The economic slowdown has impacted the two major industries for the region, namely financial services and tourism, with a detrimental knock on effect on construction a natural consequence, as lending dried up. Thus a presentation by KPMG Bahamas Partner Simon Townend at the recent Caribbean Hotel and Tourism Investment Conference assessing financing for the region was a timely report for attendees. Business Editor Lindsey Turnbull reports.
KPMG created its 2010 Caribbean Region Financing Survey for the travel, leisure and tourism sector by polling the lenders themselves to appreciate trends within major financial institutions in the Caribbean. Such entities have over $2.5 billion combined exposure to hotels and real estate in the region.
Townend detailed pertinent points of thinking among lenders, which included a disinclination to finance a project that was already broken, a push to look at the overall viability of a hotel project as a cash flow generator, rather than just looking at the value of the land, as well as a new drive to look at good project fundamentals when lending to developers, including a strong sponsor, good customer flow and airlift.
Banks in general displayed a general slide in confidence from May 2008 to March 2009, but the KPMG survey indicates a growth in confidence in April of this year.
Their lessons learned from the economic downturn include a return to more conservative, long term approach to lending as well as a requirement to obtain more cash support from promoters. Banks are also looking to adhere to proven credit underwriting practices while at the same time avoiding higher risk fund models and reducing the rate of reliance on pre-sales as a source of funding. Lenders are also intending to monitor projects more closely and encourage their clients to plan for difficult economic times.
What makes an investment successful?
Townend detailed five major reasons why projects were successful for lenders. Those projects that were financed conservatively with sufficient cash equity did well, as did those with a great location and adequate airlift. Projects that were supported by strong sponsors with a proven track record did well and phased projects with good pre-sales and a build-out in line with market demand were also successful. Finally, a diversified client base also bode well for the projects.
Why projects failed
Conversely, highly leveraged financing structures were contributing factors in the collapse of a project, as was a decrease in access to private equity and US debt financing sources. Unrealised and overly aggressive projections or forecasts did not result in success, while insufficient cash equity or external cash resources were also blamed for poor performance. Poor cost control and monitoring of construction were other areas of concern, as were a lack of strong management and financial control over the project and heavy presales reliance.
Government responses to the economic crisis as far as the failure of such projects has involved little direct investment, according to the report, because they are struggling with significant economic issues and do not have the capacity to intervene or subsidise in failed hotel or real estate developments (although the report did note the exception of the Barbados government’s proposed US$60 million guarantee for part of the financing to revive the Four Seasons project in that jurisdiction).
Top preferred destinations
Encouragingly Cayman ranks third in the report’s survey of lenders’ top three markets. The top slot goes to the Bahamas, Barbados and Bermuda, second place to the Dominican Republic and St. Lucia and Cayman sits alongside South East Mexico and Jamaica.
The Cayman Islands do not feature in the lenders’ markets of interest for the future, which are as follows:
The Bahamas, Costa Rica, Jamaica;
Barbados, Bermuda, Brazil, the Dominican Republic;
Dutch Caribbean, Panama, St Lucia.
The report suggests that lenders choose these destinations above others for their good airlift, good market demand and a growing interest in Latin America.
New financing sources
Townend highlighted an interesting area of borrowing for those seeking new financial sources, that of China. The financing of the Baha Mar project in the Bahamas by the China EXIM Bank allows for a $2.5 billion single phased project, which includes 3,000 rooms, a 100,000 square foot casino, an 18-hole Jack Nicklaus signature championship golf course, three spas and 200,000 square feet of meeting space.
The InterAmerican Development Bank is also moving into the hospitality sector, promoting the co-financing of public and private sector projects in Latin America and the Caribbean.
View from KPMG
At the end of the presentation, Townend shared the views of his firm, explaining that KPMG believes new projects to be successfully financed in the Caribbean will be smaller and phased in stages. These projects will most likely be not so high end, but will be well capitalised, with sound fundamentals and experienced backers.
He noted a refinancing bubble is round the corner but failed half-built projects will find it very difficult to obtain refinancing.
KPMG predicted more rigourous financing models and forecasts and more detailed due diligence becoming the norm. It anticipates lower returns and longer investment horizons for equity holders, higher margins and shorter tenor for banks.
It also expects that the second home market will not fully recover for at least a few years with surplus inventory already in existence and more discerning buyers with less equity.