The worrying news about the global economic recession tend to make most Brazilians (including hotel managers – who are now finishing their 2009 budgets) foresee a difficult time next year.

A careful analysis, however, shows Brazilian hotels' performances in 2009 should be better than in 2008, despite the global turmoil.

The most relevant urban markets and the resorts market illustrate this point and are worth a closer look.
The main urban lodging markets – which are essentially oriented towards the business and meetings segments – suffered a strong decline in the first five years of this decade, due to oversupply caused by an avalanche of new condo-hotels.

Especially in São Paulo, but also in Porto Alegre, Curitiba, Campinas, Guarulhos, Fortaleza, Brasília, among others, the massive construction of hotels in the late 1990's and early 2000's made supply drastically overcome demand, causing occupancy and average rates to fall abruptly and dramatically.

A recovery process started in 2005, after the opening of the last condo-hotels, as supply ceased to grow and demand accelerated pushed by strong economic activity.

The chart below illustrates this process in São Paulo, showing the market's past performance and projections for upcoming years.

Market Recovery – São Paulo


In São Paulo, before global recession started, hotel revenue increases of 20% to 25% were expected in 2009, subject to a 5% growth in Brazil's GDP. If GDP growth is adjusted to current expectations (around 2,5% ), forecasts point to a smaller, but still significant increase in hotel revenues, of about 10%.

The urban lodging market's recovery should last five or six years at least, since there are very few hotels under construction and the remaining ongoing projects have been postponed "sine die", mainly as a result of poor hotel performances and the lack of finance.

The resort market – which is essentially oriented towards the leisure segment, but also depends significantly on the convention market – had been facing a performance decline in the past years, caused by the depreciation of the dollar, which made Brazilian destinations expensive to foreigners and international destinations cheaper to Brazilians.

Because of international travelers not coming to Brazil and Brazilians preferring to take an international tour or sea cruises (which prices, set in dollars, were also attractive), Brazilian resorts, especially in the northeast, were becoming gradually emptier.

Brazilian Resorts' Occupancy and Currency Exchange Rates


With the dollar worth only R$ 1.70, a week in the Bahamas was 30% cheaper than one in Salvador for a European traveler. And Cancun was about the same price than Sauípe (an important Brazilian resort destination) for a traveler based in São Paulo. Now, with the dollar at the R$ 2.30 level, the European traveler would pay nearly the same for a week in Bahia or the Bahamas, and Cancun became roughly 50% more expensive than Bahia for the traveler departing from São Paulo.

As the dollar stays at this level or above, resort tourist flow trends should reverse (especially for properties in the northeast), and the virtuous Brazilian tourism development cycle should resume. 2009 will mark the beginning of this process, and occupancies should be coming back to the 50% level next year, on average. Even though Europeans will be less inclined to travel in 2009, Brazilians traveling inside the country (instead of going abroad), will more than compensate the reduction in foreign guests.

That makes it clear that, despite the global meltdown, hotels in Brazil will very likely have a 2009 better than 2008. Hotel (and apart-hotel) owners can expect (and should demand) higher income from their properties. And resorts must prepare to take advantage of current market conditions which are improving.

Diogo Canteras is the Managing Director of HVS São Paulo, Brazil, and Professor of Hotel Development in Fundação Getúlio Vargas.

e-mail: dcanteras@hvs.com

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