Foreign direct investment in the U.S. lodging segment is intensifying and showing no signs of let up. And what began with investments in hotel companies—think Hong Kong’s New World Hospitality buy of Rosewood Hotel Group—is now shifting toward hard assets—China’s Anbang Insurance Group acquiring the Waldorf Astoria, for example.
“International capital is seeking protection against downside risk in other parts of the world,” Neil Shah, president and COO of Hersha Hospitality Trust, a publicly-traded REIT, told Hotel Management, referring to the quality, liquidity and strength of the U.S. hotel market, particularly in gateway cities. “Capital is flowing to those opportunities.”
The Deluge from China
Last year, Hersha sold the 70-room Hotel 373 in New York to China’s Fantasia Holdings for $37 million. And it’s coming in spades from China, facilitated not only by the government’s regulation reform in how companies can deploy capital overseas, but also due to a stagnating economy and currency shifts.
As the yuan depreciates against the U.S. dollar (it lost 2.5 percent in 2014), many Chinese companies, particularly insurance companies, have set their sights overseas on the property markets, with New York squarely in their sights. According to JLL, offshore investors poured $1.9 billion into New York hotel transactions in 2014, accounting for 50 percent of total transactions in the city. This year, JLL expects transaction volumes in New York tied to offshore capital to reach $3 billion.
While much of the new capital is flowing from Chinese investors—they could account for $5 billion worth of global hotel sales in 2015, according to JLL—other investors, from Qatar, Bahrain, Kuwait, Malaysia and Singapore, to name some, are also moving into the U.S. hotel sector.
The Big Apple isn’t the only city in on the action. Other top MSAs are in play, as well, seen as safe havens for overseas capital. “We’ll see more foreign capital come to the U.S. for hotels,” said Mike Bellisario, senior research associate at Robert W. Baird & Co.
Hotels remain a risk/reward play for investors. “There is a great benefit to real estate investments by coupling returns/going-in yields, which are greater than most countries’ treasury yields,” said Jay Morrow, VP at Hodges Ward Elliott. “Further, hotels are typically on the highest end of the cap-rate spectrum due to their perceived risk. There are likely investment windows that shift from country to country regarding their investments as laws and regulations on both sides change.”
Meanwhile, the action isn’t only in trophy assets. Overseas investors are more and more tempted by the yields provided by select-service hotels. “The big news for 2015 and 2016 is we’ll see more coming for yield-oriented select-service hotels in global gateway markets,” Shah said.
One of the more pressing questions is how FDI will impact asset valuations here in the States and whether it will make for added competition to U.S.-based REITs and private equity. “As an owner of hotels in gateway markets, [FDI] is a positive; it increases property values and introduces more liquidity,” Shah said. “As an acquirer, it does make it more challenging to identify and find opportunities, but the lodging market has been taking in new entrants for the last decade as the industry got more institutional and securitized. It’s adding another player to the party. Net-net, it’s a positive for hotel REITs.”