June 19, 2019 Don Goodson 0 Comments

Summary

  • The Caribbean is seeing a surge in tourism arrivals and a strong hotel development pipeline.
  • Conversion projects present a prime opportunity in the Caribbean for investors
  • Having a partner with an established reputation, like ALG, is key for moving projects forward in the region

 

The Caribbean is ripe with opportunity for hotel development after a steady recovery following the 2017 hurricane season, with banks, private equity firms and non-bank lenders all showing confidence in the market. This has been a consistent theme during several recent industry conferences delving into the region’s future potential, starting with last year’s Caribbean Hotel Investment Conference & Operations Summit (CHICOS).

 

I personally moderated a panel at the Caribbean Hotel & Resort Investment Summit (CHRIS) on Caribbean capital and private equity this year where panelists shared a highly positive outlook for 2019 and beyond.

 

With that said, private equity firms are seeing strong competition in the Caribbean for assets, with REITs, family offices and high-net-worth individuals all vying for limited investment opportunities and subsequent yields. Financing remains challenging, especially for investors attempting to break into the market, making having the right partner, like Apple Leisure Group (ALG), from the get-go crucial for success.

 

A Region Bouncing Back

The Caribbean welcomed 29.2 million total visitors last year according to the Caribbean Tourism Organization, with even the islands most impacted by the 2017 hurricanes seeing a surge in the last four months of 2018. Americans flocked to the Caribbean, representing a 28% increase in arrivals.

 

This influx was motivated in part by increased airlift, comprised of both more routes to certain destinations as well as the reestablishment of air connectivity to regional hubs such as Princess Juliana Airport in St. Martin and San Juan Airport in Puerto Rico, which had been impacted by the hurricanes.

 

On the development side, STR reports there are nearly 100 projects in the pipeline, totaling 22,000 rooms, all expected to open within the next three to five years. While there was a minimal 1.1% decline in occupancy in the region, the Caribbean still saw record-breaking average daily rate (ADR) and a slight increase in revenue per available room (RevPAR). All signs point to a full recovery for the Caribbean.

 

Finding the Opportunity

 

There continues to be ample room for growth in the Caribbean, but the key, as always, is location. But it’s not only about the destination – is there connectivity allowing visitors to get there? An owner may have the most beautiful piece of beachfront land, but if he or she cannot get guests there, that is a problem.

 

Conversion projects also remain more favorable when compared to new construction for a variety of reasons. First, there are many resorts throughout the region that are approaching the thirty- or forty-year mark from opening that are in need of significant capital investments. These properties offer prime beachfront locations and proximity to local airports.

 

Second, remember that investing in the Caribbean is a long-term play. Hold rates on resorts can range from 7 to 10 years, much longer than the average in the U.S., with no clear exit. Also, consider the length of time it can take for a new construction project to come to fruition. There are many factors that can impact this, ranging from lack of labor to local politics to the risk that comes with being in a hurricane-prone region.

 

During a panel on debt at CHRIS, speakers noted lenders are shying away from aspirational projects as new construction can take up to 10 years, while securing and repositioning an existing asset cuts lead times and risk significantly.

 

Third, while there is interest from a variety of investors in the Caribbean in search of yield, institutional lenders are still limited. Investors will not see the same favorable terms as they would in the U.S. and there is a lack of affordable local lending. For new construction, lenders are looking for an average 55% loan-to-cost ratio according to the same panel at CHRIS, making it even more important to work with partners in the market that can help identify the right investment opportunities.

 

The Right Partner

ALG has long been a major player in the Caribbean, with strong connections to local lenders that allow us to assist investors and help bring their projects to fruition. Lenders are looking for projects where the sponsor has done their due diligence, possesses an established reputation, and track record of success, all which ALG brings to the table for investors and developers as an experienced brand manager and operator.

 

Furthermore, our market awareness allows us to identify conversion opportunities well in advance of competitors, which in turn allows us to work with owners on their repositioning strategy to ensure they see favorable returns.

 

Looking to invest in a resort in the Caribbean? Let ALG’s team of experts be your guide. Contact [email protected] to learn more.

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Sourcing Capital in the Caribbean was last modified: June 19th, 2019 by Don Goodson