São Paulo – The World Cup 2014 and the Rio de Janeiro Olympics, in 2016, will increase the flow of foreign tourists into Brazil in the next few years, but do not single-handedly justify the investment that the country’s hotel industry is receiving. A survey conducted by consulting firm BSH International, which specializes in the industry, estimates that Brazil should receive a total investment of 7.3 billion reals (US$ 4.5 billion) between 2011 and 2014. In addition to the two leading sports events worldwide, oil discoveries, the relocation of industries to the interior of the country and economic growth are the reasons for the injections of cash.
According to BSH survey, out of the 198 hotels that should start operating by 2014, 76 will be in the Southeast, the region that should get the most investment. In terms of cities, according to BSH, Rio de Janeiro should receive the highest number of new hotels: 17. Salvador should get 10 units.
Most of the 46,296 rooms to be delivered during the period will be economy class. They will be located in hotels with no pools or saunas, for instance. They do, however, offer comfort and competitive pricing. Out of all new rooms, 39% will be in this category. Only 3% of the hotels will be in the upscale, or super luxury, category. Another 10% will be resorts.
A manager at BSH, Renata Cianciaruso claims that o Rio de Janeiro attracts the bulk of investment not only because it will host the Olympic Games, but also because hotels in the city are already showing signs of saturation. “Rio has reached the limit of its capacity, at a [hotel] occupancy rate of 75%. It needs more hotels,” he says.
In spite of the new wave of enterprises, the chairman of consulting firm Hotel Invest, Diogo Canteras, claims that the investment is still insufficient to meet the demand. “In São Paulo there are 40,000 hotel apartments. The rising demand is linked to the growth of the GDP, which will average at 5% in the next few years. In order to meet the supply, the demand would have to grow by 5%. We would have to have 2,000 new hotel rooms. Right now, there are no apartments under construction in São Paulo. The same holds true of Brazil. The country would need 15,000 apartments, but is only getting 2,000 to 3,000 during the period,” he says.
The hotel industry invested heavily in Brazil in the late 1990s and early 2000s. Lots of apart-hotels were built, attracting buyers who were interested in using the properties as investment. The buyers would then assign the units to companies which would manage the enterprise. The managing company would pay rent to the owner, no matter whether the unit was occupied or not. The supply, however, outstripped the demand and some businesses incurred losses. The profitability of the companies also dropped.
“Apart-hotels were regarded as a good business and people would buy them to invest. They used to say this type of real estate was rented out from the start, that there were no tenants, no problems… It really is interesting, but ideas and the market follow distinct paths. More apart-hotels were built than the market could absorb,” says Canteras.
A professor of the postgraduate course in Hotel Administration of the Senac University Centre, Paulo Mélega claims that investment in the hotel industry is highly sensitive to a country’s economic performance. “The recent scenario of the Brazilian economy, driven mainly by growing industrial activities, agribusiness and oil, had a positive impact on business and event tourism, which account for the bulk of guests in the cities whose hotel industries are receiving investment,” he says.
In order to ensure high profitability, investors seek cities or places that seem ideal to host new hotels. Despite the building of hotels throughout Brazil, Canteras still believes that profit is guaranteed only in the major capitals. “The best places for investing in a hotel are exactly those that are the hardest to enter: Rio, Brasília and São Paulo. It is very hard. Brasília has restrictions due to the Master Plan, in Rio plots are scarce and São Paulo has plot issues and is expensive. However, these are investments that will remain a source of joy for a long time to come,” he says.
The coordinator of the hotel and tourism real estate section of the São Paulo Housing Union (Secovi-SP) and a hotel industry consultant, Caio Calfat claims that small cities will also see investment. Santos, on the coast of the state of São Paulo, and Uberlândia, in the Triângulo Mineiro area of the state of Minas Gerais, are two examples.
Economy class
The bulk of investment that the country receives is not aimed at five-star or boutique hotels, in which hosts even get to choose their favourite type of pillow. “The bulk of investment is concentrated in economy-class hotels, which offer limited services, and are business tourism-oriented. In some markets, such as Rio and Belo Horizonte, there is investment in midscale (three or four stars) and upscale hotels (five stars), but these are not prevalent,” says Mélega.
There are exceptions. The businessman Eike Batista is investing 200 million reals (US$ 125.5 billion) in refurbishing Hotel Gloria, in Rio. Once completed, in late 2013, the enterprises should have 231 apartments and become part of the select group with daily rates starting at US$ 500.
The new hotels focus on business tourists and Brazilians who travel around the country. Many of the enterprises are built by Brazilian companies, such as Allis and Atlantica, or by international chains that have been operating in Brazil for several years.
Investment funds and major foreign hotel companies have projects to either open hotels in Brazil or expand their operations, but are still having trouble. According to Mélega, the local market and economic conditions demand a lot of planning from foreigners.
“Developing hotels in Brazil is not easy, due to several factors. One of them concerns the lack of financing mechanisms for the industry or the difficulty getting funds through existing lines of credit. Another challenge resides in the tropicalization of products and development strategies. Chains such as Marriott and Hilton have structured out their new business development sections, but are still faced with major challenges when it comes to making their plans viable. However, I believe some international chains are going to conquer the barriers to entering the country anyway, and establish themselves in relevant fashion,” says Mélega.
As an example of success, the Senac professor mentions the French chain Accor, which has been in Brazil since 1977. Here, Accor has hotels under the brands Formule 1, Ibis, Novotel, Mercure and Sofitel in the major cities. It has recently inaugurated the first Pullman hotel in São Paulo. It is a brand whose luxury level is second only to the chain’s Sofitel brand. As part of its investment, Accor is buying out the establishment that houses Sofitel, its most sophisticated, in Rio de Janeiro.
Similar to what happened with apart-hotels in the 1990s, many chains do not own the hotels that they manage. This is a widespread practice in Brazil, because it is less risky to investors. Incoming investment is beginning to change this scenario around as well. Still, the industry is far from being professionalized in Brazil. Calfat claims that many hotels are still in the hands of small investors, are family companies and in some cases do not earn as much as they could. “Our hotel industry is small and 90% of hotels are not owned by chains, they are small, poorly managed, amateurish and expensive,” he says.
Visitors
Brazil still has less hotel rooms and receives less tourists than other countries. According to figures from the Ministry of Tourism, as of 2010, Brazil had 288,610 rooms. According to the Eurostat research institute, which compiles data on the European Union countries, France had 624,000 hotel rooms as of last year; Italy had 1.2 million; Spain had 884,000; and Portugal had 124,896 rooms (according to figures from Turismo de Portugal). According to consulting firm STR Global, the United States has 4.8 million rooms; Egypt has 152,900; and the United Arab Emirates have 86,000.
Brazil still receives few foreign tourists. In 2010, 932 million people travelled to foreign countries worldwide. Brazil received 5.2 million foreigners in 2010. During the same period, France received 74.2 million tourists, and Italy received 43.2 million.
The estimates of the Ministry of Tourism do not point to a strong increase in foreign tourists in Brazil in coming years. That, however, does not affect investment. After all, says Mélega, the investment that the hotel industry receives is targeted at Brazilians, not foreigners.
“The demand that has been growing in Brazil is domestic demand, not that of foreign tourists. As a for instance, passenger traffic at Brazilian airports grew by 15% in 2008 and 2009 combined, and by 21% in 2010. In 2011, we have seen growth of 20% already, compared with the same period of 2010. These are expressive figures which reflect the increasing number of travels, especially domestic ones by Brazilians. The domestic market is the big opportunity that justifies investment in hotels,” says Mélega.
*Translated by Gabriel Pomerancblum
