Economic stability and enhanced security have drawn interest from hotel groups looking to capitalise on increased business and investment activity in Colombia. However, recent falls in oil export revenues have reduced fiscal incentives to expand tourist infrastructure, and the hospitality industry is hoping that the rising number of tourists will support ongoing expansion.
Room For Growth
The country currently has a total of 260,000 rooms. Around 70% of operating hotels have up to 50 rooms, according to the Hotel and Tourism Association of Colombia (Asociación Hotelera y Turística de Colombia, Cotelco). Growing demand for rooms is driven by an increase in foreign arrivals, which grew by 174% between 2004 and 2015, according to the Ministry of Commerce, Industry and Tourism (Ministerio de Comercio, Industria y Turismo, MINCIT). Between 2012 and 2015 the number rose from 3.5m to 4.5m visitors. Continued growth is expected, with the number of arrivals projected to reach 6m by 2018, contributing up to $6bn to the Colombian economy.
For over a decade the hotel segment has been adding capacity to match this rising demand, incentivised by a 30-year corporate tax exemption for hotel development. Between 2003 and November 2016 over COP4trn ($1.2bn) was invested in new hotels, leading to the construction of 43,700 rooms across the country, according to Cotelco. Another COP600bn ($180m) was directed towards the refurbishment of hotel infrastructure from 2013-16. More than 5700 rooms were added in 2016, with an additional 1540 refurbished. Increasing hotel capacity also had positive trickle-down effects for local communities. According to Cotelco, each new hotel room created an average of 1.7 direct jobs.
With Colombia an increasingly attractive investment destination, international hotel management brands accelerated their commitments, not only in established destinations such as Cartagena but also in urban markets catering mainly to business travellers, such as Medellín and Bogotá. According to Colteco, 63 hotels will begin operating in the coming years, adding 255,000 rooms. In 2017 alone up to 37 new hotels are expected to open in cities across the country. These include three Hilton Garden Inn units in Santa Marta, Rionegro and Bogotá; a Hampton by Hilton located in Cúcuta, on the border with Venezuela; a Hilton Resorts in Santa Marta; and a Conrad in Cartagena.
Domestic travellers also contribute significantly to demand. Bogotá, which accounts for 25% of Colombia’s hotels, built its offering around international and domestic business travellers. “Bogotá is a destination for business, so the corporate segment is very important for the city’s hotels,” Mark Bingle, general manager at Four Seasons Hotel Bogotá and Four Seasons Hotel Casa Medina, told OBG.
A drawback to the cities’ dependency on business travel is sensitivity to the domestic business environment, especially at a time of reduced commodity prices and tax hikes. “Tourism in Colombia is driven by business tourists,” Gustavo Toro Velásquez, executive president of Cotelco, told OBG. “If if the economy is not doing well there is a negative impact on hotel figures.”
Occupancy rates in Colombia’s larger cities are relatively stable. In smaller towns and rural areas, however, occupancy is seasonal and caters for domestic tourists on weekend or holiday travels. Smaller hotels dependent on domestic tourism often find it challenging to secure sufficient and stable enough revenue to develop their offer.
The average occupancy rate for the country was 58.3% in 2016, up 2.7% from 2015. November 2016 saw a record 62% occupancy rate, the highest since measurements began in 2004, according to the National Administrative Department for Statistics. An occupancy rate of 56% is expected in 2017, a figure that, while lower than 2016’s, is above the historical average of 50%. In the 12 months to November 2016, hotel revenues grew by 5.4%, a slower growth rate than the 8.6% increase in the year prior to November 2015.
While currency devaluation made hotels less expensive for foreign visitors, increasing demand from abroad, the benefit was offset by reduced domestic tourism due to decreased spending power and tax reforms. Under reforms effective from January 1, 2017, value-added tax (VAT) increased from 16% to 19%. The industry felt the impact even before the change was implemented. “This left a whole year for people to be discouraged by the increase of the VAT,” Toro Velasquéz told OBG.
The lower peso had the additional effect of cutting into increases in industry tariffs. Average tariffs in 2016 were around COP230,000 ($69), a 4.8% increase in real peso terms compared to 2015, according to figures from Cotelco. This gain was nonetheless offset by inflation that surpassed 6% in 2016.
Domestic and international chains are expanding in Colombia. Marriott opened its first hotel in Cali in early 2014. The 170-room facility was the result of a partnership between Salvador’s Grupo Poma and the international brand, which had already opened two Marriott-branded hotels in Bogotá in 2009 and 2010. Four Seasons Hotels and Resorts entered the capital in recent years with two luxury hotels. The first, the Four Seasons Casa Medina, opened in October 2015 with 62 rooms. The second, the Four Seasons Hotel Bogotá, opened in April 2016 with 64 rooms.
In November 2016 a 132-room Hampton by Hilton opened in Medellín, followed in December by the Hyatt Regency Cartagena. The latter, a 261-room facility, is the brand’s first in Colombia. Spain’s Sercotel recently opened two hotels in Bogotá and another in Bucaramanga, and as of mid-2016 was managing 20 properties with more than 2000 rooms in total. France’s AccorHotels also recently opened properties under its brands, which include Sofitel, Novotel and Ibis. The group manages two Sofitel units in Bogotá and Cartagena, as well as Ibis units in Bogotá, Cartagena and Medellín.
Colombia’s hospitality sector is learning to compete with alternative options based on online platforms, such as AirBnB. Traditional hotel operators must conform to higher standards and follow regulations that lead to higher operating costs. “In Santa Marta, for example, there are 4000-5000 apartments on offer online that may not meet the safety and hygiene conditions required by law,” Toro Velásquez told OBG. “This is a challenge for traditional hospitality, which must abide by a series of rules and regulations that are not enforced on these other platforms.”
In addition to alternative accommodation, the industry is learning to adopt promotions and digital platforms to reach potential customers. “The majority of Colombian hotels are family businesses, and may not really understand the importance of a digital presence, how to do promotions or how to drive and manage demand patterns with the help of the internet,” Toro Velásquez said. To address this challenge, Cotelco, in partnership with the American Hotel and Lodging Association, began certified courses for hotel managers to support the use of technology in domestic hotel chains.
Cotelco, along with MINCIT and ProColombia, the government agency in charge of developing tourism and establishing the country’s profile abroad, are working on additional programmes to make technology use more widespread in the hospitality sector. “We need to help hotel owners understand that this is a topic that should be addressed now,” Toro Velásquez told OBG.
Another challenge for the market has come from the reduction of fiscal incentives for new hotel construction. Regulations to encourage hotel development exempted hotels built between 2003 and 2016 from paying corporate tax for a period of 30 years.
In late 2016 the government reversed this measure and announced that those units would have to pay a 9% tax starting on December 31, 2017. In a bid to address the industry’s concerns, the government included a special tax incentive for hotel development in communities of fewer than 200,000 people. Hotels built in these areas over the next decade will pay a 9% corporate tax rate for a period of 20 years instead of the current 34%. Incentives for development have been critical in encouraging the growth of hotel capacity and development of Colombia’s accommodation infrastructure.
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