Caribbean Hotel and Resort Assets - Gradual Recovery with Further Upside?

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. November 05, 2010

October 28, 2010 - The impact of the recent world recession still reverberates around the Caribbean's hotels and resorts, even as a weak recovery continues in to the upcoming high season. Around 35% of existing hotels and resort projects with debt finance are estimated to be in default on their loans - this according to Robert MacLellan, who is Managing Director of MacLellan & Associates - the Caribbean's largest hospitality consultancy.

MacLellan presented a Caribbean update this month at the annual conference of the International Society of Hospitality Consultants (ISHC) - an elite invitation-only group of worldwide experts. The following are the headline excerpts from the presentation.

Regional Financial Fall-Out
The early effects of the Wall Street, City of London and Icelandic bank problems manifested themselves in the Caribbean with the collapse of the Stanford banks in Antigua and CL Financial Group companies throughout the region. The demise of Air Jamaica and the high profile failures of mixed use resort projects in Anguilla, Turks & Caicos, Dominican Republic, St Lucia and the Bahamas were further evidence of the close and immediate interlinking of the world's economies today. Subsequently, hotel occupancies declined by up to 16 percentage points on some islands, room rates in many mid market properties were slashed to levels not seen since the previous post 9/11 downturn and villa / condo sales dropped off dramatically in almost all mixed use resorts. Most banks in the region, with a history in the hospitality and tourism industry, remained calm and supportive of this key Caribbean business sector but sought specialist consultancy input on the most difficult loan situations as necessary.

The Recovery in Hotel Performance
Tourist arrivals in 2010 are generally up year-on-year by single digit percentages in most islands and airlift volume is relatively steady to most destinations, albeit with the aid of government subsidies in some countries. While hotel occupancies in the stronger destinations are expected to recover to pre-recession percentages this winter, it is expected that average room rates will take up to five years to return to 2008 levels in real terms. In general, the financial performance of higher end boutique hotels appears to be improving faster than major flag or mid market properties - older resorts, in need of refurbishment, are struggling badly on occupancy and room rate.

Hotel and Resort Valuations
There was an obvious overheated development “bubble” in the Caribbean on the run-up to 2008, with second rate sites being developed and inexperienced finance coming in to the region from previously unknown sources - then came the crash. At one point, appraisals of existing hotels and resorts were down by around 30% from their peak with green field development site valuations down by around 40%. There are still significant challenges in producing appraisals in the current recovery scenario, with differing views on appropriate cap rates. Traditionally minded valuers are arguably not recognizing the likely impact of improving market conditions and the probability of better operating results in the next few years.

Hotel and Resort Transactions
The transaction market was slow up until the midpoint of 2010, with existing owners knowing that now was not the time to sell. Banks have been in the “extend and pretend” mode, and they are still being supportive with the existing hotels and resort projects which are most likely to turn the corner quickly during the upcoming high season. However, funders have started to force the sale of properties in the last few months, starting with those existing properties and projects which are deemed to be least recoverable under current management and financing structures.

Buyers, now including institutional money - as well as entrepreneurs who were traditionally more prevalent in the Caribbean - are currently seeking assets which are perceived as under-trading and where there is significant potential for improving yields. As these are snapped up, focus will move more towards partially completed projects - providing these are not the subject of complex legal disputes. Lastly, within a few years, demand for green field sites will increase again as true high quality sites are a finite commodity in the Caribbean and the region is likely to remain popular in an ever shrinking world.

The Leisure Real Estate Market

Sales of condos and villas are seen as a vital part of continuing resort development in most Caribbean islands, given that they can mitigate investment risk to some degree. While governments in Trinidad and Barbados have recently built large scale conventional hotels, as have Spanish hotel companies in Jamaica, current levels of return on investment for these properties are a source of concern. On most islands the long term track record is mixed for larger Caribbean hotels with no real estate component, as the strong seasonality factor and potential for hurricanes represents a significant medium term investment risk.

Situated between the two major outbound tourism markets of North America and Europe and with good airlift, the Caribbean is an ideal location for vacation homes. Real estate sales at the high end, such as $3 million plus villas, are still slow but there are definite signs of recovery in the $500,000 to $2 million range of properties. Land costs and construction costs are now considerably lower than at the height of the development “bubble” and many people today still appear to trust attractive real estate as an investment - more than banks, pensions or the stock market - providing they perceive that they are getting value for money. While some existing resort projects are stalled and are involved in lengthy legal complications, new projects are being funded - providing the destination is strong and that there is successful differentiation of the product from competition in terms of developer and operator track record, design quality, overall image and a sensible business plan.

BACKGROUND INFORMATION
Robert MacLellan is a Fellow of the Institute of Hospitality and a member of the International Society of Hospitality Consultants - an elite invitation-only group of specialists world-wide. He has a Masters Degree in International Hotel Management from University of Surrey, England, where he majored in hotel design and development. In a diverse 35 year career in the hospitality industry, MacLellan gained his operations experience with major international hotel chains and cruise lines, working in UK, Spain, the Caribbean, North and South America and the Middle East. He worked for consultancy practices in Florida and London prior to holding three positions at Vice President and Managing Director level in UK based property and hospitality companies. Robert is a regular speaker at Caribbean conferences and is often quoted in hospitality industry media.

MacLellan & Associates is a specialist consultancy and valuations practice, founded in 1997, which serves the hospitality, tourism and leisure sectors in the Caribbean. The company's consultants, based in St Lucia, Miami, St Maarten, Trinidad, Antigua and London, have extensive international experience at senior levels in operations management, project development, sales and marketing, human resources, tourism development and appraisals. In St Lucia the company lists among its clients the award winning resorts, The Landings and Cap Maison, as well as The Tides at Sugar Beach which Viceroy Hotels will launch next year.

MacLellan & Associates
Hospitality, Tourism & Leisure Consultants
St Lucia - Miami - St Maarten - London - Trinidad

For further information, please contact Carolyn Lloyd at the St Maarten Office (+599 520 5679)