Where to buy the next hotel condo?
Where indeed? All these high-pressure here today...gone tomorrow sales programs can be confusing. Which location? What size unit? What price range? 1/4 or the whole unit?
How do you do all the research required? One way is to align yourself with a trusted investment partner, someone who has experience in that market place and understand the risks involved. A company that has a track record of assisting clients in finding the right property for them by offering prudent counsel, and a company that at the same time is guiding developer clients to meet the market needs.
Several companies specialize in finding those destinations that have that certain "je ne sais quoi!" except we do know why!
The market that many global investors are currently focusing on is Latin America, and for good reason. The real estate markets in the region vary from emerging to mature, with areas like Cabo san Lucas offering high quality, high service properties for high dollar values and low risk, whilst areas like Nicaragua and Panama offer emerging opportunities of arguably higher risk but with tremendous upside.
One of the positive aspects of many of these Latin American destinations is that the tourist market is emerging at the same time as the real estate market. Where is the benefit in that you ask? Well it comes in the form of rental returns over the next several years. In mature markets in Canada and the US where the "here today gone tomorrow" condo opportunity is available on every ski hill and beach resort, what the end consumer does not think about in most instances is the impact of this convenient and available source of financing to the developer.
In many instances, banks are reluctant to finance new hotel development. If the bank is reluctant, think why? It is because the returns on a new hotel cannot service the typical debt ratio. Wait a minute... how were you sold that condo.... Positive cash flow from day one said the developer, 80% occupancy in the second year said the rental management rep, great ROI, think again, the bank is reluctant, because they did their research.
The obvious weakness in this scenario, which is common in all mature resort destinations, is that hotel (hotel condo) units are being "over built" because of this relatively new access to capital (other peoples money) from people who are more tolerant of lower rental returns because of a blend of personal use and rental. As a region/resort is overbuilt, the obvious flipside of the equation is that the annual average occupancy rate decreases, this has a corresponding and direct relationship to a lowering of average daily rates (ADR) which means overall less yield (income) to the financier and owner of the unit... you!
Given this situation, how can you avoid the pit falls? One way is to research the unified marketing efforts of the region since it usually takes quite some time to develop an agency that can form partnerships and relationships required to market a region cooperatively with all tourism suppliers. Destination tourism agencies take many years to form, often are under funded and rarely have a unified approach to marketing leading to fractured and ineffective regional marketing campaigns.
The other option is to look at emerging tourism destinations where development activity can provide much needed resort accommodation virtually guaranteeing the owner good rental cash flow for a number of years until the region starts to build out. Our very own Wayne Gretzky said that he became so good at hockey because "he skated to where the puck was going to be!" At build out, there is usually a very healthy capital appreciation that can be liquidated in a rather active market place. So folks it is time to strap on your skates and learn from the master himself!
By:Mark Jennings-Bates
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