Caribbean Construction Costs Rising

The cost of obtaining funds to develop large real estate projects in the Caribbean, like hotels, has risen significantly in the past year across various products, according to Tim Lorimer, vp for corporate finance at Scotiabank. One of the drivers for the rising premium is the bigger opportunity cost of deploying cash in such ventures, since today cash can be deployed in lower risk investments with similar returns. For a $150m-$200m greenfield hotel development in the Caribbean, Central America or Mexico, at least two funding options – the term loan B market and mezzanine debt – are no longer available. Twelve months ago, the former was available at rates that hovered around Libor plus 650bp for up to 5 years, while the latter could be raised with coupons of 15% for 36-month construction periods and takeouts of up to 66 months, says Lorimer. Those options are now gone, and while the bank market is still open, the margins there have widened from Libor plus 250bp to the Libor plus 350bp-400bp range for structures with a 2-year construction period and 15 years for amortization. Private equity investors, meanwhile, have also increased their targeted annual returns to 30%-35% from 20%-25%.