Hotels: An Olympian effort may be required

The rather drab Sheraton hotel in Rio de Janeiro seems to epitomise some of the particular difficulties facing hotel chains in Brazil.

As advertised in the blurb, it is the only beachfront resort in the city, sitting by a quiet stretch of white sand. But although renovated, it has a functional look and as you lift your eyes, you stare right at one of Rio’s notorious favelas, draped menacingly over the hill above.

International hotel chains proclaim bags of enthusiasm about investing in Brazil, citing the large domestic market and the new spotlight on the country thanks to the 2014 World Cup and 2016 Olympic Games.

On the ground, with the notable exception of France’s Accor, they have not made great inroads.

The market is hard to ignore. The size of the country and its economy puts it high on the list of desirable investment locations for hotel chains, says Alvaro Diago, head of Latin America for InterContinental Hotels Group (IHG).

Moreover, Brazil had a much better than expected 2008, beating gloomy predictions, partly helped by a stronger currency, adds Ricardo Mader, executive vice-president at Jones Lang LaSalle Hotels.

He expects the top end to suffer this year, as overseas clients cut trips to Brazil and as locals forgo events and conferences, but he says hotels in the two- to four-star range are stable and may even be able to increase profits this year.

The market is also ripe for consolidation, dominated as it is by hundreds of family hotels, many of which are sadly run down. As Brazilians become more brand-aware, they will look for the reassurance of a well-known name, Mr Mader says.

Despite the positive overall picture, Mr Diago’s enthusiasm wanes when it comes to the nitty-gritty of investments. The Brazilian government is parsimonious with incentives: whereas Colombia treats capital expenditure on renovations as tax-deductible, Brazil does not.

Local rules compound the difficulties. The state of Rio makes investments through condominium structures unnecessarily complicated, he says. Large projects are uncertain in a market where historically the currency has see-sawed.

That means that it is often not worth making the huge investments necessary to upgrade a property, says Mr Diago. Moreover, rates and occupancy levels have not been stellar, with the latter rarely touching 70 per cent.

“During the week, properties are full. But when you get to the weekend, you could hang out a sign saying ‘free rooms’ and people still wouldn’t check in,” quips Mr Diago. He sees the most attractive sector as city hotels near bars and restaurants, which would allow the hotel to skimp on services.

Although mid-range offerings have fared well, the recession has hit the top end of the market hard, forcing operators to rethink investment plans.

Invest Tur, which joined the stock exchange in 2007, raising R$840m (US$481m), had ambitious plans for a slew of luxury resorts along the relatively undeveloped coastline. Today, Invest Tur is much more selective about which of the 19 mooted projects it will launch, notes Carlos Guimarães, co-chairman of the new entity.

The company has rewritten its business plan, scaling back the number of expected overseas visitors and gearing its business to domestic holiday-makers. It will now emphasise resort hotspots, because wealthy locals tend to focus on fashionable places where the in-crowd stays, says Mr Guimarães.

Still, Mr Guimarães, a former banker, remains optimistic. He had his epiphany on a trip to the Dominican Republic when he realised that Brazil’s beaches were just as beautiful, and that his homeland offered a vibrant city, music and cultural life that few Caribbean resorts can match.

Brazil’s 7,000km long coast has hardly been exploited and prices of land remain well below those of more mature markets in the Caribbean and Mexico, he notes.

As the global economy recuperates, chains are bound to dust off plans for Brazil. The accommodation scene in Rio is the focus of attention, thanks to the Olympics, with a test run two years before when the city will be one of the 12 hosts of the football World Cup.

Some say the two events may lead to a glut of hotels, although Mr Mader dismisses that possibility.

He points out that developers are focusing on Brazil’s huge home building programme, which recently got a shot in the arm from the government. However, the sector has shown little willingness to focus on hotels, limiting the number that will be built.

The challenge is not only to build new properties, but to update much of the existing infrastructure, which is very frayed. The government needs to help Rio recapture its heyday of glamour, says Mr Diago wistfully. The days when Ginger Rogers and Fred Astaire starred in the musical Flying Down to Rio.

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