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Opportunity Knocks?

Although we in the Caribbean have had our fair share of doom and gloom, there have been savvy investors taking the opportunity to step into projects that appear to have real value in this changing market. Some have snapped up REALLIFE_Real_Report_Opportunity_Knocksdistressed properties that have been over-leveraged or undermanaged, some have picked up deals from defaulting loans and others have recognised the evolution in the resort investment market and restructured their projects to suit.

Established Caribbean resort players such as Sandals were quick to spot potential and their purchase of the Emerald Bay Resort in Great Exuma (formerly Four Seasons) provided them with a magnificent 500 acre golf resort at a knockdown price. This resort reopened in January 2010 and has provided a much needed boost for this Bahamian island’s economy.

Resorts such as this are the life-blood of our islands and positive encouragement from Caribbean Governments has been able to attract new investment to distressed properties that are so important for local employment.

Another property, the Four Seasons in Nevis, recently re-opened in December 2010 having been closed for over 2 years. The 196-room golf resort has been refurbished as a result of new investment and the re-opening has been a real positive step forward for the island as a whole.

The pro-active actions of the Barbados Government have been instrumental in the recent re-starting of construction of the Four Seasons at Clearwater Beach following their provision of a $60million loan guarantee in return for equity interest. The project provides for 36 luxury villas and a hotel and had stalled mid-construction in February 2009. Following the agreement of new financing from Trinidad based ANSA Merchant Bank, the project now appears to be back on course.

The Bahamas Government has actively sought to encourage new investment players into the Caribbean market and assisted greatly in attracting $2.5billion of new financing to Nassau’s 2,250-room Baha Mar Cable Beach redevelopment project, which is set to stimulate significant growth for The Bahamas. Located on the island’s premier beach, the completed resort will boast six hotels, the largest convention centre in The Bahamas, the largest casino in the Caribbean, a world-class golf course and retail village.

Construction is at last underway and this massive project is set to bring a huge boost to the local economy and provide thousands of new jobs. New financing for the project has been provided by Export- Import Bank of China (EXIM) and to supplement the Bahamian labour available to build the resort, Baha Mar has partnered with China State Construction Engineering Corporation (CSCEC) to supply short-term labour from China to help complete the resort as quickly as possible.

However, local Government assistance can only go so far. Resort developers must be able to adapt to the changing tourism investment model in order to attract new backing for their projects.

In particular, there appears to be a trend away from those concepts relying on residential components as a significant source of financing. Residential condominium products have seen significant reductions in price due to a lack of demand, typically to a level below what the replacement cost would be – therefore discouraging developers from starting or continuing with these types of resort projects.

The reduction of second home real estate investment from the Caribbean’s key investment markets combined with falling tourism arrivals and a decline in real estate based project financing has had a dramatic effect on the resort development picture in the region.

In a recessionary economy, where consumer confidence is low, there is an obvious reluctance to invest significant sums in second homes, particularly when property markets at home may have contracted significantly. Hence the resort and condominium market must evolve to cater for new market demands – vacation ownership, timeshare and fractional ownership are all examples of reducing the significance of the investment to encourage demand.

Similarly, the global financial crisis and tightening of credit guidelines has led to the failure or stalling of many resort projects under construction and has prevented many others from starting construction. With lenders focusing more on cashflow and debt service rather than real estate security, and a reluctance to finance projects relying on real estate sales, the days of the condominium resort appear numbered.

Success would appear to lie in the effective operation of a property as a hotel first and a real estate ownership product second. Whilst hotel average daily rates (ADR’s) and turnovers declined significantly in 2009, occupancies are now bouncing back and tourism arrivals are typically on the rise. Thus the profitability of hotel operations should continue to improve and provide development opportunities in refurbishment of existing prime hotel stock or new resort development concepts.

With the lack of support from financial institutions, private equity investors are finding themselves with liquidity in a buyers market and able to choose from a considerable array of distressed or defaulting properties. Those projects that demonstrate strength of design, revenue generating potential and value for money are attracting interest from investors who recognise the evolution in the resort market.

With the return of the tourists and increasing investment confidence from some of the less traditional sources (BRIC countries in particular), now may be the time for visionary developers to find new ways of packaging the traditionally idyllic Caribbean assets of sun, sea and sand.

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