Munro Beach owner says Bermuda tourism needs new model
This is the second in a series of reports on the state of the Bermuda tourism industry.
We will examine how far we have fallen since our heyday in the 1980s, why dozens of resorts and hotels- including highly rated ones- have failed and closed, why no one wants to invest in a hotel in Bermuda right now, why no new developer has broken ground despite promise after promise, and what it will take for a new resort to be built, and for the less than 50 hotel properties we have left to be profitable enough to keep their doors open.
If anyone is going to build a new resort in Bermuda any time soon, it would be American real estate investor Sam Byrne.
He already owns Munro Beach, a gorgeous five-acre site with its own protected beach, surrounded by the world-class, public Port Royal Golf Course, site of the PGA Grand Slam of Golf.
The investment firm Mr Byrne founded, CrossHarbor Capital Partners, specialises in real estate investment and distressed loans. It manages $5.5 billion in assets for its own account and on behalf of pension funds, and institutions.
And, he says, I am personally a big fan of Bermuda and the people of Bermuda. I have been coming there for 20 years and want nothing but the best for Bermuda, its leadership and citizens.
Mr Byrne said his views are those of an outsider who invests heavily in the hospitality industry, not as a developer per se, but as a direct capital provider, which is a different perspective.
So whats holding him back?
As he tells us, in his own words in this exclusive interview, he still is looking at developing Munro Beach.
But Mr Byrne said for significant hospitality investment to occur in Bermuda, the Island should bring down construction and other costs and come up with a new model to encourage foreign-owned vacation properties.
As he points out, many of our competitors in the Caribbean dont have the heavy restrictions that we have on foreigners owning property.
They dont limit foreigners to being able to buy just timeshares, fractionals, certain condos and multi-million-dollar homes.
According to hospitality reports, real estate based tourism (sales of villas and condos to foreigners, condo hotels, fractionals) has taken off across the Caribbean in recent years, though demand weakened significantly in 2008 with the global financial crisis and a number of residential/hotel projects have stalled.
But while Bermuda has numerous restrictions on foreign ownership and high taxes and fees, reports show that islands such as Turks & Caicos, Cayman Islands, the Bahamas, Grenada and the Dominican Republic, have no real restrictions on foreign ownership.
St Kitts and Anguilla have some restrictions but they are nowhere near as heavy as the Bermuda Governments, which include: a land holding licence required, financial and personal references, you may not hold title in name of company or trust, you may own only one property, you can only purchase a home with ARV of $153,000 or more and condo of $32,500-plus (effectively a home of $5 million-plus), and rental is prohibited without permission. On top of that licence fees are 18-25 percent for condos and homes, ten percent for fractional units plus theres stamp duty of 2.5 percent up to six percent for amounts over $1.5 million.
By comparison, in the Turks & Caicos the only taxes/fees are stamp duty of five percent to 9.75 percent, and in the Cayman Islands stamp duty of five percent to seven percent.
But, of course, the Caribbean doesnt have the advantage Bermuda has of being a non-stop two-hour flight away from major, lucrative US East market.
Why is it so difficult to make any hospitality project work in Bermuda?
Sam Byrne: First off, the market has suffered a serious downturn since the financial crisis so that is the biggest reason why its difficult to do any new hospitality project, virtually anywhere, in recent years. For Bermuda, this is compounded by very high construction costs and immigration controls that do not encourage vacation home ownership by non-Bermudians. In todays environment, the only way to get a hotel or resort project financed is with a meaningful element of for-sale property to offset the high, largely loss-leading, costs of building hotel rooms.
What is the update on Munro Beach. Is it postponed indefinitely?
We are evaluating the right way to move forward with Munro Beach. Its a wonderful site in a wonderful country, and has great long-term potential. At this point, without a market turnaround and significant economic incentives to move forward, its not economically justifiable. It will take a stabilisation of the market and a thoughtful policy regarding foreign ownership of vacation homes to get traction to proceed.
What are the top three things that could be done right now that would help a Munro Beach development get off the ground in Bermuda?
At this point, we are looking at what product type would be desirable and economically feasible for the Munro Beach site given market conditions. Once we have a better understanding of the former (desirability), we will likely need incentives for foreign home ownership for the latter (economic feasibility). With the right mix, a small project such as Munro would be a very good test case for a model of higher-end, luxury tourist product on the Island. It would be up to us to create the right product to sell and succeed.
Fractionals are being discounted now in Bermuda and not selling as well. Why has the fractional product and financial model failed? Was it a result of the global economic crisis? Or do you feel the fractional model is still a good one?
Fractional product works in the right settings and context. Unfortunately for Bermuda, the newly introduced fractional model suffered from poor timing relative to the global economic crisis.
How does the cost of building and the efficiency of construction in Bermuda compare to building years ago?
I cannot comment on historical building costs in Bermuda, but the high cost of building in Bermuda is definitely an issue for new development. Higher costs are understandable given the nature of the Island environment (one of the things that makes Bermuda so great!), but are exacerbated in Bermuda due to high wage scales for labour coupled with a limited local contractor base for larger projects.
Why have there been so few properties that have been built or significantly expanded/upgraded in Bermuda since 1972, with two being put in receivership (Newstead, Pink Beaches)?
It is no secret that Bermudas economy successfully moved away from tourism towards international business for many years, and the regulation and competition for land and construction labour created disincentives for the required redevelopment of the Islands historical bed base. High costs on many fronts made traditional hotel development and operations unfeasible compared to lower cost destinations in the Caribbean where successful tourism development has taken place.
High cost markets and high-end product (which should be Bermudas focus given its proximity to the New York, Boston and DC markets) have only been successfully developed with a significant for-sale component (the highly successful development of the Aman in the Turks and Caicos and redevelopment of Eden Rock in St Barths are excellent examples).
Bermuda did not encourage ownership schemes (in fact prohibited them in most cases) and was too expensive for mid-market hotel operations to succeed. Thus, the bed base reduced, airlift declined and the overall industry suffered. The economy still succeeded with global business, particularly reinsurance, thriving in Bermuda, but the tourism market suffered to the point that it requires complete rebuilding from the ground up with new thinking and creative incentives to attract outside capital.
What is your view of Bermuda as a tourism destination?
Bermuda is one of the most desirable places on the planet and remarkably a short two hours from the highest concentration of consumer wealth in the world. Bermuda should succeed as a tourism destination catering to high-end and mid-market clientele from the US and Europe.
However, this wont be achieved simply by a recovery in the economy. Bermuda needs to creatively rebuild its tourist bed base and upgrade tourism amenities targeted towards a higher spending segment of the market. To do this, a new model to encourage foreign owned vacation properties could be developed which would not impact the local rental market. This, along with improvements to transportation, airlift and local tourism amenities could be the impetus to a new generation of successful tourism for Bermuda.
We came to Bermuda and made a significant investment right out of the gate in an existing disused property without seeking any incentives or concessions. Unfortunately, the worldwide financial crisis has hit Bermuda hard and impacted the viability of any significant hospitality investment on the island. I am sure other well-intentioned investors and developers have been similarly impacted.
So in your opinion what are the main problems/barriers of doing business in Bermuda for the hospitality industry?
As enumerated, high construction costs and restrictions on foreign ownership are the barriers to new construction.
Bermuda needs a new attitude about tourism, a focus on supporting its small properties to the high end of the market and support for foreign vacation home ownership that doesnt disadvantage itself against other markets that have more favourable business environments for developers.
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