Why high-net-worth investors are eyeing Caribbean assets
A Caribbean recovery is being driven by non-banks, which includes the family offices of high-net-worth individuals, and private equity. What is fuelling 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 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.
Just 11 million visitors headed to the region in 2020, triggering what the World Bank estimates was a 7.7% fall in GDP.
Yet despite those grim numbers, the region outperformed many other parts of the world which saw far steeper drops.
Caribbean countries were relatively quick to implement measures such as vaccine and test requirements, which allowed tourists to return faster than to other destinations, and the use of ‘bubbles’ has seen hotel occupancy on many islands return close to 2019 levels.
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.
“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.”
– Gary Brough
For the past six years, the survey has included non-banks, recognising 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.”
The latest Caribbean Hospitality Financing Survey finds banks are only marginally less confident in 2021 compared to 2019 pre-pandemic levels — a fall in confidence of 8%.
Among non-bank respondents, however, confidence has doubled.
“It represents the highest confidence levels since 2015 when non-banks first participated in the survey,” Mr Brough says.
“What’s more, 69% of non-banks say they 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 fuelling Caribbean confidence?
Mr Brough points to two key trends: a recognition by high-net-worth individuals that ‘life as normal’ has changed and the attractiveness of the Caribbean as a bolt-hole 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,” he says.
“It’s a sense of, ‘I don’t need to commute into Manhattan or London to do a 14-hour day anymore’. Here in the Caribbean, I 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 favourable environment for deals.”
While the lure of an island bolthole is strong, Mr Brough warns that past booms have shown investors and buyers can’t be taken for granted.
“It’s a sense of, ‘I don’t need to commute into Manhattan or London to do a 14-hour day anymore’. Here in the Caribbean I can work from home in an environment where there’s nonstop sunshine, perfect ventilation and where nearly all activities are based outside.”
– Gary Brough
And the pandemic has shaken some of the certainty that travellers to the region will always return in droves.
“In the Caribbean, we’ve been a little bit complacent over the years,” Mr Brough says.
“We know that the sun is going to shine every day, that our beaches are beautiful and our people friendly — and we know that when there is 10 feet of snow in Buffalo in February, people are going to come here. There has been a sense that we don’t have to do too much as everything will just work out.
“I think that’s changed.
“Now, there’s so much competition out there, that we have to be more proactive. We need 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, he says. For operators of tourism and hospitality venues — or even for those selling real estate — it is about meeting the demanding expectations of wealthy customers.
“A true five-star luxury holiday starts from when they make the booking,” he says.
“Is the reservation process excellent? When I land is the process at the airport efficient? Is the transfer to the hotel simple and smooth?
“Tourists and investors don’t want to experience delays, they don’t want to be going over bumps in a road — everything matters, even the temperature of the car needs to be right. Luxury means the whole travel experience.
“There are real opportunities available right now for operators, dealmakers and the region, but Governments have 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.”