Regional Investors Shy About Caribbean Hospitality

Despite a slight rebound in the region’s tourism business, most investors are still shy about financing hospitality projects in the Caribbean. A new KPMG study introduced at last week’s Caribbean Hotel & Tourism Investment Conference in Jamaica shows only 36% of lenders in the region are optimistic for the Caribbean tourism industry over the next 12 months.

“Even though there is a boatload of risk [to invest in the region], there still exists cautious optimism among some lenders,” said Raymond Campbell, a KPMG partner based in Jamaica. Since the survey only included respondents from the region, it may have understated the full extent of lender interest in the Caribbean’s hospitality industry. On the same panel, a representative of the Chinese government outlined his country’s broad commitment to finance hotel and other tourism and infrastructure projects in the area.

According to the KPMG study, many traditional lenders to Caribbean tourism have responded to a perceived increase in risk by tightening terms on loans and lending only to low-risk borrowers. Branding and experience are also key.

KPMG Partner Raymond Campbell shared the results of his firm’s lender survey with the CHITC audience.

“A strong operator and hotel brand is seen as a prerequisite in order to survive and, in some instances, thrive within the increasingly competitive market, where hotel properties are faced with operating cost pressures,” said Campbell, who noted that most financing activity is focusing on existing properties and established operations rather than new-build projects. Thirty percent of respondents said they focus solely on existing properties. Over the next 12 months, 41% of financing from these lenders will go to existing projects.

In general, those surveyed said they’re requiring borrowers to take additional risk in their projects by lowering loan-to-value ratios and increasing debt-coverage ratios. As a result, the lenders surveyed ranked low leverage as the key characteristic of a successful project. It was cited as the number-one success factor by one-third of respondents. The presence of a global brand in the project was the critical characteristic mentioned next most often.

While the Caribbean has had its share of regional issues in the past several years (a heightened perception of crime problems, additional tourist taxation and stagnation in visitor arrivals to some countries), they paled compared to the effect the U.S. and global recession had on business. Nearly three-fourths of those surveyed said improvements in the U.S. and global economies will be a key indicator in a turnaround in the Caribbean tourism industry.

The lenders surveyed also offered advice to borrowers in the region saddled with distressed properties: control costs and manage liquidity, which was named by 22% of lenders. They also suggested operators develop “effective marketing campaigns and creative sales strategies.” And, again, they mentioned the value of working with a global brand to overcome distressed situations.

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