Why high-net-worth investors are eyeing Caribbean assets
A Caribbean recovery is being driven by non-banks, which includes family offices and high-net-worth individuals, as well as private equity. What is fueling optimism in the region? Baker Tilly’s annual Caribbean Hospitality Financing Survey explores the drivers.
The Caribbean is used to being in the eye of the storm.
As hurricanes pass through the region with increasing frequency and intensity, some of them incredibly destructive, tourism operators have become adept at battening down and opening up once the threat moves on. When it comes to the impact of the COVID-19 pandemic, however, that approach has failed to weather the crisis. The tourist-dependent region of the Caribbean as a whole has been battered by border closures, flight cancellations and the near-collapse of the cruise ship industry, as well as the human impact of a virus estimated to have led to tens of thousands of cases across the islands.
The Caribbean Tourism Organization puts the drop in tourist arrivals in 2020 at 65% compared to 2019, which was a record year for the region with 32 million tourists visits. In comparison, the Curacao Tourist Board (CTB) puts the drop in visitor arrivals in Curaçao during 2020 at 62% compared to 2019. According to CTB, just 436,242 visitors headed to Curaçao in 2020, contributing just over US$ 579 million to the local economy. The economic impact of tourism dropped 53% compared to 2019.
Yet despite those grim numbers, the Caribbean region outperformed many other parts of the world which saw far steeper drops. In Bonaire, for example, tourist arrivals in June 2021 were already back to 75% of arrivals in June 2019 as measured by Statistics Netherlands (CBS). In Curaçao, September saw arrivals at 85% of pre-pandemic levels according to CHATA, the Association for tourism and hospitality in Curaçao. According to the Aruba Tourism Authority, June 2021 showed a 98% recovery (!) compared to the same period in 2019.
The Dutch Caribbean islands were relatively quick to implement measures such as vaccine and test requirements, which allowed tourists to return faster than to other destinations.
Now, Baker Tilly can add another reason for optimism – a surprisingly bullish outlook by tourism lenders and investors for the region.
Gary Brough, Managing Director of Baker Tilly Turks and Caicos Islands, has undertaken the Caribbean Hospitality Financing Survey for more than a decade, looking at financing trends in the region’s hospitality and tourism industry and the outlook for the future. For the past six years, the survey has included non-banks, recognizing the role they play in underpinning tourism transactions. “To be honest, we’ve never seen so much M&A activity over such a concentrated period and they are very keen to acquire assets,” Mr. Brough says.
“The recovery is predominantly being driven by non-banks, which includes the family offices of high-net-worth individuals, usually multibillionaires, and private equity. On the macro environment, you’ve got a lot of liquidity, you’ve got low-interest rates, you’ve got concerns that the stock market may be at or close to a peak." “So you’ve got all this liquidity, and people and institutions are asking the question, where are we going to place these funds and get a return? They are turning, in part, to small islands in the Caribbean with limited land and huge potential as valuable assets for high-net-worth individuals.”
Anjli Finessi, a Tax Partner at Baker Tilly in the Dutch Caribbean, recently presented the findings of the latest Caribbean Hospitality Financing Survey at a Caribbean investment summit. The survey showed that banks are only marginally less confident in 2021 compared to 2019 pre-pandemic levels — a fall in confidence of just 8%.
Among non-bank respondents, however, confidence has more than doubled. This represents the highest confidence levels since 2015 when non-banks first participated in the survey. According to those surveyed, 69% of non-banks have made an investment since the pandemic began and 100% expect to make new investments in the next 12 months. Non-banks are now responsible for the greatest share of inbound investment, with particular interest in resorts and condo-hotels with real estate components. The survey also reveals a rapidly growing market sector of privately owned villas and villas for rent, some separate from traditional resorts, others managed by established resort management companies.
What’s fueling Caribbean confidence?
The survey identified two key trends: a recognition by high-net-worth individuals that ‘life as normal’ has changed and the attractiveness of the Caribbean as a refuge as the pandemic rolls on and exposure to similar threats increases. “We’re definitely seeing concerns that living with threats like the pandemic may result in a permanent change in the landscape and people’s thinking has adapted accordingly,” Mr. Brough says.
In the Caribbean, you can work from home in an environment where there’s nonstop sunshine, perfect ventilation and where nearly all activities are based outside. If you combine the macroeconomic impact of thriving M&A activity (driving confidence), with the unique features of the Caribbean and people’s response to the pandemic, and you’ve got a favorable environment for deals.” Ms. Finessi adds “People have come to realize that they don’t need to commute to large office blocks in over-crowded city centers to attend to their high-pressure jobs anymore.”
While this is certainly good news for the islands of the Dutch Caribbean, we must take care not to take investors and buyers for granted. And the pandemic has shaken some of the certainty that travelers to the region will always return in droves. No longer can we assume tourists will find their way to us. There’s so much competition out there, that we have to be more proactive. It is essential to know exactly what works and what doesn’t, what market to aim at and what and who we need to target in that market and how.
The survey supports this concern, with respondents highlighting non-negotiable factors that underpin investment, including regular airlift, security, health services and excellent telecommunications. Mr. Brough tells the story of one ultra-wealthy family who booked a penthouse for Christmas, flying down by private jet. “Because their kids couldn’t get on the internet or couldn’t get the speed they were looking for they left the same day. They paid everything but there’s no way they’re coming back,” he says. “To really succeed you have to have excellent telecommunications, you have to have a private airport so they can bring their private jets in, you have to have low crime. You can’t just wing it.”
At a Government level, that requires planning and integrated services. For operators of tourism and hospitality venues — or even for those selling real estate — it is about meeting the demanding expectations of wealthy customers. We have to change our thinking. A true five-star luxury holiday starts from when they make the booking. We must ask ourselves: Is the reservation process excellent? When the visitor lands, is the process at the airport efficient? Is the transfer to the hotel simple and smooth?
The bottom line is tourists and investors don’t want to experience delays, they don’t want to be going over bumps in a road — everything matters. Luxury means the whole travel experience. There are real opportunities available right now for operators, dealmakers and the region, but Government has a big role to play and must be prepared to think differently and take a different approach to decision making if they want to win in this increasingly complex and competitive market. And this is where our challenge now lies.
The Caribbean Hospitality Financing Survey can be downloaded here.
