With the World Cup and Olympics on the horizon, there are opportunities for investors in Brazil's hospitality sector, writes Stephanie Schwartz-Driver

Brazil, the fifth largest economy in the world, is putting itself front and centre on the world stage as it prepares to host two huge global sporting events - the World Cup in 2014 and the Summer Olympics in 2016. Real estate in the country is already booming - some say too much so. Will the bump from these events help or hurt the sector?

Brazil as a nation has been enjoying its new prosperity, benefiting from generally positive economic trends. Economic growth came in at 7.5% in 2011, and a growing middle class has been creating domestic demand for consumer goods and homes. Growth, however, has moderated; predictions for 2012 put GDP growth at around only 3%, although the government is aiming for 5%.

Concerned about falling industrial production, the government has announced a stimulus package worth some $35bn. This is on top of the government funding for various infrastructural programmes aimed to prepare the country to host the World Cup and the Olympics.

The World Cup is attracting global attention to areas of Brazil well outside Sao Paulo and Rio de Janeiro, the latter being the host city for the Olympics. There are 12 World Cup host cities spread throughout the five geographical regions of the country (Fortaleza, Natal, Recife, Salvador, Belo Horizonte, Curtiba, Porto Alegre, Brasilia, Culaba, and Manaus, in addition to Rio de Janeiro and Sao Paulo).

An Ernst and Young report, ‘Sustainable Brazil: Social and Economic Aspects of the 2014 World Cup', notes that these regions "differ significantly in terms of infrastructure, capacity, and adequacy of stadiums and geographical features". Brazil is building not only stadiums for the athletic competitions but also hotels and housing in and around these cities, and also focusing on the national transportation infrastructure. The report points out that BRL14.54bn (€5.7bn) in investments in host cities should boost their local GDP by BRL7.18bn.

The World Cup and the Olympics have created interesting opportunities for institutional investors cognisant of the shortage of quality hotel rooms in Brazil. According to the Brazilian Institute of Geography and Statistics (IBGE), the government statistics bureau, there is marked under-capacity in the hospitality sector, not just to meet the demand of extraordinary events like the World Cup and the Olympics, but also to satisfy normal demand.

Even Rio de Janeiro, which experiences an annual tourism blast during its annual carnival, is undersupplied for the Olympics. There are more than 45,000 available beds in 429 hotels and hostels, but it is forecast that the city will need 52,000 beds in 2016. New development is already taking place - and not just to prepare for special events. The economy in Rio, which houses headquarters for many companies in the oil and gas industry, is booming, and the city is known as one big construction site, with office, hotel and infrastructure development ongoing.

For the World Cup, the government estimates that there is a deficit of around 62,000 hotel rooms nationally. Some BRL3.16bn is forecast to be invested in the hospitality sector to prepare for the World Cup - the second-largest investment, coming in just under stadiums. An additional BRL3.16bn is targeted to develop almost 20,000 new housing units in the host cities. Nonetheless, even this projected investment is unlikely to meet demand during the event.

This situation is a legacy of a lack of domestic tourism, explains Ricardo Mader, executive vice-president at Jones Lang Lasalle Hotels. But it is changing. "In 2011, for the first time, more people in Brazil travelled by train than by bus, and the use of hotels is growing," he says. "This reflects the growth of the middle class and of disposable income."

Domestic tourism, in fact, is driving the growth in the hospitality industry. The World Travel and Tourism Council (WTTC) found that domestic tourism spending in Brazil increased by 6.5% in 2011. This is reflected in hotel occupancy patterns, which are demonstrating growing occupancy at weekends, notes Mader.

Traditionally, people who travelled domestically stayed with family and friends, but the use of hotels has been growing for the past four years, from 58-60% occupancy to more than 70%. "The fundamentals for hotels are improving. This is the best time for the hotel industry in Brazil," Mader says.

In 2011, Brazil recorded major increases in its hospitality sector. According to STR Global, occupancy was up 2.4%, average daily rate (ADR) was up 15%, and revenue per available room (RevPAR) up almost 18%, during 2010. This was led by Sao Paulo and Rio de Janeiro, two of the three fastest growing hotel markets in the world.

There are limiting factors to hotel development, similar to those that influence office and retail development. Land prices are very high in major cities in Brazil, and it is difficult to price this into hotel investment. In addition, real estate finance is scarce. Some existing properties are owned by multiple small investors, which makes acquisition and upgrading of existing stock challenging.

Most of the existing hotel stock is controlled by independent operators, and the majority of hotels and hostels are not of a high standard. The IBGE estimates that more than 85% of hotels are of only medium or low standards.

Noting quality issues and undersupply, many of the major international hotel chains are increasing their presence in Brazil. Paris-based Accor is the largest branded presence in the country, with 150 hotels. Choice Hotels International is aggressively developing its presence in Brazil. It has 60 existing properties, as well as 26 under construction. InterContinental has 12 facilities open and 12 being constructed.

While tourism and the World Cup are focusing international attention on Brazil's regions, these are not the most significant factor driving regional development, according to Mader. The decentralisation of the economy, and consequent economic development around the country, has created an increasingly mobile workforce, he says. The mining and oil and gas sectors are based all over the country.

"Cities that were not on the map are now, because of mining, experiencing significant growth, creating opportunities in areas where they did not exist before," Mader says. "There is growth of existing markets and also the creation of new markets, both geographically and in terms of the type of demand."

Andre Viola Ferreira, strategic growth market leader at Ernst and Young Terco in Brazil gives one example. Petrobras, the giant Brazilian multinational energy company, is leading $200bn in development around the country, building new ports and other infrastructure to grow its business. All this development is creating a need for workers in new industrial centres, and it is estimated that some 60,000 people will relocate for work as a result.

Demand is growing not just for workforce housing throughout the country. Increasing prosperity and rising disposable incomes are creating demand for the trappings of middle class life. "There is a lot of development to be done because of a traditional deficiency in the residential sector to provide better housing," Ferreira says. "But there is also increasing demand in the second-home market and for developments like condos and golf courses."

Business travel is also on the increase. "Brazil is a hub for the Latin American business community and is home to many South American or Latin American headquarters for multinationals. "The problem of the lack of hotels is not for the Olympics or the World Cup - but for now," says Mader. "In big cities during the week, hotels are operating at full capacity. So while office and residential markets in major centres in Brazil have stabilised in terms of demand for new supply, there are opportunities for hotel investment."

Lack of sufficient infrastructure, particularly in terms of transportation, is proving to be a limiting factor on economic growth and development throughout Brazil. "We need to develop our infrastructure to continue our economic development. We need the income from economic growth to invest in infrastructure. The two go hand in hand," says Ferreira. "We are at a nice point in time now - we have them both, and they are in balance."

The World Cup will focus international attention on domestic travel in Brazil, as fans attempt to travel between the various host cities. An estimated 2.25m additional passengers will be flying through Brazilian airports during June and July 2014. FIFA, in fact, has specifications that must be met in terms of "access to the various means of transportation that can serve the intense movement of people associated with the Cup."

Airport development is currently lagging usage, even without the logistical demands of an international event; all the major airports are operating at over-capacity. However, developers are rising to the challenge. "We are seeing the first private airports and ports," Ferreira says.

In addition, BRL1.44bn is being invested in the highway infrastructure, over and above work planned outside the World Cup. Despite this, many observers are sceptical that Brazil will be able to deliver what was promised to FIFA.