Within these digital pages, we've documented the growing number and growing rate by which investment groups based in Asia are acquiring hotels, specifically upper-echelon U.S. hotels. And while within free markets, where the freedom to spend money in any way someone sees fit is a right, is it a good thing if that money is coming from groups that are not U.S. based? Or is it a case of tough noogies?
1. Marginalizes U.S. investors, lenders
Cross-border investment is becoming more ubiquitous by the moment and there are no signs it is letting up. The October 2014 announcement that Hilton Worldwide was selling the Waldorf Astoria in New York to a Chinese insurance group was not the first shot across the bow, but a signal that foreign capital was coming for U.S. assets—and coming hard and fast. Subsequent to the Waldorf sale, another Chinese insurance firm followed suit buying the Baccarat Hotel in Manhattan for around $2 million per room.
Though the Chinese may be new buyers—Middle East buyers have long acquired stakes in U.S. real estate—they could prove to be the biggest game changers: seeking safe haven to park their oodles of cash. While there are no regulations preventing U.S. companies from selling to overseas buyers, for some, it doesn’t sit well. To wit, Access Point Financial’s Jon Wright, whose business is lending. “Foreign cash buyers have no cost-basis concerns,” he said. “They don't have to worry about what the cap rate is, like most domestic investors. They are seeking safe harbor to park their capital. That trickles into our livelihood. Without a regulatory environment, and this immigration-style question of more and more cash coming in for safe harbor, my livelihood and those of my borrowers are impacted.”
Wright may be the most sharp in his examination, but he is not alone in his estimation that foreign capital flooding the U.S. in search of assets—a major portion of which being hotels—is a trend will not dissipate. “Global brands and international travelers have made their mark across the last fifteen years, but in the coming five to 10 years, global investors will have an even more lasting and direct impact,” said Hersha Hospitality Trust’s Neil Shah. “Across the last year, Chinese, Korean, and Middle Eastern investors have been the highest profile buyers of New York hotels. Not simply high-net-worth trophy buyers, but global institutional investors attracted by the security, liquidity and yield of top U.S. lodging markets. Our daily leases in lodging provide inflation protection and will prove attractive to global investors in search of yield and security.
It will make the investment markets even more competitive, but it should increase values significantly. It will also make the investment landscape tougher for buyers who can’t consummate all-cash deals. “Cash is king. It’s winning transactions because of the certainty of execution,” said Wright. Moreover, as the availability of trophy properties peters out, these foreign buyers will begin to look downmarket, snatching up select-service portfolios in secondary and tertiary markets. Also disconcerting to Wright. “When saturation sets in with trophy assets, middle-market borrowers get effected,” he said. “They will begin to buy tertiary portfolios because they have to aggregate meaningful dollars. If there is enough desire to sink capital into U.S. markets we serve, just for safe harbor, where IRRs don't matter, then that’s a real issue for traditional investors here.”
People, groups are going to sell to the highest bidder. That's a no-brainer. But what if the government stepped in? Which brings us to the second point.
2. Security concerns
Subsequent to the acquisition of the Waldorf Astoria came the State Department decree that U.S. officials will no longer stay at the hotel. That includes President Barack Obama. Instead, all U.S. officials will stay at the New York Palace Hotel, which, similar to its competition down the block, was acquired by foreign money in early June. (It was bought by a South Korean group; not a peep yet from the Feds.)
U.S. presidents have always stayed at the Waldorf for the September UN assembly sessions, occupying the 39th and 40th floors of the tower. The Secret Service sets up "clean rooms" throughout the hotel to prevent eavesdropping and cyberespionage.
So the State Department is wary, should normal Americans be? Unless you are carrying U.S. secrets and voicing them over a $50 omelette in your suite, probably not. But what does it say that the U.S. government is not cool with its own people staying in the hotel? Why, if concerned, did it not do something to thwart the deal?
Foreign invstment in U.S. real estate, particularly hotel assets, is not going away, and will only get bigger. Addressing some of the issues will be paramount.