Chinese hotel investors may be less savvy than we think

In the U.S. real estate market, it goes without saying that the past couple of years have featured the Chinese and their robust appetite for assets. In the hospitality sector, insurance groups Anbang and Sunshine became the poster boys for massive spending, when each acquired trophy assets in New York, the Waldorf Astoria and Baccarat Hotel, respectively.

It prompted me to devote an entire piece on "Why China is infatuated with U.S. real estate?"

Like many—myself included—the Chinese, we assumed, not only had ample wealth, but were sophisticated investors: they knew what to buy, where to buy and how to operate it optimally. Look at the numbers: Between 2010 and 2015, Chinese buyers put more than $17 billion into U.S. commercial real estate, with half of that spent last year alone. Overall, Chinese investment in U.S. commercial real estate reached $8.5 billion in 2015, a record high and a 70-percent jump from 2010, according to a report by Rosen Consulting Group.

And the buying spree is not going to let up any time soon.

Not As Smart As We Thought?

Still, historically, the Chinese are unlike most: they are apt to buy high and hold for a long period. Private equity and REITs, they are not. It's this aggressiveness that has priced many other would-be buyers out of the market, as valuations have soared.

The notion that Chinese buyers don't know what they are doing never crept into conversation. Until now.

During a panel on Chinese real estate investment at the Asia Society, a non-profit organization that focuses on educating the world about Asia, and as reported by The Real Deal, several investment insiders expressed a belief over a knowledge gap amongst Chinese investors.

One of which was John Liang, Xinyuan Real Estate’s managing director of U.S. operations, who said: “I’ve been surprised by the lack of sophistication of some Chinese institutional investors. Some are even missing the basic finance 101 concept of risk and reward."

Liang reasoned that real estate in China operates more like a manufacturing business, wherein one builds, sells and makes a profit. It's that simple. But in the U.S., real estate investment is considered more advanced.

“The U.S. is way past that,” Liang said, citing the myriad complexities in the States. “It’s a little ahead of what the Chinese are used to.”

Smarter Than We Think

But what matters is what's being bought and sold. Anbang may have whiffed on Starwood Hotels & Resorts Worldwide, for example, but did win out in the $6.5-billion acquisition of Strategic Hotels & Resorts. Meanwhile, Sunshine and other more endemic hospitality investors, such as Wanda Group, continue to make inroads in U.S. real estate.

Still, Liang is not the only one with skepticism. Liang’s panelists, who included Wendy Cai-Lee of East West Bank, Beth Fisher of Corcoran Sunshine, Kai-yan Lee of Vanke USA Holdings and Arthur Margon of Rosen Consulting Group, were, too, in accord with his assessment.

“You do wonder what the underwriting criteria is with some of these purchases,” Fisher said. “As a broker, you assume that they see into the future in ways that we sometimes don’t see, but it is a tad concerning on the supply side.”

Liang further went on: “Some of the investors could be a little overwhelmed. Your long-term business model and financial liabilities should be managed according to the class and model of real estate you invest in. A lot of Chinese companies lack basic understanding of that, including some of the so-called real estate funds and insurance companies.” 

There is, however, another consideration behind Chinese appetite for U.S. hotel assets. Namely, all the Chinese tourists that are set to visit them.

The number of Chinese tourists traveling outside of the country is expected to double to 234 million by 2020, accounting for $422 billion in spending, according to a recent report by China Luxury Advisors and the Fung Business Intelligence Centre.

“In the case of hotels like the Waldorf-Astoria, they believe they may be able to use domestic connections to bring more tourists to these properties,” Thilo Hanemann, an economist at the Rhodium Group, told The Washington Post, in March.

“The simple fact of pointing to a well-known hotel brand and saying, ‘That is my asset,’ is important,” Liang said.