Market Insight

Hotel Intelligence
Mexico
February 2014
Market Insight
• The budding economic and political climate in Mexico is
leading to a positive outlook for the Mexican lodging sector.
• Newly emerging domestic investment vehicles are targeting
the hotel sector; this increased liquidity, coupled with growing
interest from foreign investors, is expected to result in hotel
acquisition volumes exceeding US $700 million in 2014.
“Improved hotel performance metrics coupled
with rising hotel demand underpin a robust
environment for continued global investment
in Mexico’s lodging sector.”
Contributors
Clay Dickinson
Executive Vice President
[email protected]
Fernando Garcia-Chacon
Executive Vice President
[email protected]
Alfonso de Gortari
Senior Vice President
[email protected]
Stewart Brown
Senior Vice President
[email protected]
Wendy Chan
Associate
[email protected]
Eric Gorenstein
Analyst
[email protected]
Jones Lang LaSalle’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select
service and budget hotels; timeshare and fractional ownership properties; convention centers; mixed-use developments and other hospitality
properties. The firm’s 300 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and
shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset. In the last five years, the team completed more
transactions than any other hotels and hospitality real estate advisor in the world totaling nearly US $36 billion, while also completing approximately
4,000 advisory, valuation and asset management assignments. The group’s hotels and hospitality specialists provide independent and expert
advice to clients, backed by industry-leading research.
For more news, videos and research from Jones Lang LaSalle’s Hotels & Hospitality Group, please visit: www.jll.com/hospitality or download the
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February 2014 | Hotel Intelligence Mexico 3
Table of contents
Hotel Intelligence Mexico......................................................................4
Macroeconomic perspective.................................................................5
Travel and tourism trends......................................................................5
Investment activity.................................................................................6
Trends shaping Mexico’s hotel market..................................................7
Market spotlight: Mexico City................................................................8
Market spotlight: Cancun.......................................................................9
Market spotlight: Los Cabos................................................................10
4 Hotel Intelligence Mexico | February 2014
Hotel Intelligence Mexico
Despite the turmoil affecting some emerging markets today, Mexico continues to offer a robust outlook for investors. Most of this bullishness can
be tied to the country’s improving political environment. During most of the 20th century, the country was ruled by the Institutional Revolutionary
Party (or PRI, its Spanish acronym), which had been known for election fraud and corruption. However, after losing its first election in 2000, the
PRI returned to power in 2012 under a reform platform that has surprised many.
After gaining consensus with the opposition, President Enrique Peña Nieto, who leads Mexico’s current administration, embarked on a
series of developments that have shaken many of the country’s historic norms. In early 2013, the government arrested the head of the
powerful teacher’s union, thus paving the way for an education reform that was approved last September.
Other improvements include the PRI’s passing of a telecommunication legislation designed to bring more competition to the sector. Likewise,
the government has implemented various fiscal adjustments.
But perhaps the most surprising development was the government’s energy reform package, which was approved last year, to allow foreign
investment in this sector. The PRI recognized it will need assistance in exploring its vast reserves, and such a move could translate into US
$20 billion in annual investment.
The aforementioned developments bode well for the lodging and tourism sector. From a leisure travel standpoint, Mexico offers unparalleled
riches, from Caribbean-like beaches to desert vistas and mountain ranges. According to the UNWTO, with over 23.4 million visitors, Mexico
already ranks as the most visited country in Latin America, earning its spot among the top 15 most visited destinations worldwide.
Although drug-related violence has undoubtedly impacted visitation volume, a growing number of tourists are beginning to understand that
most of this violence is specific to certain geographic areas such as Ciudad Juarez, Sinaloa and Acapulco. On the other hand, Cancun and
Mexico City are enjoying record visitation and, likewise, Los Cabos is recovering strongly.
From a capital markets perspective, and focusing on the tourism sector, the biggest development has been the introduction of REIT-like structures
(known as FIBRAs1) and related entities, such as CKDs2. These investment vehicles have introduced liquidity to a market that traditionally
witnessed very limited transaction activity. Namely, domestic institutional funds, which were long prevented from acquiring real estate, now have
the ability to participate in the domestic real estate market. FIBRAs have formed partnerships with global hotel companies, such as Marriott
International, and developers to expand their hotel portfolio across key primary and secondary markets in Mexico.
Fideicomiso de Inversión en Bienes Raíces de Mexico, or FIBRA, are similar to the real estate investment trust (REIT) structure in the U.S., and allow for a more favorable tax structure.
Certificados de Capital de Desarrollo (CKD) structure is comprised of securities that allow investors to participate in private equity projects through long-term public fund structures. This structure
will become prevalent both for acquisition of existing hotels and/or development of new hotels. CKDs mark a vehicle whereby domestic institutional capital is able to invest in hotels and other real
estate.
1
2
February 2014 | Hotel Intelligence Mexico 5
Mexico economic indicators
Indicators
Real GDP growth
2005
2006
2007
2008
2009
2010
2011
2012
2013E
2014 F
2015 F
2016 F
2017 F
4.0
3.7
1.3
3.8
3.9
4.1
4.2
3.3
5.0
3.1
1.2
-4.5
5.1
Real Gross Domestic
Product (USD Millions)
866,159
909,408
937,895
948,856
906,405
952,871
990,697 1,027,068 1,040,840 1,080,555 1,123,035 1,169,023 1,218,058
Nominal GDP Per Capita
(USD)
7,814.5
8,597.7
9,167.1
9,632.1
7,687.5
8,905.9
9,783.8
9,794.0
10,276.8
10,778.3
11,350.6
11,811.6
12,364.4
Consumer Price Index,
% change
4.0
3.6
4.0
5.1
5.3
4.2
3.4
4.1
3.8
3.6
3.4
3.2
3.1
Exchange Rate,
MXP to USD
10.9
10.9
10.9
11.2
13.5
12.6
12.4
13.2
12.8
12.8
12.9
13.2
13.4
Population (Millions)
110.9
112.3
113.7
115.2
116.6
118.1
119.5
121.0
122.5
124.0
125.4
126.8
128.2
Source: Oxford Economics
Macroeconomic perspective
Travel and tourism trends
Mexico’s real GDP is set to average 4% annual growth over the next
several years, an increase that is more than one percentage point above
that of the United States. Mexico’s economy is considered by many to be
in its incipient stages of dramatic growth.
Investor confidence in Mexico’s lodging sector is predicated by four
consecutive years of improving hotel performance. Since 2010, the
country has witnessed upward movement in occupancy, ADR and
RevPAR performance, following the economic recession and fears
over the H1N1 virus.
Moreover, Mexico’s emerging middle class has stimulated growth in
the services industry, which now comprises over 60% of the nation’s
GDP, a benchmark that generally corresponds to substantial growth
in lodging demand as has been observed in the U.S. and the U.K.
The aforementioned industrial and manufacturing activity is bolstering
the economic performance of many primary and secondary markets,
which are showing signs of a growing services economy with the
entry of several branded select-service hotels.
Mexico’s economic outlook is promising, and investors, both foreign and
domestic, are eager to partake in the investment potential across various
industries, including tourism and lodging.
$US
Mexico hotel performance
$140
70%
$120
60%
$100
50%
$80
40%
$60
30%
$40
20%
$20
10%
$-
2009
2010
ADR
Source: Smith Travel Research
2011
RevPAR
2012
Occ
2013
0%
Occupancy
Mexico’s manufacturing industry is blossoming once again, particularly
in light of the re-shoring of some manufacturing activity that had been
outsourced to China. Also, Mexico’s automobile industry, driven by low
labor costs, continues to achieve record-setting production and export
levels as existing and new global auto companies continue investing in
manufacturing plants across secondary markets. This, coupled with the
nation’s oil extraction capabilities following the recent energy reform, is
anticipated to boost Mexico’s export levels in the near-term—particularly
to the U.S. given the proximity of the countries.
6 Hotel Intelligence Mexico | February 2014
In terms of total consumer spending in Mexico’s hotel sector, following
the low point in 2009, the country has experienced steady growth with
spending on accommodation services rising by 6% annually from 2010
to 2013. Over the next three years consumer spending at hotels in Mexico
is expected to see 8% annual growth, according to Oxford Economics.
These growth rates are well above those in most mature economies.
Recent news reports announced the partnership between FibraHotel
and Marriott International, which affirms both the investment capacity of
FIBRAs and the desirability of secondary markets. FibraHotel plans to
develop 20 Marriott branded hotels in secondary markets by 2016. This
highlights growth prospects for institutional quality branded hotel rooms.
Mexico hotel transaction volume
Consumer spending on lodging in Mexico
25%
$700
20%
15%
Millions ($US)
0%
-5%
$10,000
Annual % change
5%
-10%
-15%
$5,000
-20%
2007
2008
2009
2010
2011 2012E 2013E 2014F 2015F 2016F
Consumer spending on accommodation services
-25%
4,000
$500
3,000
$400
$300
Rooms sold
10%
$15,000
5,000
$600
Millions ($US)
$20,000
$-
6,000
$800
$25,000
2,000
$200
1,000
$100
$-
2005
2006
2007
2008
2009
2010
2011
2012
2013 2014F
0
Source: Jones Lang LaSalle Annual % change
Source: Oxford Economics
Investment activity
Against the backdrop of steady top-line growth, the hotel investment
climate has resurged. From a low of under $100 million in hotel
transactions in 2009, capital has increasingly flowed into the sector,
and hotel transaction volumes topped $600 million in 2013.
Driving the country’s record-level transaction volume are newly
formed investment vehicles such as FIBRAs and CKDs, which
accounted for 25% and 50% of hotel acquisition volume in 2012 and
2013, respectively. As such, these newcomers to the market have
quickly ratcheted up to half of hotel transaction volumes in the country.
Based on our review of drivers impacting the hotel investment landscape,
we expect deal flow to rise by another 15% in 2014, which would equate
to over US $700 million in hotel transactions. This would make 2014
the highest annual level of transaction volume on record, which further
exemplifies the stronghold that the newly formed investment vehicles
have on the market.
February 2014 | Hotel Intelligence Mexico 7
Trends shaping Mexico’s hotel market
Consumers increasingly seeking branded hotels
While Mexico’s hotel stock is the most sophisticated in all of Latin America in terms of the proportion of branded hotels, it still lags the United
States where nearly three quarters of hotel rooms are affiliated with a hotel brand. In Mexico, 70% of hotel rooms are unbranded. Business
travelers and tourists are increasingly seeking standards and consistency while owners want access to larger reservation systems to boost
occupancy. Expect to see hotels raise flags by partnering with U.S. management companies or local groups, like City Express, to increase the
low proportion of branded hotel stock in Mexico over the next three to five years.
Developers in historically illiquid market see more favorable exit strategies
The presence of FIBRAs and CKDs is boosting market liquidity. Hold periods are compressing, giving developers more certainty regarding an
eventual exit. Having favorable exit strategies in sight will lead to more new development projects. In addition, as FIBRAs and CKDs acquire a
number of the value-add purchase opportunities on the market, they will look to new development as a means to achieve yield. These groups
are expected to also build new stand-alone hotels as well as mixed-use developments with hotel components in areas where land is available.
Increase in foreign investment
As yields tighten in the U.S., some investors are turning to emerging markets like Mexico for higher rates of return. Over the past three years,
investors from the U.S. accounted for a relatively minimal 15% of hotel acquisitions in Mexico given the high amount of product on the market
in the U.S. as well as opportunistic plays available domestically. In 2014 and 2015, we expect U.S. buyers seeking exposure outside of their
home country to review investment opportunities among Mexico’s branded full-service hotels in both primary and secondary markets.
Safety of tourist areas improves
Mexico’s drug violence has generally been restricted to specific areas of the country, including Ciudad Juarez, the state of Sinaloa and the
Acapulco area. The country’s top leisure destinations like Cancun/Riviera Maya, Los Cabos and Puerto Vallarta are largely perceived as safe.
Likewise, the nation’s capital has successfully mitigated the negative perception of violence that once tainted the city’s reputation, evidenced
by increasing domestic and international visitation, which increased in 2013 by 6% and 8%, respectively, over the prior year’s figures.
Although violence will not disappear in the short-term, Mexican authorities have put in place a longer-term strategy to reduce these threats.
Mexico’s “white space” for future hotel development is vast
Jones Lang LaSalle studied economic indicators and demand drivers in Mexico and estimates that approximately 191,600 new hotel rooms
will be warranted through 2022, which represents a compound annual growth rate in room supply of 4.9%. This would be more than three
times the growth rate expected for the U.S. Jones Lang LaSalle’s analysis is based on an industry-sponsored white paper which looked at
± 200 infrastructure projects across 13 economic sectors to assess Mexico’s transformation from an industrial to a services-oriented
economy. The full paper can be accessed online at: http://www.jll.com/hospitality-latam.
8 Hotel Intelligence Mexico | February 2014
Market spotlight: Mexico City
Mexico City is among the largest five cities in the world, with a
population of over 20 million people in the greater metropolitan area,
making it the most populous metropolitan area in Latin America.
However, the city’s room supply is relatively small—the market’s stock
of 28,000 quality hotel rooms is comparable in size to that of secondary
markets in the U.S., underscoring the opportunity for growth.
Nevertheless, the supply pipeline is constrained due to the high
barriers to entry including both the increasing cost and lack of
available land in prominent submarkets within Mexico City such as
Polanco and Reforma. The improving market fundamentals are thus
driving values of existing properties. Following are three factors
impacting the investment market:
1. RevPAR has exceeded the previous peak
RevPAR in Mexico City has exceeded prior peak levels, following
compound annual average growth of 11.5% since 2009. The market
has now recovered from the combined impact of the H1N1 virus and
the financial downturn. Given renovations in the market and the limited
outlook for new supply, hotel performance is expected to see steady
growth over the next several years.
Mexico City lodging performance, selected upper-tier hotels
$200
100%
$180
$160
80%
$140
$US
60%
$100
$80
40%
$60
$40
20%
$20
$-
2007
2008
2009
ADR
Source: Smith Travel Research 2010
RevPAR
2011
2012
Occ
2013
0%
Occupancy
$120
2. Hotel owners driving capital investment cycle
Hotel owners perceive considerable runway for growth and are increasing
capital expenditure as a means to drive room rates. Following a
number of years of lower capital expenditure, Mexico City hotels are
witnessing both large and small-scale renovations. The JW Marriott
recently completed a major US $30 million renovation, while the
adjacent InterContinental Presidente is undergoing a property-wide
renovation. The former Hotel Nikko also underwent a renovation for its
rebranding as the Hyatt Regency.
3. Mexico City earns gateway city status
In 2013, Mexico City witnessed hotel transaction volume totaling
US $270 million, earning the title as Latin America’s most liquid hotel
transaction market. Given the aforementioned trends, Jones Lang
LaSalle anticipates growing transaction volume in Mexico City and
increases in real estate values with cap rates for prime assets as low
as 6.5% to 7%.
February 2014 | Hotel Intelligence Mexico 9
Relative to the rest of Mexico, Cancun has a greater share of branded
rooms—approximately 60% of rooms are affiliated with either U.S. or
European brands. Such hotels remain on investors’ radar given the
more robust reservation systems and loyalty programs associated
with larger brands. Here are four factors impacting the Cancun/Riviera
Maya investment market:
1. Institutional investors enter the all-inclusive segment
Cancun already stands out as the Mexican resort market where the
all-inclusive structure is most common, and the prevalence of the allinclusive operating model is on the rise. While all-inclusive operations
require a different distribution model of American and European plan
hotels, institutional investors are making strategic investments into allinclusive hotel companies’ operating platforms as a means to acquire
their expertise and couple it with their strong brand platforms.
The all-inclusive sector is becoming increasingly attractive to
institutional investors. Notably, Hyatt Hotels Corporation purchased
a stake in Playa Hotels & Resorts and is debuting new brands in
Cancun, and Bain Capital invested in Apple Leisure Group, parent of
AMResorts. The continued foray by institutional-grade investors into
this sector is expected in 2014 and beyond, which will elevate the
quality of sector as a whole.
2. Five years of RevPAR growth
Cancun has seen compound annual RevPAR growth of 8.9% since
2009. In 2013, the market’s 10.5% RevPAR growth was driven by a
6.6 percentage point increase in occupancy, resulting in record
occupancy levels. Nonetheless, there is still upside potential for ADR
as it remains 21% below the previous peak of 2008. Riviera Maya
is expected to see disproportionately higher ADR growth due to the
addition of upper-tier and luxury American and European plan hotels.
3. Target for investment capital
Since 2010, Cancun has notched US $250 million in hotel transaction
volume, making this Mexico’s second most liquid hotel market.
Opportunistic investors from the U.S. such as private equity groups are
looking to markets such as Cancun as hold periods in Mexico shorten
and yields in the U.S. tighten. We expect investors to capitalize on
branding opportunities as well as make capital infusions to drive rate.
Cancun lodging performance, selected upper-tier hotels
$200
100%
$180
$160
80%
$140
$120
60%
$100
$80
40%
Occupancy
Cancun/Riviera Maya, located in the state of Quintana Roo, is among
Mexico’s largest and most international resort markets, generating
almost half of the country’s spillover from foreign exchange induced
by the tourism industry, according to a report from Banxico. Moreover,
the Cancun/Riviera Maya corridor contains among the highest number
of hotel rooms among resort markets globally.
$US
Market spotlight: Cancun
$60
20%
$40
$20
$-
2007
2008
2009
ADR
2010
2011
RevPAR
2012
2013
0%
Occ
Source: Smith Travel Research
4. Supply pipeline is tepid and comprised of smaller hotels
New supply remains in check as a number of projects originally
conceived before the downturn struggle to obtain funding. Likewise,
new construction has been stalled by zoning and environmental
regulations impacting wetlands. Nevertheless, we expect that a
number of these stalled projects will be recapitalized over the next
18-24 months, at which time the market could see an uptick in supply.
The market’s recent hotel openings include AMResorts’ 495-room
Secrets the Vine, the 274-room NIZUC Hotel & Spa as well as the
180-room aloft Cancun. Incoming supply includes 950 rooms that are
anticipated to enter the market by 2015.
Select hotels under development in Cancun
Property
Proposed
opening date
Rooms
Status
2014
112
In Construction
Holiday Inn Express
2014
160
In Planning
Andaz Mayakoba
2015
213
In Planning
Hyatt Playa del Carmen
2015
332
In Planning
Thompson Playa del Carmen
2015
125
In Planning
Four Points Cancun Centro
Source: Jones Lang LaSalle
Note: Based on publicly available information; dates and projects are subject to change
10 Hotel Intelligence Mexico | February 2014
Market spotlight: Los Cabos
Los Cabos garners the highest average room rates in Mexico due to
the high quality of rooms. Los Cabos is a popular destination for U.S.
travelers, especially from the West Coast. In addition to the highquality hotel product, the favorable exchange rate for U.S. travelers
is also a draw given the dollar’s strong buying power—and exchange
rates are expected to continue to favor the U.S. dollar. Following are
key trends in the market:
1. Operating fundamentals have not reached previous peak
Los Cabos witnessed compound annual RevPAR growth of 12% since
2009, driven in large part by rising occupancy. As of year-end 2013,
ADR, occupancy and RevPAR were still below peak levels last seen in
2007, affirming continued upside potential. The outlook for Los Cabos
is strong given the strengthening economic environment in California,
Los Cabos’ largest source market, and the U.S. as a whole.
Los Cabos lodging performance, selected upper-tier hotels
$500
100%
$450
$400
$350
$US
$200
40%
$150
$100
20%
$50
$-
2007
2008
2009
ADR
Source: Smith Travel Research
2010
RevPAR
2011
2012
Occ
2013
0%
Occupancy
60%
$250
Select hotels under construction in Los Cabos
Property
Proposed
opening year
Rooms
Holiday Inn Express Los Cabos
2014
90
Thompson Cabo San Lucas
2014
114
Courtyard by Marriott Los Cabos
2014
130
Hampton Inn & Suites Los Cabos
2014
150
Ritz-Carlton Researve Puerto Los Cabos
2015
124
JW Marriott Puerto Los Cabos
2015
300
Source: Jones Lang LaSalle
Note: Based on publicly available information; dates and projects are subject to change
80%
$300
2. New development cycle slowly emerging
The healthy recovery of the Los Cabos lodging market following the
economic downturn and negative impact stemming from fears over
the H1N1 virus in 2009 and 2010 has increased developer interest
as of late. While the proposed new hotel stock is well below the level
of increases seen in the early 2000s, additions to the market include
the recent opening of the 157-room Hyatt Place San Jose del Cabo.
The following pipeline is comprised both of luxury boutique hotels and
branded select service hotels.
February 2014 | Hotel Intelligence Mexico 11
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