With tourism increasing rapidly in Brazil owed to impending events such as the World Cup 2014, the Olympics 2016 as well as the vast natural beauty and rise in business travel – the demand for hotels looks certain to remain high for the foreseeable future.  Yet under such a seemingly interesting investment climate, it often comes as some surprise that the sector is not as consolidated as the other Brazilian property funds that we have previously outlined in this blog.

According to Rodrigo Machado, partner at XP Realty speaking to the Exame magazine, there are a number of additional due diligence considerations that need to be taken on by an investor: “hotels have operational implications – different to what occurs in the real estate market,” he commented.  Machado refers to the fact that residential and commercial real estate projects have more of a practiced and inherent history (such as clearer patterns of price movements).  Hotels also have a number of separate questions and variables related to management, logistics and other internalised factors that may well influence their investment potential.

It is, however, believed that the Brazilian hotel fund investment industry – despite being in its infant stages – has a healthy future ahead.  Commenting in the same magazine, Diogo Canteras director-president of Hotel Invest comments that the Hotel Max-Invest saw a return of 23.66 from January to October of 2011.  However, the Continental Square Faria Lima São Paulo based fund has seen a negative 5.13 percent return this year, demonstrating that there are no hard and fast rules to investing in the sector.  The article indicates one fund of interest currently under analysis by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, CVM) is the FII Belvedere Hotel in Belo Horizonte to be managed by Banco Brascan with the aim of raising R$ 203 million to construct an Accor affiliated hotel in the city centre.

Based on speaking to specialists, the article suggests that investors have a firm grip on the seasonal nature of hotel investment which will vary from region to region; look into the current portfolio of the fund and its associated performance; understand that revenue compositions are more complicated (often involving sub-business entities such as restaurants, conference leasing and other events) as well as the issues that the Brazilian real estate sector is experiencing as a whole such as project delays in works completed (often fuelled by labour shortages, inflationary pressures on construction costs etc.).

Ruban Selvanmayagam www.brazilinvestmentguide.com