Caribbean Resort Investment - The way forward?

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. May 20, 2010

May 19, 2010 - This month's annual Caribbean Hotel and Tourism Investment Conference saw straight talking from several experienced industry professionals about the scale of the challenge to improve profitability in the region's stressed resort industry. 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. The current situation represents a major threat to continued inward resort investment for the region, in the opinion of Robert MacLellan, Managing Director of MacLellan & Associates, the largest Caribbean based hospitality consultancy.

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 said, “Over 50% of the world's cruise fleet operates in the Caribbean during the hotel industry's high season, then most ships move to high season elsewhere in the world. Furthermore, cruise ships today are intently focused on maximising passenger discretionary spend - currently estimated at around 80% onboard, 20% onshore spend - and they operate in a virtual 'no tax' regime, often with government subsidized shipbuilding costs of around US$250,000 per cabin.” He went on to state that, unlike Alaska, Caribbean governments to date have failed to negotiate with the cruise lines for appropriately high levels of port taxes. Arguably, these taxes should adequately reflect the high levels of environmental impact from the increasingly larger, more profitable, ships and the consequential public sector investment requirement for deep water berths on the islands.

On the other hand, 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 forecast 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. MacLellan stated, “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.”

Robert MacLellan is a Fellow of the Institute of Hospitality and a member of the International Society of Hospitality Consultants - an elite invitation-only group of specialists world-wide. He has a Masters Degree in International Hotel Management from University of Surrey, where he majored in hotel design and development. In a diverse 35 year career in the hospitality industry, MacLellan gained his operations experience with major international hotel chains and cruise lines, working in UK, Spain, the Caribbean, North and South America and the Middle East. He worked for consultancy practices in Florida and London prior to holding three positions at Vice President and Managing Director level in London based property and hospitality companies. MacLellan is a regular speaker at regional conferences and is often quoted in hospitality industry media.

MacLellan & Associates is a specialist consultancy and valuations practice, founded in 1997, which serves the hospitality, tourism and leisure sectors in the Caribbean. The company's consultants are based in St Lucia, Miami, St Maarten, Trinidad, Antigua and London.