A Hotel Shortage in a Tourism Hot Spot

Saturday, May 28, 2011

Dear Reader,

Colleague Ronan McMahon has often written about the shortage of hotel rooms in Fortaleza. It's an interesting situation, and one that really hit home on a scouting trip this month.

Fortaleza is Brazil's #1 tourist destination. The city boasts a population of more than 3.5 million. Gleaming modern condo towers line the city's boardwalk. Huge new shopping malls offer designer goods. Shiny new SUVs fill the city's streets. But when it comes to hotels, you won't find a major chain or familiar brand.

In Fortaleza's boardwalk area, you have two major hotels to choose from. They both rate themselves as five star, but in any big US city they would only rate maybe a three. And they are over-priced. One quoted me 680 reals ($416) per night for a small, standard room during my trip. So why isn't there more competition?

I found out part of the answer from some of the biggest names in the hotel industry at this month's ADIT event in Fortaleza. (ADIT is the group that represents hotel and real estate developers in Brazil.) I listened to a panel discussion on what the hotel industry was planning in Brazil. The panelists represented Starwood hotels, the Four Seasons, and Vila Gale (a big Portuguese hotel group, already active in the Fortaleza area). The moderator was from the ministry of tourism. It made for a lively discussion.

The panel outlined the hurdles to international hotel groups coming into Brazil. Here are the main ones:

1. A lack of locally-available funding.
2. Land prices have risen in recent years, and it's harder to find a large enough parcel in either the city or coastal areas at a reasonable price.
3. Problems with infrastructure, particularly hub airports, which are currently operating at maximum capacity.
4. A strong currency, the real, which is good for the country but bad for foreign tourists.
5. Costs. Hoteliers mentioned the country's relatively heavy and complicated tax burden, and high cost of employees.

The panel also spoke about ideas that would help the hotel industry. These included:

1. Tax breaks/incentives for hotels.
2. Proper targeted campaigns to bring in more foreign visitors, promoting specific locations. Brazil currently only receives five million foreign tourists annually, compared to Mexico's 22 million.
3. A clear guideline on the permitting and approval process, with local permitting agencies obliged to provide an answer within a set timeframe.
4. A Ryanair Effect. Although Brazil has low-cost carriers, they have not slashed fares to the levels seen in Europe.
5. A FONATUR type body. In Mexico, FONATUR selects specific areas for development...puts in basic infrastructure...and supports hotel and residential developers in those areas. There is no such agency in Brazil.

The pressure for new hotel rooms in Brazil is high. In 2014, the Soccer World Cup comes to town...followed two years later by the Olympics. Today, northeast Brazil has 7,000 hotel rooms. By 2020, they aim to have 36,000. Everyone agrees that the country offers huge opportunities for tourism ventures. But from this panel discussion, it sounds as if there are still major problems to overcome before international hotel chains fully commit to Brazil.

Of course, every cloud has a silver lining. And in this case, the lack of hotel rooms (and suitable accommodation) spells opportunity. Rental units in Fortaleza, for example, can achieve excellent occupancy rates...and generate strong yields.

Margaret Summerfield

P.S. You can take advantage of Fortaleza's hotel shortage, with units close to the new boardwalk, and the site for South America's biggest aquarium. These new units are ready to furnish and rent. The start price is 193,939 reals ($118,981). The neighborhood is already a fun, lively one, with plenty of restaurants, cafes, and bars, and a newly-completed boardwalk. Once the aquarium is finished, and the final upgrades to the area in place, this will be the chic hot spot...for tourists and locals alike. Get a full information package from our local broker, Daniel Neves, here.

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Posted Under:

brazil, rental yield

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