New hotel development cycle begins in Latin America

LATIN AMERICA Many economies throughout Latin America have shown great resilience and, with the exception of the Caribbean, have rebounded relatively quickly from the global recession.

Governmental and political reforms enacted after earlier financial collapses created improved economic and financial management systems, stronger and better-regulated banks, and together with booming export-based economies, have served to minimize the impact of the global economic crisis. Combined with positive gains in lodging demand and operating results and the growing availability of credit over the past year, major improvements in developer and investor confidence have occurred.

These are the important prerequisites that have sparked the new lodging real estate cycle currently under way in much of Latin America, according to New Hampshire-based consultancy Lodging Econometrics.

The key metric confirming the onset of the new cycle is new project announcements into the pipeline, which were up in the first three quarters of 2010 year over year for every subregion within Latin America except the Caribbean.

With the fifth largest pipeline in the world, Brazil is up an astounding 87% year-over-year, while the remainder of South America is up 28%. As a region, South America has the most new project announcements since the first quarter of 2008. Mexico, which has the seventh largest pipeline worldwide, is ahead by an impressive 39%.

For projects already in the pipeline that migrated forward, construction starts increased year over year by 24% in Brazil and 44% in the other South America countries. In the months ahead, construction starts are certain to trend upward strongly, as the recent increases in new project announcements migrate forward toward construction, Lodging Econometrics says. Already, the number of projects scheduled to start construction in the next 12 months has advanced to levels not seen since late 2008.

These are the nascent beginnings of a new real estate cycle. Increases in total pipeline counts will take a few more quarters for the flow-through to become visible, as new hotel opening counts leaving the pipeline are near pre-recession highs and will exceed new project announcements for a while longer. However, the beginning of a new real estate cycle, one of the first beyond Asia Pacific, is definitely confirmed, Lodging Econometrics asserts.

Many Latin America economies have aggressively embraced globalization, led by Brazil and Mexico, which together account for 65% of the region’s GDP. These two countries, along with Argentina, Colombia, Peru and Chile, make up 77% of the region’s population. All six were among the fastest growing economies in the world leading up to the recession, and except for Mexico, all have bounced back nicely.

Since new hotel openings leaving the pipeline as new supply from the last cycle are plentiful, it will be a few more quarters before total pipeline counts reflect the increases in new project activity. The evidence for a growing pipeline in the months ahead is convincing despite the record levels of new openings. South America’s pipeline is already at its highest levels since the second quarter of 2009, while Central America has been trending upward for three quarters. Mexico’s pipeline now appears to be in a bottoming formation and is poised to expand.

While Latin America’s development growth is not as impressive as in other emerging countries like China or India, nor are pipeline totals as large as they are in North America or in the fully developed countries of Europe, their shallow recession and impressive bounce-back leads Lodging Econometrics to declare that this could be the “Decade of Latin America.”