Whitepaper Section 07

MARKET APPRAISAL

MARKET APPRAISAL

Tourism Opportunities & Infrastructure

Economic & Social Factors

Mexico Tourism Industry

Hotel Supply & Occupancy Levels

Trends & Major Developments

SWOT Analysis

MEXICO TOURISM OPPORTUNITIES

 

Two straight years of record growth in Mexico’s tourism sector have solidified its importance as a motor for economic growth. According to the Ministry of Tourism (Secretaría de Turismo, SECTUR), tourism contributes over 8.7% to Mexico’s GDP and employs 3.6m people directly, 57% of them women. It is also the fourth most important source of foreign currency.

 

Given its dynamic performance, the sector was recognized as a pillar for development. Government authorities are working to establish a foundation for long-term growth, and the results of their work are beginning to show. In 2014, Mexico reclaimed its spot among the top 10 tourist destinations in the world, according to the UN World Tourism Organization, and advanced 14 positions in the World Economic Forum’s 2015 “Global Travel and Tourism Competitiveness” report, from 44th to 30th, out of 144 countries. Many tourism opportunities exist in Mexico including:

Adventure & Nature

Weddings & Romance

Culture & Heritage

Attractions & Entertainment

Luxury

Health & Wellness

MEXICAN TOURISM GROWTH

The hotel segment continues to improve coming out of the latest recession. As Mexico’s economy recovers, hotels have started to recover from an occupancy and ADR side. With no real new supply in the market, hotels are able to reach a certain occupancy where now they’re able to increase their room rates above the rate of inflation.

 

The small number of hurricanes in 2014, a decrease in news about crime in the country, the absence of SARS, and continued quality aviation infrastructure are factors in strengthening Mexico’s tourism scene, Through the third quarter of 2014, InterContinental Hotels Group’s properties in Mexico saw an increase of 1.6 points in occupancy and 2.8 percent in rooms occupied, leading to RevPAR growth of 7 percent, Mexico’s tourism growth is driven by the influx of tourists from North America. According to the US 2010 Census, 33.7 million people of Mexican origin resided in the US. Growth will continue to be driven by the promotion efforts of the Mexico Tourism Board in the US, and improvements in relations with Cuba.

 

Aviation capacity has been increasing. In 2011-2012, LCCs Interjet and Volaris ordered 40 Airbus jets each, and in August 2013, AeroMexico Airlines added one Boeing 787-8 jet to its fleet. Further growth in capacity is expected over the forecast period as AeroMexico plans to add another 19 Boeing 787-8 jets by the end of 2019.

 

According to Mexico’s national tourism board, by 2024 the country will have to build an average of 180,000 new rooms to meet its demand, a 70% increase from today’s market. There is a lack of institutional-quality hotel inventory available for big portfolios, and the opportunity will be for those who are willing to develop new hotels. At the moment there are approximately 7,000 guestrooms under construction in Mexico, which account for 2 percent of existing supply.

Main Airport Arrivals to Mexico
In January 2018 the airports with the highest number of foreign passengers were: Cancun (710,450); Mexico City (348,814); Los Cabos (142,835): Puerto Vallarta (190,327); Guadalajara (80,960), Monterrey (18,896) and Cozumel (19,231); which represents 92.1% of all foreign passengers.

TRANSPORT INFRASTRUCTURE

The development of the travel and tourism infrastructure in Mexico reflects the success of the country’s National Tourism Strategy. Mexico has increased its touristic attractiveness in recent years because capital has been made available to successfully recuperate public spaces, pedestrian streets, parks, plazas and boardwalks, among others, which now serve a vibrant and attractive social life for tourists to enjoy.

 

Tourism in the state of Jalisco in particular is on the cusp of a major boom in the Costalegre region. A project long in the making is the extension and modernization of federal highway 200, running from Puerto Vallarta to Barra de Navidad, which authorities say is soon to be finished after two years of work.

 

Another major infrastructure project in the area is the Chalacatepec airport, which could be ready for its first airplane in as soon as 2020.

 

The runway has been ready for the last four years but the state government still must conclude expropriation agreements with community landowners for the terrain that surrounds what will be the airport proper.

 

The payout will cost 15 million pesos (US $858,000), while the construction of a road to give area residents access to the main highway without crossing the runway represents an additional 17 million pesos. Once ready, the 90-million-peso airport will be able to accommodate 170-passenger aircraft, and both commercial and private flights.

ECONOMIC & SOCIAL FACTORS

Labor market conditions continue to improve and in the first quarter of 2018. employment and unemployment rates are also projected to keep improving in 2018 and 2019. – Employment as a share of the population aged 15-74 years has not yet recovered from the impact of the global economic crisis. It stood at 59.8% in the fourth quarter of 2017, still 1.4 percentage points lower than its pre-crisis level. The employment rate is predicted to further decline through 2018 and 2019. This reflects declining labour force participation notably among youth and older workers.

The unemployment rate in Mexico has further declined to 3.4% in the last quarter of 2017, below its pre-crisis level and close to 2%below the average. However, this low unemployment rate partly reflects the lack of unemployment insurance system and the high incidence of informal employment.

CONSUMER CONFIDENCE

Labor market conditions continue to improve and in the first quarter of 2018. employment and unemployment rates are also projected to keep improving in 2018 and 2019. – Employment as a share of the population aged 15-74 years has not yet recovered from the impact of the global economic crisis. It stood at 59.8% in the fourth quarter of 2017, still 1.4 percentage points lower than its pre-crisis level. The employment rate is predicted to further decline through 2018 and 2019. This reflects declining labour force participation notably among youth and older workers.

GDP

The unemployment rate in Mexico has further declined to 3.4% in the last quarter of 2017, below its pre-crisis level and close to 2%below the average. However, this low unemployment rate partly reflects the lack of unemployment insurance system and the high incidence of informal employment.

TOURISM IN THE ECONOMY

 

It is estimated that tourism contributes approximately 8.7% of the total GDP in Mexico. The sector provides 2.3 million fulltime jobs (5.9% of fulltime paid employment), rising to around 10 million jobs in total including informal employment. Tourism accounts for over 79.9% of exports in services. Overall, economic and employment growth in tourism has been faster than in the rest of the economy.

 

Mexico received 35 million international arrivals in 2016, a 9% increase over the previous year. While in 2017 this figure reach around 39.3 million visitors that is another 12% increase over previous year. By far the largest source market is the United States with almost 27% of all visitors, followed by Canada at 5%, United Kingdom at 1.3% and Argentina – 1.1%. However, the general pattern has been towards greater market diversification, with arrivals from the United States reducing as a proportion of total arrivals over the past ten years, as a result of faster growth from Latin America and Asia. This is linked to the opening of new international air routes, including three new direct flights from Asia in 2017 (Seoul, Canton and Tokyo). In terms of domestic tourism, the number of Mexican nationals staying in hotels is estimated at around 91.5 million, with an annual growth rate of 2.8%.

 

GOVERNANCE & FUNDING

 

The Ministry of Tourism is the lead government body with responsibility for tourism policy, planning, development, quality and regulation. The Mexico Tourist Board (CPTM) is responsible for promoting the tourism brand and for developing and coordinating international and national strategies for tourism marketing. CPTM aims to strengthen the image of Mexico as a tourist destination promoting the quality, diversity and authenticity of its attractions.

 

The National Fund for Tourism Development (FONATUR) acts as a facilitating instrument for foreign investors. It was created by the Ministry of Finance and is coordinated by the Ministry of Tourism. FONATUR’s objectives are to promote investment, create jobs, improve social welfare, and encourage national and regional development through the development of destinations and tourism products. FONATUR’s functions include conducting feasibility studies, developing destination master plans, project management, executing infrastructure projects, and engagement with various forms of financing.

 

State and local level bodies have the right to promote and finance their destinations and to collect room taxes. Coordination with state and local levels of government is undertaken by several commissions, including the Governor’s Commission for Tourism and the association of local ministers of tourism. In 2017 the budget for tourism in Mexico amounted to USD 441 million. This figure consisted of around USD 219 million for the Ministry of Tourism, USD 188 million for FONATUR and USD 34 million for the Mexico Tourist Board. The latter also obtains significant resources from an entry tax charged on tourists. Much of the funding for the tourism sector also occurs at the local level and from public and private initiatives.

ECONOMIC & SOCIAL FACTORS

Main Airport Arrivals to Mexico

 

In January 2018 the airports with the highest number of foreign passengers were: Cancun (710,450); Mexico City (348,814); Los Cabos (142,835): Puerto Vallarta (190,327); Guadalajara (80,960), Monterrey (18,896) and Cozumel (19,231); which represents 92.1% of all foreign passengers.

 

The arrival of international tourists was 39.3 million, exceeding 4 million 218 thousand tourists, this represented an annual growth of 12% in comparison to the same period of 2016.

 

Foreign currency income from the arrival of international visitors was 21 thousand 333 million dollars equivalent to an increase of 8.6% in comparison to 2016.

 

The amount of foreign currency that visitors residing in Mexico spent when going abroad was 10 thousand 828 million dollars, amount at 525 million dollars higher than that observed in 2016 and equivalent to an annual increase of 5.1%
The international tourist departures of Mexico abroad amounted to 19 million, this is one million 198 thousand fewer passengers to the same period of last year which represented a drop off (-) 5.9%.

 

The balance by international visitors registered $10,504 million, representing an increase of 12.4% compared to 2016.
The percentage of hotel occupation in a group of 70 resorts reached 61%, level 0.6 point higher compared to that observed in 2016.

Chart 3, Foreign currency income from the arrival of international visitors in January 2018 was 1,941 million dollars, equivalent to an increase of 0.7% in comparison to January 2017.

Average Expenditure of Long Staying Tourists

Chart 4. In January 2018, the average expenditure of long-stay tourists by air was 901.4 dollars, this represents a decrease of (-) 7% in comparison to the same month of 2017.

International Tourists Arriving by Air to Mexico

During January 2018, the arrival of foreign air-coming visitors who reside in the United States represents 52.5% of all foreign arrivals by air. From the Latin American and the Caribbean region, the countries of residence with the highest number of foreign arrivals in Mexico were Argentina, Brazil and Colombia, with 3.7%, 2.4% and 2.2% of total visitors respectively.

HOTEL SUPPLY & OCCUPANCY LEVELS

The Mexican hotel industry reported mostly positive results in the three key performance metrics for the second quarter of 2016.. Compared with Q2 2015, the Mexican hotel industry’s occupancy was mostly flat (-0.5% to 63.3%). However, average daily rate was up 15.8% to MXN2,079.87, and revenue per available room grew 15.2% to MXN1,317.20. Performance was similar to the first quarter with a weakened Peso as the main reason behind Mexico’s hotel success. Based on proximity alone, Mexico gains a lot of travelers from the U.S. However, many people realize that now is a good time to take advantage of the value, and hoteliers have capitalized with increased rates.

 

Among the key markets in the country, Northwest Mexico posted the largest spike in RevPAR (+52.3% to MXN1,432.36), driven primarily by the country’s largest increase in ADR (+49.2% to MXN2,355.25). Occupancy in the market was up 2.1% to 60.8%.

 

Mexico City experienced the largest rise in occupancy (+8.3% to 70.7%). That coupled with a 19.9% increase in ADR to MXN2,486.43 pushed RevPAR up 29.8% to MXN1,758.07.
The only decreases in any of the three key performance metrics were reported in the Yucatan Peninsula (occupancy -6.4% to 69.1%) and Northeast Mexico-Monterrey (occupancy -0.2% to 65.6%).

Hotel room demand is concentrated, mostly in beach destinations such as the Riviera Maya, Cancun, Acapulco and Costalegre. Among the main urban centers, Mexico City and Guadalajara are the most relevant. Among secondary cities located in the interior of the country, Puebla, Oaxaca and Mérida are also relevant markets.

The hotel segment categorized as 5-star hotels has the largest share of the Mexican market regarding the total number of rooms, though it presents the smallest number of lodging establishments. As in most markets, 5-star hotels, and particularly beach resorts, have a strong incidence in Mexico’s hotel supply..

 

Quintana Roo, where some of the most important beach destinations such as Cancun, Playa del Carmen and Tulum are located, concentrates more than 15% of the total hotel supply in the country, according to DataTur. Jalisco (Guadalajara, Puerto Vallarta) and the Federal District (Mexico City) concentrate 11.5% and 8.9%, respectively.

Spreading the sphere of interests of the hotel business to products and services previously provided by enterprises of other industries (i.e. catering, leisure, entertainment, exhibition activities, etc.).

Development of the democratization of the hotel industry, which contributes to increasing the availability of hotel services for the mass consumer.

Strengthening the specialization of the hotel business, which allows to more clearly focus on certain segments of consumers, taking into account various characteristics.

Wide introduction of new means of communication and information technologies, allowing deep and systematic economic diagnostics.

Introduction of new technologies into the business strategy of hotel companies, in particular the widespread use of the Internet to promote hotel products and services.

The globalization and concentration of the hotel business is manifested in the creation of large corporations and hotel chains. This approach allows hotel companies to regroup and attract additional resources for the development of their business. Hotel enterprises are concentrated through the creation of unions or associations that do not violate their legal and economic autonomy but allow for joint marketing programs and unifed systems for training personnel.

 

Analysis of the hotel sector indicates the efectiveness of investments in the hotel chains, not in individual hotel facilities. The two main types of hotel chains include integrated chains that are created from homogeneous units and a hotel consortium that unites independent hotels (to resist competition from integrated and franchising chains).

 

The concept of the hotel consortium in recent years has become very popular and the number of consortia around the world has increased signifcantly. The largest hotel consortium in the world is the American chain “Best Western International”, with 4195 hotels and 350,000 rooms. The primary advantage hotel chains have over individual establishments is their ability to pool [fnancial] resources. The main trends in the development of the hotel business include:

TRENDS AND MAJOR DEVELOPMENTS

The Mexican government plays a key role in the success of the hotel industry. There are approximately 70 hotel companies working in Mexico, and all of them receive assistance from the government to operate. In certain regions such as those set within the hurricane belt, the government offers additional tax deductions and incentives.

 

Transaction activity has heated up recently, going from a low of less than $100 million in 2009 to $600 million in 2013. The action has been in transactions with Mexican REIT-like structures known as fibras and related entities. Fibras have formed partnerships with global hotel companies, such as Marriott International, and developers to expand their hotel portfolio across key primary and secondary markets in Mexico.

 

Mexican ownerships tend to have long-term holdings, which affects the number of properties changing hands. Properties may be held for generations with ownership being more family-oriented as opposed to corporate LLCs. Consequently, the number of transactions tends not to be as high in Mexico compared to a country like the U.S.

 

There is presently a lack of institutional-quality hotel inventory available for big portfolios in Mexico, and the opportunity will be for those who are willing to develop new hotels. Labor and construction costs in Mexico are still low and are increasing at a slower rate than in the U.S., which makes now an opportune time to build.

 

Generally Mexican investment culture tends not to overleverage a property, with investors in some cases injecting up to 50 percent of the capital cost to construct a new property. Whereas developers in the U.S. may only require 25%-30% equity to begin new construction.

 

Equity in the hotel industry comes from a variety of places including fibras, local private-equity funds, local construction companies, and local families. However, with the government setting limited barriers to development and taking steps to advance tourism due to its role as a major engine of economic growth, it is anticipated that more international groups will move into the country.

 

Mexico’s national tourism board predicts that by 2024, the country will need to build an average of 180,000 new rooms to meet its demand. An increase of 70% from the market today.

MEXICO CONVENTION BUSINESS TRENDS

 

According to the 2013 International Congress and Convention Association (ICCA), Mexico is the fifth most relevant destination regarding meetings incentives-conventions-and-exhibitions tourism, hosting 158 international events during 2013. According to the ICCA, statistics indicate the number of events held in Mexico has continued to grow through 2016. Mexico is presently ranked the fourth most visited destination in Latin & North America.

MEXICO CONVENTION BUSINESS TRENDS

 

One trend that appears to be generally consistent is that overall supply growth in the meetings industry has been outpacing overall demand growth in recent years, creating a more fiercely competitive environment. Functions that previously would have been held at secondary or tertiary convention destinations are now being accommodated at primary destinations, as the larger facilities in major markets have the ability to host numerous smaller events concurrently. However, there is a renewed interest on the part of many convention groups to consider second-tier cities in their evaluation of destinations. Although it is reasonable to expect that third-tier cities will benefit from this trend, the options open to groups at this level are extensive.

COSTALEGRE MAJOR & PLANNED DEVELOPMENTS

 

Visitors will discover a sampling of luxury boutique hotels and resorts along Costalegre. Costa Careyes, one of the most touristed destinations, is home to the Costa Careyes Resort, an exclusive private resort featuring ocean castles, villas, casitas, and bungalows. 2 hours south of Puerto Vallarta, visitors can find the Moorish-inspired villas and casitas dotting the grounds of Cuixmala Hotel, former home of a British billionaire turned boutique hotel featuring a sprawling estate of beach, jungle, nature reserve, and fruit plantations. Lcated midway along Costalegre, El Tamarindo is another luxury resort built on a nature reserve offering beachside villas, a jungle backdrop, and 6,700-yard golf course. Another luxury hotel option near Cabo Corrientes is Las Alamandas, sitting on 1,500 acres of nature reserve offering sixteen suites on its own stretch of beach.

 

AMResorts, North America’s fastest-growing leisure resort company, is currently implementing its plan to open 10 new hotels in Mexico by 2020. Plans for their Zoetry brand is in development for Chamela Bay and slated to open in 2020 with 120 suites.

 

The latest major development in the works for Costalegre is the luxury Zafiro Master Plan, including the Cheval Blanc, a Louis Vuitton Möet Hennessy hotel with branded villas, an 18-hole golf course, and up to 525 real estate units. Billed as one of the most exclusive tourist escapes in all of Mexico with an investment of more than $80 million, the resort was slated for completion in 2019 but has since been halted for re-evaluation of room rates vs capital expenditure. .

SWOT ANALYSIS

STRENGTHS

A unique idea that has not been developed in Costalegre.

Great potential to attract hundreds of thousands of visitors every year.

As the idea of creating a chain of resorts based on hobbies is new, it has no competition in the space.

Project has the right people on the board with necessary experience and knowledge to handle a project of this scale..

The project owns the real estate that will be used for the development of MilCoin Network’s projects and will only increase in value upon completion of the project.

Closest potential competitors (resorts and hotels with a similar quality of service) are over 400 miles away.

OPPORTUNITIES

Annually growing number of tourists in Mexico

Geographically a very good spot for project development – beautiful landscapes and a fantastic weather.

Unlimited marketing opportunities thanks to the always growing importance of internet travel platforms

Targeting a specific market niche – creating resorts based on people hobbies

Government programs to promote tourism development

Exhibitions and conferences dedicated to travel and tourism can be a great spot to find new partners and draw attention to the project.

WEAKNESSES

The selected region currently has very poor infrastructure, which is why it is not the most visited region by tourists. This means that project management will need to take additional measures to ensure the necessary flow of guests.

Significant costs for infrastructure development.

Project owner lacks experience in hotel/resort management, which also means lack of reputation in the eyes of potential customers.

A very expensive project, thus significant financial risks.

THREATS

Market Demand – Safety concerns, hurricane weather, and delayed completion of necessary infrastructure (highway and airport) could hamper access to Costalegre.

Potential Competitors – Hotel chains already in the Mexican market (InterContinental Hotels Group, Posadas, City Express Hotels, Hilton, Marriott, etc..) with large amounts of capital available to implement similar projects.

Ambitious nature of the project may caution potential investors who view the opportunity as too speculative for investment.