Although the recent prospects for Latin America�s economies seem dubious, there are signs of recovery and opportunity on the horizon.
 

The global economic deceleration, including the economies of Latin America, has been one of the top news headlines of 2001. Frequently, there are examples of economic struggle such as the Argentine government�s battle to sell treasury
bills to a captive domestic debt market or the devaluation of Brazil�s currency, the real, which has lost more than one-fifth of its value since the beginning of the year, despite interest rate hikes. Chile�s normally strong peso has also slid against the dollar. Even Mexico�s economy is slowing, with its exports being impacted by shrinking U.S. demand. However, many predict a Latin American recovery by the beginning of 2003, led by the global and U.S. economic recovery. The predicted U.S. rebound, with expected growth of 1.6% in 2001 and close to 2.9% in 2002, should especially benefit countries exposed to the international business cycle, such as Mexico.

The global recovery should also coincide with the completion of domestic policy tightening. By 2002/2003, most Latin American governments are anticipated to have tight domestic policies in place, bringing current account deficits well below the long-term flows. Excess capital flows in relation to current account deficits should make for easier international financial conditions and sustained decline in interest rates, which could spur domestic demand.

An Argentine rally and reduced pressure on capital inflows could also contribute to the Latin American recovery. Although the recovery is anticipated to be gradual, it might diminish concerns about debt-default risk and consequently ease access to international capital markets, reducing external borrowing costs. However, the recovery will likely be uneven across countries. In particular, oil exporters such as Colombia and Venezuela could benefit less from these factors, as they might be impacted by the projected drop in oil prices. Countries with a strong tourism industry, namely Argentina, Brazil and Mexico, should in turn recover at a swifter pace.

---

The Latin American hotel market cannot be summarized in a blanket statement; all optimism or pessimism is localized. The above table provides an overview of economic and financial market indicators for Latin America�s 10 largest economies. We then focus on four of the region�s most prominent countries in terms of investment potential: Argentina, Brazil, Chile and Mexico; each of the countries�
hotel supply/demand dynamics and investment potential will be discussed. 

Argentina

Argentina, the second largest economy in South America after Brazil, is entering its third and most acute recession year. Confidence is at its lowest point as international lenders are pondering Argentina�s abilit y to repay its sovereign
debt. This lack of confidence is apparent with the difficulty Argentina has encountered in selling its government bonds, carrying rates above 16% for short- and mid-term bonds. Additionally, unemployment is at a record high of 15%
and growing.

Recently, Domingo Cavallo, the newly appointed Economy Minister, has been given a full range of powers to turn around the economy. He started by convincing the international lending community to swap short-term debt obligations for longer-term expirations, easing the Argentine financing burden by $16 billion for each of the next five years.

He also created a new parity for the Argentine peso for import/export transactions, basically devaluating the peso for trade purposes by approximately 8%. The long-term goal of the Economy Minister is to slowly abandon the U.S. dollar / 
peso parity for a currency basket comprised of the euro and U.S. dollar. This policy may result in a peso devaluation, making Argentine products more competitive in international markets and boosting GDP growth.

On the hotel/commercial real estate investment front, transactions are practically non-existent. Bond yields have jumped from approximately 13% to more than 16% in the last two months limiting interest in commercial real estate, which has traditionally provided stabilized yields of between 12% and 16% (depending on asset class and position in the market). Most local real estate owners are not ready to sell in a depressed market at higher cap rates, and as a result, are holding onto their assets until the market improves. The buyers, on the other hand, have lit tle incentive to acquire assets at returns below long-term bond yields. Furthermore, debt and equity remain scarce, although some of the foreign players who are taking a long-term view on the region are beginning to conservatively re-enter the market, such as GE Capital and Prudential.

The future of Argentina lies ultimately in its ability to extract itself out of the current recession. Two schools of thought exist regarding this speculation:

a) Argentina has hit the bottom of its economic crisis and the next six to 12 months should show signs of recovery, making it an ideal time to invest in Argentina at the bottom of the cycle.

b) The worst is yet to come, and Argentina is still a long way from the bot tom. The economic crisis will widen in the region, taking its toll on Brazil and Chile, dragging South America via contagion into recession with little help from the northern hemisphere as it deals with its own recession fears. At this point, it is too soon to gauge as the United States is still sending mixed signals with its own slowdown.

Buenos Aires Area Highlights

• With twelve million people, Buenos Aires is the second largest metropolitan area in South America after Sao Paulo.
• It is a well renowned international destination with total visitor volume leading other cities in South America.
• Foreign companies invested more than $ 89 billion in the city between 1994 and 2000.
• Buenos Aires is considered the most cosmopoli tan cit y in South America; its essence is more European than Latin American.
• The city offers a modern infrastructure, a well-educated labor pool and easy access to Brazil and Chile.

Buenos Aires contains approximately 8,200 hotel rooms. Following are the additions to the Buenos Aires lodging supply within the last two years, which constitute a 19.3% increase.
 
 

Our opinion is that Argentina has hit the bot tom of the cycle, and although there are very few hotels offered for sale on the market, medium- and long-term investors should have Argentina on their radar screen.
 
 

Brazil

Brazil is the eighth largest economy in the world and the largest economy in South America, dwarfing all other countries in the region. Its GDP is larger than Denmark, Belgium and the Netherlands combined. In 1999, a Latin America-based Citibank investment banking official commented on the crisis of the moment: �Brazil�s reaction to this crisis has been applauded by international investors by virtue of the controlled inflation rate, smaller-than-expected GDP decline, relatively calm foreign exchange and declining interest rates. The fiscal discipline the government has been showing, along with IMF funding, should continue to restore market confidence in Brazil.�

Two years later this optimistic view has been somewhat tarnished. The latest survey from the National Confederation of Industry shows that business confidence has slipped significantly in the first quarter of 2001, from 65 to 60. The reason lies with the contagious crisis in Argentina, Brazil�s largest trading partner, the electrical
energy crisis and some recent corruption scandals casting a shadow over economic recovery.

This uncertainty has put pressure on the real, which has slipped more than 20% since the beginning of the year. But not all is gloomy. GDP is still expected to rebound to 3.6% in 2002. Inflation is still under control with a projected rate of 5.3% by year-end 2001, up from previous forecasts due to the higher cost of energy. It should drop down below 4% in 2002, assuming that the energy crisis is successfully managed.

Sao Paulo Area Highlights

• Sao Paulo generates 32% of Brazil�s GDP.
• It is considered the commercial and cultural center of Brazil.
• Sao Paolo is the second largest city in Latin America, after Mexico City.
• $16 billion of direct foreign investments were injected into its economy in 2001.
• It has a significant tourism-related infrastructure.
• 1,400,000 foreign tourists visit annually.

Sao Paulo is mainly a business destination with some leisure demand. In recent years, occupancy and ADR have slipped due to a construction boom. This situation will most likely worsen as supply is expected to surge in the next 20 to 36 months. Fif t y percent of the projects are condo hotels, a capi tal structure popular among Brazilian developers.

Due to the lack of capital availability, hotel chains have chosen two ways to expand their brands in Brazil. European hotel chains, less restricted than U.S. chains
that are encumbered by strict SEC regulations, have taken the condo hotel route, associating themselves with local developers. For example, in 2000, Accor built an
Ibis propert y that was sold in a mere 48 hours.

Executives at two major, international brands decided to build hotels with their own funds and are spending $70 million and $100 million respectively to build hotels in Rio de Janeiro and Sao Paulo. Although many management companies are reluctant to own or invest in real estate, sometimes it is impossible for these companies to complete hotels unless they provide some type of financing.
 

Sao Paulo has a total inventory of nearly 16,000 rooms. The following pipeline room supply represents a 25.6% increase.
 

Sao Paulo, the financial epicenter of Brazil, is a vibrant emerging market . Although there is some concern about the supply coming on line in the next 24 months, this supply should be absorbed by the domestic demand in the long run. Hotel companies should focus on the limited-service sector in order to capture Brazilian market share. This is a new development as in the past there was virtually no mid-scale product in this sector.
 

Chile

�Investment grade� in South America? In addition to Mexico, Chile has the enviable reputation as being one of the investment grade economies in Latin America. According to Standard & Poor�s and Moody�s Investors the country has a risk rating of A- in part due to the transparency of its regulations and the predictability of its market decisions. Chile�s A- investment rating is the highest in Latin America, a fact that has permitted Chilean firms to finance investments through credits, collections of bonds and shares in both local and international markets.

Moreover, the perception of country risk has continued to improve, moving Chile further away from the rest of the countries in South America. Contributing factors include the minor costs of financing and the best spreads obtained from the collection of its bonds, both public and private. As a result, Chile remains one of the most dynamic and promising markets in Latin America.

At present, Chile occupies the 15th place in the world in terms of international competitiveness, according to the World Economic Forum. The country�s prudent economic policy has also insured a long-term stability that cannot be
found in other Latin American countries.

In spite of the Asian crisis and its repercussions on other countries, especially in emerging markets, Chile at tained vigorous growth though the 90s (averaging 7.3% per annum). Forecasts for GDP growth in 2001 and 2002 are 4.0% and 5.7%, respectively. The slowing in growth is in part due to the general slowing in the global
economy, along with the uncertainty of the Argentine economy and the recent currency devaluation of South America�s largest economy, Brazil.

Several significant changes to foreign investment laws occurred in 2000/2001, which
have improved capital flows. First, foreign investors are no longer obligated to maintain their capital in the local market for at least one year. Secondly, and more importantly, the 15% capital gains tax levied on foreign and domestic investors trading in Chilean stocks has been eliminated.

Santiago Area Highlights

� Santiago offers strong international air access from all major regions.
� Chile has an investment grade risk rating.
� Strong underlying GDP growth is forecasted.
� There is limited new hotel supply in the pipeline (only two projects).
� Per the World Economic Forum, Chile ranks 15th place in the world in terms of international competitiveness (per the World Economic Forum)

Since 1999, Santiago has experienced a large increase in room stock particuraly in the four- to five-star market. Much of the new supply was initiated on the back of the growing GDP, increasing business confidence and booming real estate markets pre-1999. The upswing caused overconfidence among developers resulting in a 25%
increase in new hotel stock during the past few years bringing the city�s room inventory to 3,900.
 
 

A slowing in the global economy, the languishing recession in Argentina and increasing new supply in the city has caused a dramatic softening in the Santiago hotel market. The market is reliant on increases in demand from the corporate sector to boost overall performance. This is likely to require a short-term recovery period where the current new supply can be effectively absorbed. With good prospects for GDP growth and the continued sound investment-grade ranking, underlying business confidence and opportunities should begin to facilitate a recovery in hotel profitability.

Santiago continues to enjoy strong air access from all major markets. These include: Aerolineas Argentinas, Aeromexico, Air France, American Airlines, Delta, Iberia, Lacas (Costa Rica), Lloyd Aero Boliviano, Lufthansa, Qantas, Swiss Air, TAM (Paraguay), Tame (Ecuador), United and Varig. These airlines have allowed Santiago to remain accessible from all the major regions including the USA, Asia Pacific and Europe.
 
 

Mexico

As expected, the Mexican economy slowed sharply in Q1 2001 under pressure from a deteri-orating external environment . The global economic slowdown, particularly in the United States (Mexico�s main trading partner), and
lower oil prices have both hit Mexican export revenues hard. This has had a resounding effect throughout the economy. GDP growth fell to a two-year low in Q1 2001, while industrial activity contracted in February, March and April. On the
other hand, domestic demand remains surprisingly dynamic, although there are indications that it is starting to ease up slightly. Looking beyond the short-term, Mexico�s recovery will pick up pace in 2002 as U.S. demand for Mexican exports returns. GDP is expected to grow by 2.7% in 2001 and by 4.5% in 2002.

Mexico City Area Highlights

• Mexico City is the largest metropolis in the world with a population of close to 20 million.
• The city serves as headquarters for most multinational corporations operating in Mexico.
• Mexico City constitutes the major center of economic, cultural and political activity in the country.
• It contains a significant tourism infrastructure.

Demand growth in Mexico City is expected to dip in 2001, while ADRs are also expected to decline slightly due to the economic slowdown within Mexico and the United States. Few sites are available for new hotel development, which limits new supply. Some market segments such as extended-stay and the corporate mid-market niche are under-served, representing good opportunities for future development.
 

Mexico City has a hotel inventory of 47,000 rooms, 10% of which are rated as luxury/upscale hotels.
 

Summary

Until the 1990s, a period when market-economy policies and democratic ruling started to take center stage, Latin America was an unappealing economic market . Today, despi te a decade of market reforms, Latin America remains dependent on foreign capital. However, we expect to see a rollout of fresh reforms, more transparency, less corruption and more accountability in the next five years. 

Although growth will certainly slow in the next 12 months, we believe that the region will recover by 2003. This recovery will create opportunities for mid- to long-term investors, providing sufficient yields to justify a fund allocation to Latin America.
 

Jones Lang LaSalle Hotels is the largest and most qualified specialist hotel investment banking services group in the world.

Through our 18 dedicated offices and the global Jones Lang LaSalle network of 6,000 professional across more than 100 key markets on five continents, we are able to provide clients with value added investment opportunities and advice. Our recent track record for the last t wo years alone included the sale of 13,994 hotel rooms to the value of US$1.4 billion in 75 cities and advisory expertise to the value of US$32.6 billion across 173,021 rooms and 343 cities. The majority of active investors worldwide have bought or sold hotel and tourism real estate through Jones Lang LaSalle Hotels, taking advantage of our extensive professional relationship and innovative strategies. Our experience and success also extends to the other services, including mergers & acquisitions, valuation & appraisal, asset man-agement, strategic planning, operator assessment & selection, financial advice & capital raising, and industry research.

Disclaimer Copyright � All material in this publication is the property of Jones Lang LaSalle Hotels (NSW) Pty. Ltd. (ABN 65 075 217 462). No part of this publication may be reproduced or copied wi thout wri t ten permission. The information in this publication should be regarded solely as a general guide. While care has been taken in its preparation, no representation is made nor responsibility accepted for the accuracy of the whole or any part. This publication is not part of any contract and parties seeking further details should contact the author.