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Latin American Development - Panacea or Pitfall? Sure this part of the world is rocking, but do you have what it takes to get deals done? Here's what you must know to succeed down there. Monday, September 17, 2012 Glenn Haussman

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The Latin America market is sizzling hot. Governments have stabilized, demand is rising as economies perk up and there are plenty of places ripe for development. But Latin America is not the potential panacea one would naturally think. There’s a host of complications in this part of the world that makes building hotels complicated, but those that can find a way will surely rejoice.

So why is it so hard to get a hotel open in places such as Colombia, Nicaragua and Brazil? It’s the money!

“When you come to Brazil you have to understand you will not find financing for your projects. There is no financing for hotel projects and there is a lack of English speaking persons,” said Diogo Conteras, Founder, Hotel Invest Brazil during last week’s HD Boutique in Miami.

Ouch! But don’t worry, there are ways to get deals done if you are diligent enough.

Conteras said the business environment is completely different than in the United States and that local partners are required to help wend through a thicket of regulations and challenges. Another challenge is most suitable partners do not speak English, making it even more difficult for American based companies that do not have fluent Spanish and Portuguese speakers. Latin Americans also have their own business culture, said Conteras.

Take the extremely popular Brazil for example. Here construction is typically funded unit by unit. That is, they are essentially condo hotels. Condo hotels are properties sold one room at a time to individual investors. It is a great way to raise money, but then developers potentially have hundreds of owners to deal with over the long term.

While this sort of construction has dried up in the United States, in Latin America it’s the way to get a property built fastest. Unless you invest all the cash yourself.

“The only other way to do it is with your own money, 100%. There is no other way unless you’re selling units to individual developers. But that model has a problem. Before being a hotel business, it is real estate business where developers make money out of selling units. This makes it bad for long term capital investment in hotels,” said Conteras. He also said 70 percent of all hotel projects in Brazil are condo hotels.
Christian Charre, President, The Charre Group, agreed, noting that investors in Brazil are more interested in packaging and selling properties immediately rather than keeping them for the long term. “Brazilian partners want to sell the asset and we have to try to make them understand you can own hotels and make money,” he said.

Building hotels in South America has been a learning experience, said Jerry Ong, Principal, Jupiter Realty Corp. To be successful Onbg realized they needed to build without credit.

“Our strategy changed and our objective was to build with all cash. So we reorganized our business model. If you are not a proven commodity you won’t get money,” said Ong.

Ong said his company personally invests in every deal along with both a local and foreign capital. “Myself, my partners, we all have skin in game.

Charre also added that aside from needing money you need people that understand the systems and nuances of local markets.

“There is a lot of money in Brazil and Colombia being put out but there is no big foreign equity group going to go down there and do it themselves. You need local capital to be with you along the way. You also need locals who understand how things work such as the culture and approval process. But finding the right partners is very challenging because there is a problem of culture and language,” said Charre. 

Charre and other see great demand growth in Colombia as well as Chile. Argentina has slowed, however, as hundreds of hotels have been added during the last decade.

Hilton Worldwide has been looking at all of Central and South America as regions ripe for development.

That’s because as these nation’s economies expand people are traveling to do business. John Waters, VP Architecture & Construction, Latin America & the Caribbean with Hilton Worldwide said most hotel development there is related to the growth in business travel, not tourism.

“The business market is really coming into its own in tertiary markets, Colombia in particular. It is the next Panama,” said Waters adding the company has a robust pipeline in Colombia as well as Chile which is rife with small mining towns that get lots of visits from representatives of Fortune 500 companies.  They’re all places perfect for 120 room Hilton Garden Inns for example.

One last tip from Waters, source as many materials as possible from the country you want to build in as projects are more apt to get done with this promise. “No one wants to hire people from the United States. Sourcing local materials is important to them and the cost of employing American firms is not cost efficient,” said Waters.