Editor’s note: Quotes in this story were derived from a Mexico Hotel & Tourism Investment Conference panel that was conducted in Spanish and was translated by event staffers in real time at the event.
MEXICO CITY—The Mexican hotel industry is maturing, according to owners in the country.
Speaking during the “Capital markets overview” panel at the 2018 Mexico Hotel & Tourism Investment Conference, panelists noted the country has plenty of opportunity for investors.
1. REITs (or FIBRAs) are still establishing their place
FIBRAs, which are the Mexican equivalent of real estate investment trusts, are becoming more prominent as owners in the hotel industry, but two FIBRA executives on the panel noted the investment community still needs to do some work to understand what they are.
Fernando Rocha, director of acquisitions and development for Fibra Inn, said real estate investors in Mexico for the most part aren’t in tune with the operational differences between hotels and other real estate classes.
“Those who are not part of the daily business may have trouble understanding the drivers,” he said. “So, I believe it’s part of our task to explain the asset class.”
Guillermo Bravo, head of corporate development and investor relations for FibraHotel, noted FIBRAs were created only within the last decade and are growing quickly.
“Today it’s a 5-year-old kid, throwing tantrums and being erratic,” he said. “We have good experiences, bad experiences and regular experiences; such is life, but the sector is becoming more mature.”
2. Investor sentiment needs to catch up with value
Perhaps the largest issue facing FIBRAs at the moment, according to Bravo and Rocha, is investors tend to undervalue their stock in comparison to the value of their owned assets.
“The reality is the markets haven’t recognized the value or what we’ve generated in terms of profits and growth,” Bravo said.
Rocha said FIBRA executives, at least for the time being, have to learn to live with the discrepancy.
“Like many FIBRAs, we see a discount against the real value of our assets,” he said. “That’s a condition of the market. We might not agree with it, but it’s the reality.”
3. Currency conversions are meaningful
An important consideration for Mexico hoteliers is whether to operate or hold cash in U.S. dollars or Mexican pesos, panelists said.
Rocha noted there is risk in either proposition.
“At the end of the day, whether you choose dollars or pesos, which are dragging in impact, you have an exchange rate risk due to the volatility you’ve seen in the last year,” he said. “It’s an uncertain environment, and interest rates have been increasing constantly. Our strategy has basically been to keep ourselves in pesos.”
He added it’s impossible for a hotel company to work exclusively in one currency, given the nature of travel.
“In a hotel, you’re charging with a card in pesos,” he said. “But you have corporate rates rated in dollars.”
Marín Maydón, managing partner at BPBI, noted a devalued peso can work to the benefit of Mexico’s hotels and are more impactful than some things hoteliers pay a lot of attention to—like the country’s ongoing presidential election.
“Resorts depend on 90% to 95% of customers coming from the U.S., and they don’t care who’s the president in Mexico as long as there’s not a shooting at their hotel,” he said. “What’s attractive with devaluation is margins actually rise.”
4. Investment in the country is growing
Some higher-end properties in top markets in Mexico are already fetching large per-key prices on the market, panelists said.
Maydón said luxury properties in particular are attractive investment targets.
“In Mexico, sections of the luxury sectors have reached over $1 million per room, in Los Cabos or Riviera Maya,” he said. “It’s impressive really, because you usually expect those figures in New York, Paris or certain European markets, not Mexico.”
5. Politics are affecting deals pace
Panelists said the presidential election (along with elections for various other offices in the country) have created a level of uncertainty in Mexico, and that seems to be causing some investors to tap the brakes at least for the near term. As a result, the pace of deals in the country is expected to slow.
“I believe the 2018 elections present an unavoidable pause,” Maydón said.
The uncertainty, along with interest in U.S. investment, is drawing some international capital away from Mexican hotels.
“Today we see how attractive the U.S. is to investors,” he said. “This stresses the Mexican market.”
Efraín López, CFO of Extended Suites, said he sees the bid-ask gap growing.
“That gap has probably been enlarged recently,” he said.
But the election is a short-term issue, and owners on the panel seemed to agree that the long-term prospects for Mexico’s hotel industry are on the upswing, and opportunistic investors might be able to realize strong growth in the country.
“There’s a disconnect (in valuations), and it makes no sense,” Bravo said. “But someone will make a lot of money. I’m sure of that.”