Introduction: It is our great pleasure to present the third edition of the Trends and Opportunities South America, an annual publication by HVS/Hotel Invest (in partnership with STR) that illustrates and analyzes the sector’s performance in some of the major markets in the region.

Every year we provide recent and reliable information in addition to telling you about the challenges and opportunities in South America’s main hotel markets. We are convinced that an informed and transparent market is more solid and professional. Having said this, we believe that this publication will increasingly become a key tool for hoteliers, developers, and investors by supporting them to properly formulate their business and investment strategies.

Our Sample

The Report’s broad database mostly comprises data from STR, supplemented by HVS/HotelInvest own records and data provided by third parties. We thank all those who have contributed to this publication and we invite new hotels, operators, and associations to share their data through STR for future editions, contacting Patricia Zulato: (55 47) 99201-7002, pzulato@str.com.

The information contained herein is based on the performance of 80,665 rooms using data on average daily rates in nominal value and national currencies, and includes the main hotels in each segment of each city. We are therefore certain that the trend indicators truly reflect what is happening in each market universe.

Our annual comparisons use the same sample base throughout the historical series, except when there are openings or significant segmentation changes. Our wide sample plane is statistically significant and is shortlisted below:

• Buenos Aires: 7,828 rooms (38% of the analyzed universe);
• Santiago: 8,186 rooms (57% of the analyzed universe);
• Bogota: 7,525 rooms (65% of the analyzed universe);
• Lima: 4,267 rooms (48% of the analyzed universe);
• Rio de Janeiro: 18,794 rooms (62% of the analyzed universe);
• São Paulo: 21,822 rooms (59% of the analyzed universe);Salvador: 2,434 rooms (27% of the analyzed universe);
• Curitiba: 3,088 rooms (32% of the analyzed universe);
• Porto Alegre: 2,234 rooms (32% of the analyzed universe);
• Belo Horizonte: 4,487 rooms (39% of the analyzed universe).

2016 Retrospective and 2017 Outlook

Change of tack, good prospects for South America

2015 and 2016 were marked by low economic growth in South America. The international backdrop for this poor regional performance included the global economic slowdown and the drop in the price of commodities, which affected the raw-material exporting countries.

In addition to these external events, there were some regional factors such as new presidents taking office, plus bad administrations, in some cases, and the inability to strengthen the institutional framework and fight against corruption. Although all the countries in the region, except for Peru and Paraguay, evidenced a slowdown, the regional recession is accounted for by the internal crises of Argentina, Brazil, and Venezuela.

The good news is that a change of trend is expected in 2017. On the one hand, most of South American governments are shifting from the left to the right, with the implementation of reforms aimed at balancing the economy and improving the business climate, which should lead to greater economic growth.

On the other hand, brighter prospects for the regional and global scenarios, higher raw material prices, and government investment plans should favor the South American economies. The United States withdrawing from the Pacific Alliance might encourage the creation and strengthening of regional blocs, with a positive impact on its members.

In Argentina, the first year of Macri’s administration set a change in the country’s economic direction. In 2016, despite the drop in GDP, major economic adjustments were implemented to start balancing the economy. Although there are pending reforms and challenges to be solved, positive signs have already appeared as well as an improvement in confidence levels and in the institutional and business climate. This together with a more favorable global and regional scenario will reset the country on the growth path in 2017.

In Chile, despite the drop in copper prices, Brazil’s recession (a major business partner), and business discontent due to government reforms, the GDP went up by 1.7% in 2016, which shows the country’s economic soundness. Economic activity is forecast to accelerate in 2017, encouraged by higher copper prices and more favorable prospects for China, the United States, and Brazil.

Colombia suffered from increased economic slowdown in 2016, mostly as a result of lower crude oil prices, accompanied by concerns about the country’s fiscal deficit and a rise in inflation. However, toward the end of the year, Congress passed a tax reform bill aimed at increasing tax revenue and helping the country keep its credit rating amid a slump in oil revenue. This, in addition to progress over the peace agreement with FARC, prospects of crude oil and farm product exports picking up, an increase in industrial production, plus more investments in infrastructure, account for greater growth projections in 2017.

Peru was the star of the region. Although the country’s presidential elections, whose winner was the pro-market candidate Pedro Pablo Kuczynski, prevented greater growth, Peru’s economy showed an attractive 3.9% expansion in 2016. This was possible thanks to an increment in traditional exports and to the recovery of the manufacturing sector. The local economy is expected to expand even more in 2017.

In Brazil, high unemployment, credit restrictions, political unrest, and weak external demand caused the economy to drop again in 2016. The new government has implemented a series of reforms that are showing the first signs of economic stabilization. There are moderate growth prospects for 2017, and the economy is expected to accelerate in 2018.

Opportunities and challenges for the hotel industry

Economic upturn brings opportunities for the region

Even if the regional outlook was not too encouraging in 2016, the countries in question attained marked increases in the number of foreign tourist arrivals, with the exception of Argentina and Brazil that had a slight decrease due to their recession. In terms of hotel demand, all the cities analyzed here, except for the Brazilian ones, showed an uptrend, especially Bogota. Some markets were affected by hotel openings, particularly Rio de Janeiro, in addition to Curitiba and Belo Horizonte, which caused a drop in occupancy and, in most cases, in rates as well.

Although hotel supply will increase in some cities in 2017, the uptrend is expected to continue in line with the projected economic acceleration and the consolidation of destinations. This will contribute to a rapid reabsorption of supply and help several cities and segments keep attractive occupancy and average daily rate levels.

Having overcome uncertain times and with significantly lower risk, South America will grow again in 2017. This, in addition to the historical performance of the past 10 years, indicates good possibilities for the hotel industry in the region. Some of the current opportunities (many of which have been in place since the last edition of Outlook) are:

Attracting foreign investors. On account of the dollar appreciation and a bet on regional economic fundamentals;

New developments in cities with attractive RevPAR levels and increasing demand. The development of hotels in the economy and midscale segments is still at a budding stage in the region. Some markets also show opportunities in the upscale and luxury segments. In addition, leisure projects are stealing the limelight, especially for destinations with an expanding domestic market.

Popularization of timeshare and fractional ownership, especially in Brazil. While the business hotel segment shows a new drop in performance, the leisure market growth continues to be significant. New developments have become feasible in the country;

Improvement of operating efficiency in hotels in operation. In an increasingly competitive market and with better quality of supply, expanding revenue has become a challenge, especially in more economically vulnerable countries. In this context, seeking greater operating efficiency is critical to increasing profitability margins. Reviewing operating processes and recruiting the assistance of asset managers will help achieve better results;

Structuring new funding options. In Brazil, for instance, structuring a condo hotel is no longer an easy option. On the other hand, one of the greatest risks in the sector has considerably decreased - oversupply. Better qualified investors are more likely to arrive in Brazil;

Chains have increased conversion efforts. The participation of independent hotels predominates in the region. The challenge lies in finding properties meeting the brands’ requirements.

Market Overview

Read the full article here.