By Hans Desai, HVS International
Though the more established destinations still hold their own, their “not so distant cousins” (Riviera Maya, Punta Mita and the Cabo Corridor) are showing up on the radar screen
The Riviera Maya, Punta Mita and the Cabo Corridor are currently three of the most popular locations of choice for new resort development in Mexico. These “emerging” markets represent the outer fringes of the better known locations of Cancun, Puerto Vallarta and Los Cabos.
Though the more established destinations still hold their own, their “not so distant cousins” (Riviera Maya, Punta Mita and the Cabo Corridor) are showing up on the radar screen. These newer locations are able to take advantage of existing airport facilities, area infrastructure as well as local and national marketing campaigns, once the exclusive domain of the formerly established destinations. In many cases, they offer a more dramatic and exclusive guest experience. This dynamic is changing the resort scene in Mexico and is creating a not so subtle paradigm shift in investment strategies and hotel positioning within the formerly established markets.
The following chart exhibits the top five Mexican destinations that U.S. incentive travel agents are booking according to a March 2004 article in the Reforma, Mexico’s leading daily newspaper. (We assume because these totals do not add up to 100% that several other locations comprise the difference).
The top three are probably not much of a surprise and it is has been apparent that Ixtapa-Zihjuatenejo is a growing area; however, the fact that the Riviera Maya shows up as a destination alone and apart from Cancun is noteworthy. The Riviera Maya replaced Acapulco as the fifth most popular destination for incentive travel agents booking Mexico and is gaining interest as more development and marketing of the area occurs. According to data supplied by the Fidicomiso de la Riviera Maya (the controlling governmental entity responsible for development in the region) in 1996 the area defined as the “Riviera Maya” had roundly 3,600 guestrooms. In 2004 it is expected that total room inventory will exceed 24,000. This area is expected to continue this pace in room inventory growth anticipating an additional 7,000 rooms within the next two years.
It’s also not surprising that the predominance of new hotels in these “emerging” markets is in the luxury category as land and construction costs within these exclusive locales warrants high-end development. Both Mandarin and Fairmont have announced new developments in the Riviera Maya with both projects expected to be completed in 2006. There has also been speculation that Four Seasons will enter this market as well.
The Punta Mita market is currently represented by only two major properties, the Four Seasons and the Wyndham Resort. However, development plans are underway for two new luxury hotels by 2006. The relationship between Punta Mita and Puerto Vallarta can best be described as mutually exclusive. Puerto Vallarta serves as a springboard (via the airport and ground transportation) for Punta Mita. Due to its remote location and exclusive nature, Punta Mita is not typically influenced by market conditions in Puerto Vallarta and only competes to a minor degree with one or two high-end hotels in the Puerto Vallarta market.
The “emerging market” dynamic is less pronounced in Los Cabos where in general, this entire market is “emerging” as it is much newer than either Puerto Vallarta or Cancun. The corridor between Cabo San Lucas and San Jose del Cabo continues to be the target of high-end development though several real estate representatives indicated that the East Cape (north and east of San Jose del Cabo and Todos Santos to the north of Los Cabos appear to be the next “new” development areas in the region.
Interestingly enough these “emerging” destinations relative to the upper echelon luxury segment are in most cases more competitive between themselves than with their respective better known neighbors. Most of the high-end hotels include in their competitive set at least one property in each of these respective newer markets. The Riviera Maya has several all-inclusive hotels which will compete with those offered in Cancun. Likewise though to a much lesser degree, Nuevo Vallarta (located between Puerto Vallarta and Punta Mita) has recently seen the introduction of a Grand Turismo “All Inclusive” which apparently has some impact on the Punta Mita market particularly in the lower seasons.
The established markets of Cancun, Puerto Vallarta and Los Cabos appear to be turning the corner from the down period of the past three years. The Secretary of Tourism (SECTUR) reported that for the first trimester of 2004 international tourist travel throughout Mexico increased 14.6% from the same period in 2003. This related to a 14% increase in tourist spending during this same period over 2003. Because the previously discussed “emerging” markets contain primarily higher end products, their general impact on the established neighbors has been somewhat limited, however, still noted. There has been some demand erosion in the formerly established markets’ high-end properties caused by new development in the “emerging” markets. This occurs primarily in the low season. The locational dynamic relative to the higher end hotel product is somewhat less pronounced in the Los Cabos market. The apparent strong performance of luxury hotels such as Esparanza, Las Ventanas and the One and Only (Palmilla) in various locations along the “Golden Corridor” between Cabo San Lucas and San Jose del Cabo indicate that development opportunities are category specific. In this case higher end luxury projects, assuming an attractive location within the corridor.
The emergence of these new markets combined with a less than stellar past three years of performance, has prompted some hotel owners in the established destinations of Cancun, Puerto Vallarta and Los Cabos to consider selling their assets providing acquisition opportunities in what had been previously hard to enter markets. Capital investment and positioning basics will need to be instituted in order to provide required investment returns; however, a critical element is capable management. The continual shifting hotel scene with competition coming, going and changing requires strong and unique management in order to keep the investors basis in their properties protected.
Cap rates from recent hotel sales have indicated that prospective buyers are seeing less overall risk. Recent sales of hotels in a few resort markets yielded cap rates between 11% and 13%. The largest resort transaction to date in 2004 was the sale of eight properties previously owned and operated by Grupo Sidek-Situr and disposed of by IPAB (Instituto Para la Proteccion de Ahorro Bancario). This portfolio contained hotels in Cancun, Cozumel, Puerto Vallarta, Ixtapa, Manzanillo, and Cabo San Lucas and was part of a negotiated settlement that was in litigation for three years. The entire portfolio was reportedly sold for U.S. $95 million. Due to the aforementioned circumstances of the sale, cap rates associated with this transaction most likely do not represent pure market conditions. At the time of this article the sale of two Camino Real hotels (Cancun and Puerto Vallarta) were due to close within 30 days. The reported price for both properties was U.S. $91 million yielding a per room price of roundly $126,500, higher than one would expect even for these properties in two attractive markets.
With new development or acquisition, Mexico is turning a corner with regards to risk levels. As discussed, general economic indicators are showing positive signs, capitalization rates are trending more favorably towards international investment, and there appears to be development opportunities in the luxury hotel category. Acquisition opportunities within the established resort markets of Cancun, Puerto Vallarta and Los Cabos will be primarily in the Mexico four and five-star (Mobil three-star) categories as repositioning strategies. Investors seeking these acquisition deals must realize the importance of solid and experienced management in order to provide the expertise to elevate from the pack and produce the expected investment returns.