that the hospitality business in Mexico has a family patrimony bent and therefore tends to be risk averse. The ownership of the asset is also a must. Few owners are willing to rent the building, despite the opportunities of negotiating good long-term conditions.
Khajavi shared with the panelists and the public some interesting statistics from Lodging Econometrics with regards to recent development of the hospitality business in Mexico:
In the fourth quarter of 2015, there was a total pipeline of 170 projects in Mexico for a total of 27,700 rooms (70 projects under construction, 53 due to start in the next 12 months and 47 in early planning stage). This represented an overall increase of 21 percent in projects and 31 percent in terms of rooms. This is the continuation of a steady trend from 2013.
In terms of chain scale, 21 of these projects are in the luxury category, eight are upper-upscale, 32 upscale, 50 upper-midscale and 26 midscale, with 11 in the economy category and 22 unbranded.
Room for opportunity
Khajavi asked panel participants what segment of hotels currently provides them the largest opportunity in Mexico.
According to Massa, Hilton has found better growth and performance in resorts, targeting a luxury clientele that is both international and local. It has combined the all-inclusive concept in some of its properties. Several brands have given strong results in terms of converting independent hotels. The third generation of hotel owners in Mexico is usually the one supporting this process. Hilton has also successfully handled four conversions to DoubleTree.
Wyndham’s business combines an equal number of leisure and business travelers. In the Latin American region it has seen an increase of conversions, which represents 60 percent of its business, according to Mirabelli. For this reason, it is also experimenting with the creation of an independent program, where hotels may be able to take advantage of its reservation and loyalty networks, even when they can´t commit to the full investment and commitment required by the brand.
La Quinta has also a combination of leisure and business, targeting the segment of business travelers with longer stays and families with children who see an advantage of having an equipped kitchen in their suite, Artigas said. Its reservation system and loyalty program contribute strongly to assure high levels of occupancy of it properties. Its experience has shown that conversions are difficult, since it is often costly to meet standards through adapting existing properties.
For Grupo Posadas, the all-inclusive concept gets the best return on investment, according to Montant. In Mexico City, all types of properties are performing strongly. In industrial areas, the group has found very good performance during the first years, but then when supply catches up, return on investment tends to go down.
Accor’s big market has been the manufacturing locations, though those on the Gulf of Mexico have seen business affected by the lower oil prices, Erlacher said. The upscale and luxury segments have been exhibiting great performance, particularly since the company bought Fairmont properties in Los Cabos and Riviera Maya.
Grupo Posadas has been creative in helping traditional hotels take advantage of being part of a brand, offering access to sophisticated reservation systems and loyalty programs while allowing properties to retain their essence. Posadas recently created the Gamma Brand, as an intermediate franchise mechanism to overcome challenges owners have complying with brand standards.
Hilton also emphasized the importance of the reservation system to help meet the business goals of very traditional buildings. Through its Curio tier, it has been able to successfully market old, classic buildings in the United States. Currently it is also exploring opportunities that combine solid markets in terms of demand drivers with solid buildings (in terms of location and structure).
Distribution was seen as the common denominator for hotel conversions. Panelists commented on the challenge for independent hotels to understand disruptive changes in distribution, such as the arrival of online travel agencies. It has taken some time for independent hotel owners to understand that promoting a brand not only helps distribution through the parent company’s systems and loyalty programs, but also improves the conditions of the deals they get from OTAs, according to panelists.
Khajavi directed the conversation to the interest of the international community in opportunities in the Americas and particularly in Mexico and asked the panelists to comment on the current investment climate and the role of foreign investment.
On Mexico's hospitality investment climate, panelists commented on the importance of the creation of Fibras (Mexican equivalent of real estate investment trusts). Fibras have been a secure mechanism to allow institutional investment enter the Mexican market and have definitely supported hotel development in the last half decade. The establishment of Fibras has also generated a secondary market for hotels, which did not exist in Mexico, according to panelists.
A big gap in Mexico’s investment sector is the lack of a Fibra mechanism for resort hotels. Spanish investment in beach resorts is big, but Erlacher said that there is space for different types of foreign investment in beach and resort locations beyond the Spanish model.
Massa and Mirabelli commented on the current situation of investment in the United States, particularly in big cities, where hospitality investment has reached levels of saturation. They said that hopefully Mexico can take some coordinated action to attract such investment to Mexican destinations.
Khajavi commented on the need of foreign investors to find suitable local partners, and on the efforts that Mexican hospitality brands such as Grupo Posadas are making to provide turnkey solutions for investors who lack the knowledge and experience to feel comfortable in an unfamiliar emerging market and find it difficult to find the right match with opportunities.
Artigas commented that although the financial market in Mexico has seen some advances in terms of Fibras, SAPIs (investment promotion companies) and mixed funds, hospitality investment mechanisms are still evolving and their full potential will only be seen in the next five to 10 years.