In search of rooms: Inside Cuba’s quest for more hotels

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The Habana Libre, found in Havana's Vedado district, is one of the tallest buildings in the city. Photo by Matias J. Ocner.

The Habana Libre, found in Havana’s Vedado district, is one of the tallest buildings in the city. Photo by Matias J. Ocner.

When Fidel Castro led his band of rebel soldiers into Havana on Jan. 8, 1959, the Habana Hilton—the gleaming new hotel on the crest of La Rampa along Avenida 23—became the Comandante’s headquarters. The following year his new government nationalized and renamed the Habana Hilton the Habana Libre. The move sent a message to the United States that Cuba was no longer interested in being a playground for its tourists.

In the years following the Revolution, Castro used the Habana Libre to house people from the countryside who were bussed into Havana for massive government rallies. Surely there was a better use for a building once dubbed “Latin America’s tallest, largest hotel.”

Today, the Habana Libre serves more lucrative purposes. Thousands of visitors from around the world cycle through its doors each month, bringing in hundreds of dollars per room to a country with chronic cash shortages.

Unfortunately for Cuba, it took the collapse of the Soviet Union and the subsequent “special period” to realize that it needed to invest more heavily in the tourist sector. During the ’90s, Cuba invited foreign companies to sign deals with state-owned enterprises to run hotels, while maintaining state control of landmarks like the Nacional and the Riviera. Spanish hoteliers such as Meliá and Iberostar planted their flags early. But now with annual tourist arrivals expected to top last year’s record four million visitors, players from around the world are eager to add their brands to the mix.

Among recent foreign entrants to the Cuban market are Switzerland’s Kempinski Hotels, with a spectacular new 5-star property on Havana’s Parque Central, and Singapore-based Banyan Tree Hotels & Resorts, which recently opened an upscale beach resort on Cayo Santa Maria. They join the lone U.S. entry, Starwood Hotels (acquired by Marriott last year), which has managed the Four Points by Sheraton in Havana’s Miramar district since summer 2016.

Several more prestige hotels are in the pipeline, including a Sofitel at the intersection of Havana’s two iconic promenades, the tree lined Paseo del Prado and the seaside Malecón. Starwood, meanwhile, has signed on to manage two more properties, including the historic Hotel Inglaterra where Paseo del Prado begins on Parque Central.

Outside Havana are several intriguing beach resorts also in the pipeline. Thailand’s Centara Hotels & Resorts says it has three projects in the works, including a 250-room resort on Cayo Guillermo expected to open this year. Banyan Tree, for its part, plans to open three more beachfront resorts by 2019.

As promising as these new projects may be, many more like them will be needed for Cuba to achieve its lofty tourism goals. According to a recent Brookings Institution report, Cuba wants to add 108,000 rooms suitable for foreign tourists to its current roster of about 64,000 by 2030.

Until more hotels are built, Cuba’s existing stock—much of it needing renovation—will be operating at maximum capacity, leading to high prices for substandard accommodations. Cuba has partly dealt with this shortage by approving more cruise ships and allowing thousands of entrepreneurs to start private bed-and-breakfasts. But more must be done.

“It is clearly possible, but to make that happen I think a couple things need to occur,” said Richard S. Newfarmer, co-author of the Brookings report. Attracting more foreign capital, overcoming bureaucratic inertia, developing pricing incentives, and allowing hotels to buy more local food are some of the suggestions Newfarmer says Cuba should consider in order to reach its ambitious rooms target.

The inclusion of additional hotel groups could also shake up an industry that needs more diverse offerings. Many of Cuba’s hotels are either modestly priced all-inclusive beach resorts or expensive three- to four-star city hotels that Cuba insists are four- to five-star quality. Even though Cuba has attracted beach-loving Canadians and Europeans seeking bang-for-their-buck accommodations for decades, the country must attract a wider range of tourists, especially luxury-focused travelers.

“They need to come up with more hotels that are four- and five-star quality, because those are the tourists that are now coming in,” said John Thomas, a Florida International University professor specializing in hospitality law and tourism in Cuba. “They’ve always had the lower-end tourists, but they really need the higher-end tourists.”

A “bici-taxi” driver enjoys a cigarette in front of the Iberostar Parque Central in Havana. Photo by Matias J. Ocner.

Building Partnerships

Under Cuban law, foreign firms must partner with a state-owned enterprise to operate a hotel or resort. These partnerships typically take the form of foreign firms signing management contracts with the state-owned enterprise, or joint ventures in which the Cuban party holds a 51 percent share.

“The advantage of the management contract is the risk is reduced, and you also get a certain participation in profits based on certain performance in the contract,” said Richard E. Feinberg, the other co-author of the Brookings report, and author of Open for Business: Building the New Cuban Economy. “If it’s a joint venture, then the upside is you get to participate more fully in profits, but you are also taking some of the risk, so if occupancy rates are down that would affect your bottom line.”

Added Thomas: “The more popular thing is for the Cuban government to actually finance the construction of the hotel property, and have it managed under a hotel management agreement. That’s actually a popular form of hotel management everywhere in the world, but particularly in Cuba, because in the rest of the world there is a better chance that you can protect your investment if you put money into a property.”

Both Kempinski and Banyan Tree, for example, partnered with Gaviota, which is controlled by the Revolutionary Armed Forces’ GAESA conglomerate. GAESA is one of Cuba’s most powerful state companies, with holdings that include hotels, retail chains, restaurants, gas stations, golf courses, construction companies, and tourist bus fleets. It also controls Banco Financiero Internacional, which is responsible for financing hotel construction projects.

The Brookings report says Gaviota operates about 40 percent of the country’s hotel rooms, making it the largest state-owned hotel enterprise. In second place is Cubanacán, which operates about 24 percent of Cuba’s hotel rooms, followed by Gran Caribe with about 19 percent. The remaining 17 percent of hotel rooms are operated by smaller state-owned enterprises, some of which fall under the GAESA umbrella. Notably, Gaviota operates about 57 percent of all four- and five-star rooms, significant because those rooms accommodate big-spending foreign tourists.

While Gaviota has a reputation for being one of Cuba’s most efficient state-owned enterprises, its close ties to the military worry skeptics of doing business with Cuba. Critics point out that GAESA’s chairman, Gen. Luís Alberto Rodríguez, is President Raúl Castro’s son-in-law (though there are reports he is no longer married to Castro’s daughter).

Newfarmer said he’s sure the military benefits in some way from its relationship with Gaviota. However, he also said Gaviota “behaves like a commercial enterprise” and doubts hotel revenues go towards buying military equipment. Others say Gaviota is more essential to the military.

“It’s really the Cuban military, so they use [Gaviota] for financing the military and as a means of controlling the major economic engine on the island,” Thomas said. “There are also a couple other Cuban entities, Cubanacán and Gran Caribe, not associated with the military. But they are much smaller players with much lesser-quality properties.”

The Melía Marina Varadero is one of the most modern hotels in Cuba. Photo by Matias J. Ocner.

The Big Three Foreign Flags

Even though more foreign hotel groups are entering Cuba, three groups still largely dominate the market: Meliá Hotels International, Blue Diamond Resorts, and Iberostar Hotels & Resorts. Brookings estimates that these three operate two-thirds of the country’s hotel rooms in partnership with state enterprises.

Spain’s Meliá is the largest player by far. The company has worked in Cuba since 1990, and now operates 28 hotels and resorts throughout the island. Besides Spain itself, no country has more Meliá properties than Cuba. Some of its most recognizable properties include the Habana Libre (managed by its TRYP brand) and the Melia Cohiba, both in Havana, and the modern Meliá Marina Varadero on the coast two hours to the east.

Iberostar, another Spanish hospitality group that started working in Cuba in the ‘90s, operates 15 hotels and resorts. Its best-known property is arguably the Iberostar Parque Central, which TripAdvisor considers Havana’s best hotel.

Barbados-based Blue Diamond Resorts is a relative newcomer to the game. The company was established in 2011, but has become one of the fastest-growing resort groups in the Caribbean. It operates 18 properties in Cuba through its Memories, Royalton, Sanctuary, and Starfish brands. Unlike Meliá and Iberostar, Blue Diamond focuses more heavily on all-inclusive beach resorts far away from urban centers.

No other foreign hotel groups besides these three operate more than five properties in Cuba. Most of the remaining groups, including Spain’s H10 and France’s Accor, are based in Western Europe.

Tourists enjoy the beach in Varadero, a popular destination for visitors from Canada and Europe. Photo by Matias J. Ocner.

What’s In The Pipeline

Anyone who spends time in Cuba’s tourist hotspots will notice hotel construction projects underway. The projects range in size from eco-tourism accommodations to massive golf course communities.

One of the most ambitious of these undertakings is a $500 million joint venture between the UK’s London + Regional and state-owned enterprise Palmares to build the Carbonera Resort—a property between Havana and Varadero that will include an 18-hole golf course, a 150-room hotel and 1,000 villas and apartments. China’s Beijing Enterprises Holdings Ltd. also signed an agreement with the Cuban government to build a $460 million golf resort east of Havana.

While these projects have faced delays—the Chinese project was approved in 2015—the Cuban Communist Party newspaper Granma reported in April that both should be back on track by the second half of 2017.

Wilton Properties Ltd., a wholly owned subsidiary of Canada’s Dundee 360 Real Estate Corp., plans to develop an even larger golf-hotel-condo project. According to the Dundee 360 website, the property, located near the town of Jibacoa, is expected to cost $1.2 billion, and will feature a 45-hole golf course, five hotels, a 300-slip marina, and 2,400 condo units for sale to foreigners under a long-term leasing program. Wilton Properties President Guy Chartier declined to confirm if the project has broken ground, or when it will.

Granma also reported in early April that a joint venture with Spain’s La Playa Golf & Resorts to build Cuba’s largest golf course in Pinar del Rio province had been approved, with further golf developments in the works.

“This would be a worthwhile addition to their current offerings,” Newfarmer said of Cuba pursuing golf developments.

Meanwhile, as more tourists descend on Old Havana, additional hotels are starting to emerge there as well. Accor signed on with Gaviota to manage the 218-room Sofitel So La Habana currently under construction at the end of the Paseo del Prado. Just up the road is the Hotel Packard, which has been in redevelopment for years. A Jan. 24 Iberostar press release says the long-awaited hotel will bear the Spanish hotel group’s name when it reopens. In April, the UK’s St. Giles Hotels announced its plans to renovate and manage the Gran Caribe-owned Hotel Deauville, which sits next to the Malecón. GAESA’s Habaguanex also says it plans to open four small hotels in Old Havana by 2019.

“Havana is a lovely city, and it is one I think could attract more tourists than it does to date,” Newfarmer said. “There is a real opportunity to develop more properties.”

Not all projects that are announced bear fruit, however, and delays are common. To the west of Havana, development of a Chinese-Cuban partnership to build the 600-room Hotel Hemingway at the Hemingway Marina has been delayed for years. Reuters reported in 2009 that the project’s groundbreaking was set to happen that year. Eight years later, the hotel is still nowhere near completion.

Thomas says the project’s delay, among others with Chinese backing, may be linked to investors waiting for the U.S. to loosen its travel restrictions on Cuba. “They are just not that anxious to finish them if there is not going to be the market to sell them,” he said.

A statue of José Martí sits in front of the Hotel Inglaterra at Havana’s Parque Central. Photo by Matias J. Ocner.

Looking ahead

Cuba is well aware that its tourism sector is one of the few rooright spots for an economy in recession. In 2015, the World Travel and Tourism Council estimated that indirect and direct tourist spending accounted for more than 10 percent of the country’s GDP.

For that reason, among others, Cuba is making an aggressive push for foreign investment in tourism. The 2016-2017 edition of Cuba’s foreign investment portfolio – which lists projects that need foreign capital – includes 114 opportunities in tourism. The 2015 portfolio listed 94.

In terms of accommodations, the portfolio lists detailed opportunities to invest in new hotels, older hotels in need of upgrades, and eco-tourism accommodations. Each listing includes information on the investment’s location, estimated costs and earnings, number of rooms, and the nature of the partnership with a state-owned enterprise.

The portfolio reflects Cuba’s interest in building tourist hotels away from its traditional destinations. The Guardalavaca area in northern Holguín province, the south-central coast of Cienfuegos province, Playa Santa Lucia in northern Camagüey province, and the Covarrubias resort area in northern Las Tunas province are all listed as priorities.

“They are not hotspots now, because they are not really developed, but I think they can be in the future,” Feinberg said. “The economy is very concentrated in Havana, and a more decentralized development model definitely would be positive for the island.”

The portfolio also lists 80 properties seeking management contracts with “the possibility of including funding from managing foreign companies for hotel reconstruction.” About a third of the properties are in Havana, with room capacity ranging from 50 to 1,145.

Beyond building new hotels and finding foreign partners to manage existing ones, Cuba must also look at revamping its hospitality services. Even as the number of hotels in Cuba grows, much of the country’s hospitality sector hasn’t shaken its reputation for mediocre food, substandard amenities, and limited internet connectivity.

While the Cuban government has an important role to play in resolving those issues, foreign players can contribute. Invite more foreign hotel groups to operate on the island, says Newfarmer, and the result will be “greater competition, more foreign capital, greater technology, and more rapid growth in the industry.”

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