Herny González
Leader of Real Estate, Hospitality and Construction Mexico and Central America
EY
/
Insight

Geopolitics Forcing Tourism Developers to Adapt

Wed, 11/01/2017 - 13:04

It is no secret that experts believe the Mexican tourism sector will experience one of the highest growth rates of any of the country’s industries through 2020 and with more than 35 million visitors in 2016, the demand for infrastructure will only continue to rise. But the geopolitical and economic situation has made it more complicated to make decisions.

“The impact of an expensive dollar in the short term is beneficial for the tourism sector but in the medium term, costs and inflation could catch up, making development more complicated,” says Henry González, Leader of Real Estate, Hospitality and Construction Mexico and Central America at EY. The cost of construction has increased between 10 to 15 percent in 1Q17 and according to EY, in the short to medium term, dollar-peso fluctuation and inflation will cause the economy to deaccelerate and will reduce the inflow of investment.

As a precaution, the government has promoted the sector extremely well and has created incentives for both foreign and Mexican firms. One of the most important upcoming projects that will most likely take off at the end of 2018 are the Special Economic Zones (ZEEs).

There are four main zones: Oaxaca-Veracruz, TabascoCampeche, Yucatan and Michoacan-Guerrero. The government will encourage the states and municipalities to participate by reducing income tax and VAT, as well as offering support for lodging and payrolls. By providing tax breaks and facilitating trade, the government looks to attract even more development to Mexico’s marginalized states, ultimately boosting the country’s internal economy. “It will become a competition between the different zones and it is up to each municipality and state to do its homework and promote collaboration,” says González.

But one of the biggest hurdles that the government will have to overcome to make these zones a success is to ensure continuity across political administrations. “The government has to create the legal framework that will shield the ZEEs from changes in the political environment, so projects can fully develop,” says González.

Adaptability is a competitive advantage in the tourism sector, whether it is to the changing economic environment or to the incoming millennials who will rule the market. According to González, tourism experience-oriented developments are the best paid in Mexico and this trend is being driven by the younger generations. “The industry is now focusing on creating developments that allow its visitors to build an experience and an emotional attachment, as well as further embracing the sharing economy,” he says.

But it is not just millennials changing the game for tourism developers, as Mexico’s other shifting demographics will also steer the direction of the industry. “In 10 years, 15 percent of the population will be senior citizens, which leads to a countless number of opportunities to create and invest in developments that accommodate the elderly,” says González.

These opportunities, says González, may be the reason the tourism industry is becoming more active in the stock market. “CKDs have more strength than Fibras because the latter are limited to only rental properties,” says González. “CKDs are the best option for developing infrastructure projects.” These instruments have attracted both national and international funds, especially those from the US. But González cautions that although Mexico is attractive to investors, the fluctuating exchange rate and Trump’s ambitious infrastructure program will pose a challenge and increase competition. “This increase in competitiveness will allow local players to play a bigger role in the industry.”

These local and international players are setting their sights on investing and developing along the Mexican coasts. “Puerto Peñasco, Los Cabos, Nuevo Vallarta, Huatulco and Puerto Escondido are attracting investment on the west coast and in the south,” says González. “Isla Mujeres will experience the next boom due to its proximity to Cancun.” By reactivating the pacific coasts, the second-home market will grow even more, he concludes.