JLL: What's next for hotel investment in Brazil?

Skyline of Rio De Janeiro reflected on the water

A new report from JLL indicates that Brazil is still a long-term investment option, attracting a significant amount of foreign investors in spite of deteriorating economic conditions and weak hotel performance.

The negative impact on performance is the result of deteriorating national economic conditions, the report claims, with the GDP shrinking by 4 percent. The growth in hotel supply hasn't helped, leading to low occupancy rates in formerly strong markets. 

Looking Ahead

Hotel supply is not expected to grow in the coming years enough to positively impact occupancy rates in the major markets except in Rio de Janeiro, where a 50-percent increase in the number of rooms is expected for the 2014-2017 period. Though hotel performance will continue to decline, occupancy rates are expected to improve in the second half of the year, leading to a slight increase in daily rates.

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Inflationary pressures should also continue to negatively impact hotel margins in 2016, but JLL expects to see some improvement in the second half of the year. 

Over the long run, however, Brazil is expected to attract investors, mostly foreign, who can benefit from current market conditions.

“As direct investment starts to grow again and inflation continues on its recent downward trend, margins may likely see some recovery,” said Ricardo Mader, Managing Director for JLL’s Hotels & Hospitality Group in Brazil.

Performance Numbers

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As noted previously, Brazilian hotels’ RevPAR fell by nearly 15 percent in 2015 after 10 years of consecutive growth. A number of major hotel markets in the country experienced a decline in RevPAR in 2015 which, coupled with a nearly 10 percent rise in inflation, negatively impacted hotels’ profit margins. Average gross operating profits fell to 28.5 percent of total revenue in 2015 from 36 percent in 2014.

The weak economic performance affected the average occupancy rate of hotels and condo hotels, which was below 60 percent at a certain point in 2015, a level not seen since 2006. Despite this negative economic backdrop, ADR rose until 2014. Last year, however, hotel operators had to adopt more aggressive pricing policies, thus driving down the average room rates, which fell by 7 percent over 2014.

Affected by the weak economy and an increase in supply, which grew by 4.2 percent in 2015, occupancy rates also experienced downward pressure. The biggest growth in supply was recorded in hotels affiliated to domestic and international chains at 9.2 percent.

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Resorts

Contrary to the rest of the industry, the performance of resort hotels has improved since 2013, driven mainly by the depreciation of the Brazilian real against the U.S. dollar. With the weaker currency, many Brazilians cancelled their trips abroad in favor of less costly domestic destinations. At the same time, Brazil became more affordable to international travelers.

In 2015, the occupancy rate of resorts in Brazil was 57 percent, up 7 percentage points as compared to 2014. According to the study, average revenues for resorts increased by 4 percent, faring far better than the 11 percent revenue decline for hotels.

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