Latin America holds hospitality investment opportunities.

Despite the fall of the Mexican peso and ensuing foreign investor apprehension, the Latin American hospitality industry continues to hold many investment opportunities for the savvy investor, according to the National Real Estate, Hospitality and Consulting Practice of KPMG Peat Marwick LLP.

Not surprisingly, foreign investors are cautious of the Latin American markets after the fall of the Mexican peso wiped out over $10 billion in U.S. institutional equity and the equivalent of $14 billion of Mexican treasury reserves in a matter of days.

"Currency devaluation and inflation are part of the economic environment of developing nations, despite any assurances governmental agencies may give," said Roger Johnson, national director of KPMG's Real Estate, Hospitality and Construction Practice. "The total reliance on the Mexican government's statements of 'no devaluation' was the trap into which everyone fell."

According to Johnson, the key ingredients for investment success in Latin America are to study the fundamentals of a given country, carefully map out a strategy for hedging foreign debt where the income of the venture is based on local currency, and co-venture the project with a trustworthy local partner. Being able to recognize the difference in U.S.-based investment techniques and those used abroad in developing countries is also crucial, he noted.

Jon R. Simon, a national hospitality and real estate partner in the firm's Miami office, believes this is particularly applicable in the hospitality industry. "While Mexico attracted fame and notoriety with regard to NAFTA (the North American Free Trade Agreement) and the peso devaluation, other Latin American economies may offer good alternatives for hospitality investment in the next 18 to 36 months," he predicted.

Chile: Latin America's Healthiest Economy

After 11 years of economic expansion, Chile represents the strongest and healthiest economy in Latin America and continues to be a focal point for real estate investment. "There are approximately 50 ongoing hotel investments at present," said Simon. "The most popular areas include the government and business center of Santiago, the coastal resort area surrounding Valparaiso, the country's famed wine region of Serena, and the ski areas around Portillo and Valle Nevado."

According to the Practice, foreign visitation to Chile grew to more than 1.6 million visitors in 1994, an increase of more than 15 percent over the previous year. Practice research shows that Argentina accounts for more than half of all visitation to Chile.

Peru: World Leading Economic Expansion

"Peru is currently enjoying one of the highest rates of economic expansion in the entire world," said Simon, noting the government's active role in privatizing many services and a number of major hotel chains investing in projects to accommodate a 25 percent increase in foreign visitation.

Colombia: Coffee and Oil Support Growth

Despite a reputation badly tarnished by an illegal drug trade, Colombia has one of the hemisphere's strongest economies, according to the Practice. "Supported by coffee exports and the largest discovery of oil reserves in the last 20 years, the economy looks healthy and stable in the foreseeable future," said Simon.

"Columbia's hospitality industry in particular is showing signs of significant growth," he said. "Major cities such as Cali, Cartagena, and Bogata are attracting international hotel chains such as Forte, Holiday Inn, and Intercontinental."

The Practice predicts Columbia's hotel sector will grow eight to ten percent annually for the next decade.

Brazil: Investors Beware

While the Brazilian economy continues to expand at five percent per year, 1,000 to 2,000 percent annual inflation over the last five years should make any foreign investor wary, reports the Practice.

"Recently, Brazil's inflation rate has come way down. However, in many important sections of the country, the so-called 'sleeping giant of Latin America' continues to snore," said Simon. As crime continues to plague Rio de Janeiro, the Practice forecasts other areas such as Forteleza and Bahia will become more attractive to hospitality investors.

"Unfortunately, another devaluation of the Brazilian currency, the Real, should be expected by year-end," he concluded.

Mexico: Opportunities Exist, But Hedge Your Bets

According to the Practice, Mexico still retains a number of strong fundamentals and offers opportunities for prudent investors. "NAFTA, a cheap peso, and proximity to the U.S. are still strong ingredients for longer-term success," said Johnson.

However, while the peso appears to be stabilizing, the country's high inflation - estimated at 42 percent in 1995 (presently among the highest in all of Latin America) - could lead to another round of devaluation, according to some economic forecasts.

"Regardless of the opportunities available, investors should proceed with caution," warned Johnson. "Continued exchange rate fluctuations between the peso and the dollar are possible. And, in the event that dollar-denominated debt is being serviced by a peso revenue stream, debt ratios are subject to a steep increase - unless the investment is properly hedged," he concluded.

Summary

Over the next five years, the current window of opportunity in the Latin American region will remain wide open, predicts the Practice. Cyclical and spillover economic conditions and events of one country will continue to affect other economies in the hemisphere. However, the strong regional economies, combined with a lodging industry which has been severely neglected over the last 20 years, has created a vacuum in well-placed lodging accommodations.

As international trade continues to join global economies, travelers from abroad will look for hotel accommodations consistent with what is available in the rest of the word. According to KPMG, with the proper planning and insight, this will be very positive for Latin America's lodging industry.