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High Risk In Hotel Investing Continues

Industry Experts Say Puerto Rico Is Still Generally Attractive


August 14, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

The combination of the lackluster economy, the war in Iraq, and severe acute respiratory syndrome (SARS) has eroded hotel-investor confidence, according to the 2003 Hospitality Investment Survey by PKF Consulting and the Hospitality Research Group.

The study shows that investors and lenders aren’t close to turning bullish about hotel real estate. Hotel investors on the U.S. mainland have relaxed underwriting standards a bit, and the average debt-coverage ratio slipped from 1.52 to 1.47 while the loan-to-value ratio moved up from 62.17% to 65.25% between 2002 and 2003.

Industry experts say this trend is less apparent in Puerto Rico. "It’s correct to say lenders and investors aren’t bullish about developing or financing every type of project, but they aren’t bearish either," said Roberto Cordova, executive vice president & director of corporate banking at Banco Santander. "There is selective interest in developing the industry, and there are niche markets where Puerto Rico has space to grow."

There hasn’t been any underwriting flexibility in Puerto Rico, and the equity-return requirements of investors continue to be quite high. "To the extent that lenders believe the tourism industry is growing or is stable, the risk element is lessened; therefore, the return for the investor and the lender decreases," Cordova said. "Equity yields in the States, in some instances, have gone below 20%."

The PKF survey indicates hotel owners have held on to high-quality assets during this period of economic and political instability because the cash-on-cash returns well exceed those for other investments. Consequently, a sizeable proportion of the properties sold are of inferior quality. The few higher-quality hotels that traded recently sold at capitalization rates well below the average.

Puerto Rico does have hotel buyers. Empresas Santana, for instance, is expected to complete its $6.1 million purchase of the former Candelero Hotel at Palmas del Mar this week. Banco Santander took ownership of the hotel in December 2002 and foreclosed on the property in April 2003 because the former owner, Blue Water Palmas Ltd., reportedly owed the bank $6 million.

Another hotel that has been on the block is the Carib-Inn. Flagship Services has been reviewing its loan-agreement documentation with Scotiabank and government agencies involved in the transaction.

International Hospitality Enterprises has yet to finalize its purchase of the former Condado Trio, now called the Condado Duo. It is rumored IHE President Hugh Andrews has visited several banking institutions and some have expressed interest in financing the project. However, local banks seem hesitant to part with the funds for the Condado Duo’s refurbishment and construction could be paralyzed by difficulties with the permits.

"A mortgage on a property is worth the amount loaned when the project is completed," Cordova. "If problems occur beforehand, the bank has an asset behind a loan that is worth less than its collateral."

This Caribbean Business article appears courtesy of Casiano Communications.
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