Hold Your Horses! U.S. Hotel Developers Waiting For Cuban Tourism Windfall

Though it has been two years since U.S. President Barack Obama and Cuban President Raúl Castro restored diplomatic relations between their respective countries (a move President Donald Trump is itching to reverse), American developers are still evaluating whether the Caribbean’s largest island and third most popular tourist destination is worth their capital investment. 

Many expected companies to strike gold as business dealings between the two countries thawed, but American hospitality leaders find the nation 90 miles south of the Florida Keys has not quite opened its arms to American investment. 

“If I’m a neighboring Caribbean island, I don’t see it as a threat,” said Andrew Cohan, managing director at global hospitality advisory firm Horwath HTL. “Everyone wants to get in, but they’re finding out the partnerships aren't as balanced as in other parts of the world.”

A 2015 Cornell hospitality report forecast normalized U.S./Cuba relations could lead to prime business opportunities for the American hospitality industry — though it cited several obstacles a developer would have to overcome first, including the country’s lacking financial and banking system, the Cuban government’s tight control on labor, a lack of credible courts, and the Cuban government requiring every foreign investor to enter a partnership. 

A foreign company is required to follow regulations that give the Cuban government operational control in a business as a joint venture partner. Known as Foreign Investment Law No. 77, the measure does put a strict limit on foreign investment, which creates a lot of red tape for businesses. 

“Some prudent investors are waiting and keeping an ear to what the legal and joint venture structure is. It’s not going to happen overnight,” Cohan said. “It’s not the politics; it’s the policy.”

Numerous American investors have educated themselves on the legal structures of Cuba to assess the risks and rewards that come with entering the market in its early days, Cohan said.

Starwood (in its pre-Marriott acquisition era) became the first American hospitality company to return to Cuba after the 1962 embargo when the U.S. Treasury Department granted it permission in March of 2016 to operate a Four Points by Sheraton in Havana’s Miramar district. The company has plans for two other properties, including a delayed renovation of the Hotel Inglaterra in Havana (Cuba’s oldest hotel). 

Waiting For Certainty 

While a Brookings Institution report says Cuba wants to build 108,000 rooms suitable for foreign tourists, many hospitality companies like Hyatt and Wyndham have adopted a wait-and-see approach amid government action in D.C. and Havana.

The Trump administration has almost completed a policy review to see to what extent it will roll back the Obama administration’s efforts to normalize relations with Cuba, Reuters reports. Potential White House limitations, including tighter restrictions on travel rules, have been met with mixed reaction, as it would close off the market from American businesses. A bipartisan group of 55 U.S. senators reintroduced legislation Thursday to repeal all travel restrictions to Cuba. 

Despite the uncertainty in Washington, some businesses are simply waiting for Cuba to create a more conducive tax system for them to enter. 

The European vs. American Traveler

The hospitality market in Cuba has not been devoid of international activity just because citizens from its neighbor to the north were largely prevented from visiting. Melia Hotels International, a Spanish hotel chain, had 29 hotels in Cuba at the end of 2015, according to a PricewaterhouseCoopers report. Switzerland’s Kempinski Hotels had the soft opening for its five-star Gran Hotel Manzana Kempinski La Habana on May 22. 

"The embargoes on American firms doing business in Cuba were so strong that, if anyone disobeyed, it was a company killer," Cornell University Hotel School professor of hotel and finance Jan deRoos said. "Now that it has opened up, it's great, but these U.S. companies are learning there are a few people in line in front of them who have been already doing business there for a while."

Not all hotels in the country are as posh as the Kempinski. Many hotels in the area lack things American travelers often take for granted, such as WiFi, air conditioning and proximity to the airport. Developers are wondering if the high cost of upgrading just to accommodate the demands of an American traveler is worth it. European travelers, who have been visiting Cuba over the span of the decades when most Americans were not, have different expectations, Cohan said. While Americans might spend more money over a shorter period of time, European tourists are not as vacation-strained and stay longer. 

“When it gets down to it, as an operator, if you’re used to spending only a certain amount per day or per room night, just to please an upscale American standpoint might not be worth it,” Cohan said. 

American hotel companies are going to have to adjust to the firmly rooted policies of the Cuban government if they wish to succeed there in the near-term. Those familiar with the market find the infrastructure is being laid to make it eventually a more hospitable environment.  

“First it’s the U.S. airlines, then the cruises, and then the hotels,” SAHIC Latin America Hotel Investment Conferences president and founder Arturo Garcia Rosa said. “I think the reality is that it is going to take a little bit more time to mature.”