Examining the relationship between China and U.S. investors


Capital outflow from China especially into the hotel industry was a white-hot storyline that was birthed, massaged, then repeated subsequent to Anbang Insurance Group's $1.95-billion buy of the Waldorf Astoria in New York, which, shortly afterward, was followed by Sunshine Insurance Group, also of China, acquiring the 114-room Baccarat Hotel, also in New York, for more than $230 million, a number that equated to a record more than $2 million a room.

The spigot was turned on full blast with nothing to stem the flow...except China itself.

Toward the end of last year, China's government began taking taking steps to curb China's foreign investment "shopping spree" on all types of asset classes—with deals like this one raising the alarm bell. As many pointed out, this "tighter control of overseas­ ­investment" was likely to stymie lavish spending by the likes of Anbang and Dalian Wanda.

Reports came out that Shanghai’s municipal foreign exchange authority "had told bank managers in the city that all overseas payments under the capital account of more than US$5 million would have to be submitted to Beijing for special clearance ­before proceeding."

Still, capital outflows from Chinese investors, particularly into the North America hospitality industry, will continue.

We recently caught up with Daniel Voellm, managing partner, HVS Asia Pacific, to discuss the phenomenon, the history behind it, where it will all lead to and how the interests of China buyers and U.S. sellers align.

HVS Asia Pacific's Daniel Voellm


Chinese groups, from insurance groups to large conglomerates, are injecting massive amounts of capital into the U.S., much of it being placed on hotel assets, particularly upper-upscale and luxury trophy properties. First: Why is this happening now? Second: Will it calm down or continue to grow? Three: What are the advantages for hotel owners in the U.S.?

Voellm: Since 2012, regulation governing Chinese institutional investors changed to allow up to 15 percent of their portfolio allocated into foreign real estate assets. Before then, these portfolios might only hold 1 percent of total assets in foreign real estate. Thus, investing in these types of assets is a new experience and a steep learning curve for these organizations, from managers to investment committees. As a result, some firms were better positioned to capitalize in this new environment and executed deals quickly (particularly in Australia) through overseas Œinvestment offices. Other firms who did not or were not able to replicate this model faced significantly slower internal decision making timelines and were not able to compete at that time. That being said, the majority of institutional investors are looking to be active in this market given their allocation requirement and there will be continued activity with more experienced investment teams and faster execution cycles. At the same time, the macro-economic environment can temporarily warrant limitations in capital flows.

The focus on hotels and trophy assets is attributable to the inherent risk perception of these investors. For example, it is very difficult for a first-time investor in Beijing to discern the Bank of America Tower from say One Chase Manhattan Plaza in New York. While there are naming rights associated, tenants come and go and general built quality is difficult to ascertain. The brand name associated with a hotel (usually through a long-term contract) gives these investors confidence in the future performance and further bolsters their reputation by owning a well-known brand and even better, trophy asset. The long-term view as Œterminal capital allows them to price their capital differently and compete with some of the sovereign wealth funds.

Similarly, these investors are familiar with world cities like New York, Sydney and London. While there are micro-locational aspects, trophy assets (read premier location) help bridge this educational gap in market knowledge. As such, trophy luxury hotels are considered the Œsafer bet in the long term and give the owner some additional exposure by association. Curiously, their interest are much aligned with the operators here.


Chinese and American cultures are certainly different. As an American owner, broker or otherwise, how should one comport themselves when doing business with the Chinese? What are the cultural aspects that one should follow or respect?

Voellm: In a country of 1.3 billion people, it is difficult to generalize along the lines of Œthe Chinese. Certainly in terms of investors, there are several distinct groups to qualify, the major ones being: institutional investors, state-owned enterprises (SOE) in real estate development or conglomerates, private firms (developers, funds) and lastly high-net-worth individuals (HNWIs). Even within each group there are differences. Understanding the decision-making process and empowerment of front people on the ground is paramount. Some traditional business structures would also limit access to senior people unless they are matched by their counterparts on the U.S. side.

The supposed ŒChinese aspect, which turns out to be common in many places around the world, is that relations matter. Building and maintaining those relations with the right people are critical for success and something very difficult when interacting from the U.S. with a Beijing-based decision maker in writing only. Introductions and referrals can help as a first step.

Beyond that, the established way of doing business and investing in hotel real estate is rather foreign to Chinese investors (same applies vice versa). A limited comparison would be going from 2D to 3D and ­ understanding those differences requires the U.S. side to be very receptive to any kind of questions and Œunexpected requests to help navigate that change in landscape. For example, certain supposedly trivial matters can be heavily scrutinized whereas complex situations are quickly approved.


Vice versa, for a Chinese buyer, how should they seek to conduct business with their U.S. counterparts?

Voellm: Chinese buyers need to understand that overseas investment is, more often than not, a very different affair compared to what they are used to at home. This applies at all levels and is at times difficult to understand, particularly among HNWI with a successful track record in business. Chinese buyers need to familiarize themselves with the due-diligence process, legal requirements, general timelines in executing a deal and the different experts required in the process (plus finding the right one and interfacing according to protocol).


Anything else important in regard to Chinese and U.S. relations as it is related to the buying and selling of hotels?

Voellm: Strong communication and understanding of business cultures is paramount Under the Œone belt, one road policy, Hong Kong is intended to be the outbound hub for these investors, supporting them on their journey with the strong base in professional services with international experience.

Daniel Voellm has provided advice in many markets across the region. Prior to heading the Hong Kong office, Voellm was VP at HVS’ global headquarters in New York conducting a wide range of appraisals, market studies and underwriting due diligence services in 22 states as well as Canada. As managing partner Asia-Pacific, he directly oversees five HVS offices in Hong Kong, Bangkok, Beijing, Shanghai and Shenzhen.