As the real estate market recovers, the mixed-use resort model provides the developer with a useful combination of investment risk to mitigate the region’s challenges, and there are many successful examples in the Caribbean. With a few updates and modifications, the model still represents a sound way forward.
This is the opinion of Robert MacLellan, Managing Drector of MacLellan&Associates, the largest Caribbean-based hospitality consultancy.
According to MacLellan who speaks in an interview following the Caribbean largest tourism-based conference, “as the real estate market recovers, the mixed-use resort model provides the developer with a useful combination of investment risk to mitigate the region’s challenges, and there are many successful examples in the Caribbean. With a few updates and modifications, the model still represents a sound way forward.”
In some circles, there is still denial that the industry was already experiencing strategic difficulties, prior to the recent world recession, and there are still very few signs of urgency in the public and private sectors coming together to progress key issues.
In explaining his view, MacLellan said: “At the conference we heard again from some island governments their desire for new large-scale conventional hotels, as opposed to condo or villa resorts, and we heard from certain banks their doubts about funding mixed-use resorts. Here is the reality. Only governments have built large new hotels in the Eastern Caribbean in recent years, and the new Spanish chain hotels in Jamaica are currently achieving low average room rates, which might imply a twenty-year return on investment for these large scale assets, while they negatively impact Jamaica’s home-grown hotel groups. Savvy private equity is extremely cautious about investing in the ultimate ‘fixed asset’ – a large new-build conventional hotel on an island, totally dependent on good airlift, and with a highly seasonal tourism market.”
The risks for such an investment in the Caribbean are multi-faceted in MacLellan’s opinion. He views the current situation as “a perfect storm” – depressed room rates, high on-island costs, a fragile airline industry, an inability in some islands to achieve world-class standards of guest service, and increasing competition in an ever-shrinking world from destinations with fresher and more focused product. However, he felt that the “elephant in the room” at this year’s investment conference was again the cruise line industry and the brutal competition it represents for existing hotels and new investment.
MacLellan observed that government investment incentives for hotels on most islands are about half as generous as those in Costa Rica and Colombia, while island build costs for 4/5 star hotels are very high – up to US$500,000 per room. He said: “The hotel industry is the major tax contributor on virtually every island in the region and, while I fully understand the financial pressures on most governments today, some of that tax burden could be shifted to the cruise ships and would benefit genuine long-term resort investors on-island. For the foreseeable future, there is no replacement for the Caribbean archipelago for winter cruise itineraries – that is, a range of alternative ports, offering sufficient attractions, with spare handling capacity and within cruising range of the lines’ principal feeder markets. The cruise lines can afford to pay more and, with tough negotiations, they will pay more.”
Returning to the subject of best way forward for on-island resort investment, MacLellan observed that there had been some high-profile Caribbean projects in the last few years, where the mixed-use resort model had failed. In these cases, this was primarily due to some combination of overly-ambitious product pricing, unrealistic financing structures, ineffective project management, overly-greedy hotel operator fees, and a lack of regional knowledge. With the right level of government understanding and support, he forecasts that mixed-use resorts – providing value-for-money vacation homes to a world-wide market and offering a modest return on investment from rentals and subsequent capital gains – would still form a vital component in future Caribbean resort room inventory.
