Chinese investment in U.S. real estate was just dealt a major blow. On Friday, the Chinese government announced that it has seized control of Anbang Insurance Group, the Shanghai-based conglomerate that owns New York City’s Waldorf Astoria hotel, 16 Strategic Hotels & Resorts properties and other global assets.
China’s insurance regulator announced that Anbang would be overseen for at least a year by a group that includes China’s central bank, its securities and banking regulators, the country’s foreign exchange regulator and other government agencies. Anbang, the regulator claimed, had violated regulations, putting into question its ability to pay insurance claims—although the regulator did not specify which regulations Anbang had violated. Furthermore, the takeover could last for another year if Anbang fails to complete an equity restructuring and resume operations.
The government has also removed the company’s former chairman, Wu Xiaohui, from his job and charged him with “economic crimes.” A statement from Shanghai prosecutors said that Wu had been indicted for fraudulent fund-raising and improperly taking company assets.
The move puts the Waldorf Astoria hotel, once the Manhattan home for visiting dignitaries and presidents, directly under control not just of a Chinese company, but of the Chinese government.
Blackstone Group sold the Waldorf to Anbang back in 2014 for close to $2 billion, ushering in the era of major Chinese investment in U.S. real estate assets. After Anbang acquired the hotel, President Barack Obama declined to stay there due to security concerns, opting instead to use the nearby Lotte Palace hotel.
"It certainly adds another wrinkle to that story," Michael Bellisario, senior research analyst at RW Baird, said of the sale's possible effect on the Waldorf, which is currently closed for renovations that will turn the building into a condo with some hotel rooms. The construction may also limit the property's appeal for potential buyers, Bellisario warned. "It sure feels like that progression or redevelopment is occurring slower than I expected, but it is occurring. That one's tough because it's closed, and it's not generating any cash flow. There's more money that they need to put into it. It's a much bigger check for someone to have to write."
Anbang faced similar security problems with its $6.5-billion acquisition of Strategic Hotels & Resorts in 2016. One of the properties included in the portfolio, San Diego's Hotel del Coronado, is located close to a large naval base of eight installations that sit on either side of the property, including an amphibious base, landing fields and a warfare training center. The Committee on Foreign Investment in the United States, which reviews acquisitions of American businesses by non-U.S. entities for national-security risks, raised some concerns over the deal and ultimately, the sale was canceled.
Regulations and Restrictions
Even in early 2016, Chinese regulations may have limited Anbang's growth. The company made headlines when it tried to outbid Marriott International for Starwood Hotels & Resorts Worldwide, leading to a bidding war. But the China Insurance Regulatory Commission reportedly had "a disapproving attitude" toward the plans because completing the Starwood and Strategic deals would break rules banning insurers from investing more than 15 percent of their assets abroad. While Anbang never formally stated a reason for withdrawing its Starwood bid, the regulator may well have played an important role in blocking the company's hospitality growth.
In August, China formally implemented measures to limit and restrict what it calls extensive overseas investments made by domestic groups.
In response, companies like Anbang, Dalian Wanda, Fosun International and HNA Group are looking to offload their assets. Last week, we reported that Blackstone was in talks to reacquire some of the assets it had sold to Anbang. HNA Group, meanwhile, is looking to sell a $4-billion portfolio of U.S. assets. Dalian Wanda Group has also been rushing to divest its overseas assets, including its cinema arm, theme parks and several hotel projects. Chicago’s Vista Tower and its Beverly Hills, Calif., hotel and residential project, which total close to $2.1 billion, are Wanda’s latest projects up for sale since last week. Earlier this month, developer Greenland USA, a subsidiary of Shanghai-based property development firm Greenland Group, put Los Angeles' Hotel Indigo on the market for $280 million, or $800,000 per key. If the target price is reached, the deal would set a new record price on a per-room basis for a downtown Los Angeles hotel.
"There are more than a handful of buyers out there that I think would love to own some, or all, of those assets," Bellisario said of the numerous sales.
The Future of Chinese Hotel Investment
Brock Silvers, managing director of Shanghai-based investment firm Kaiyuan Capital, told CNN that China's insurance regulator may now seek to sell off a number of the Anbang's businesses, although he did not specify which businesses they might be.
Chinese investors may see this move as a warning about foreign investments, but they could also take it as a cue to keep their deals under the national radar. "If you're a Chinese buyer of a hotel, or wanting to be a buyer of hotels, it's become incrementally more difficult to get capital out of your country." This does not mean, however, that Chinese companies will stop investing. For example, a Chinese owner with a U.S. asset could fund the purchase of another asset with funds generated from the first. "There are a lot more options around what you can do," Bellisario said, noting that big companies like HNA and Wanda may start seeking out smaller fish in the pond. "They'd rather buy 10, 20 smaller hotels than one $1 billion hotel, or a $2 billion hotel, in this case," he said.
Ultimately, Bellisario believes that China's move is focused on keeping capital in the home country. "Keep the capital back in China. Invest in China. Grow in China—not elsewhere."