Investment from Chinese companies in U.S. hotels has been a growing trend for years, and (in spite of Anbang's failed Starwood bid earlier this year) shows no sign of slowing down. HVS' new report, Chinese Investment Trends in U.S. Hotel Real Estate, offers six simple reasons why American hotels are so attractive for Chinese investors.
First, a recap of notable deals that occurred since the beginning of 2016. In February of this year, Hersha Hospitality Trust sold a 70-percent majority interest in seven Manhattan hotels to Chinese investment firm Cindat Capital Management for a total purchase price of $571.4 million. In March, The Blackstone Group agreed to sell Strategic Hotels & Resorts to China’s Anbang Insurance for approximately $6.5 billion. And in April, HNA Tourism Group announced its plan to acquire Carlson Rezidor Hotel Group.
Growing Visitor Numbers
The last decade has brought a surge of Chinese visitors to the U.S., an impetus for Chinese investment in hotels in U.S. gateway cities. According to the National Travel and Tourism Office, 2.19 million Chinese visitors traveled to the U.S. in 2014, a 21-percent increase over the prior year; these visitors contributed over $2.3 billion in travel spending. Moreover, U.S. inbound travel from China is expected to continue to grow, and Chinese investors have been focusing on acquiring mid-scale hotels to capture the demand from the country’s middle-class.
Concerns about the market slowdown in China and the devaluation of the Yuan led Chinese investors to seek a safer investment environment or a better return. According to the Asia Society, “Chinese investors are attracted to U.S. markets given [the higher] return potential, array of investment opportunities, economic and property market stability, strong foundation of property rights, and the sheer size and maturity of the market.” According to the Rosen Consulting Group, Chinese commercial real estate acquisitions in the U.S. totaled $17.1 billion from 2010 to 2015. Hotel investments totaled $3.7 billion, or 21 percent of the total commercial real estate acquisitions.
A growing number of Chinese individual investors are using EB-5, an immigration program, as a vehicle to invest in U.S. hotel developments. The EB-5 regional center program has become an effective tool for fostering investment and creating jobs within the U.S. In the wake of the economic downturn, the EB-5 program has emerged as a viable alternative to traditional financing. According to the State Department, over 80 percent of visas issued through the EB-5 program are from China. Investors who use this investment tool are heavily motivated by the opportunity for U.S. residency and its associated benefits of educational opportunities and higher quality of life.
The EB-5 program has continued to be an alternative financing tool for commercial real estate development as construction-loan qualification requirements become more restricting. On December 16, 2015, the EB-5 visa program was officially extended through September 30, 2016, as part of the omnibus spending bill reached by Congress.
Institutional investors are attracted to the potential returns on a hotel project, along with the opportunity to expand their presence in the U.S. These institutional investors include insurance companies, such as Anbang and Sunshine Insurance, as well as some of the largest Chinese real estate developers and operating companies, including Greenland Group, Wanda Group, and Oceanwide.
Lastly, hotel investment helps diversify Chinese investors’ portfolios. Although Chinese investors have invested in all types of commercial real estate, office properties, multi-family properties, and hotel assets register the higher volumes in transactions. The buyers for hotels include private equities, tourism companies, real estate firms, construction companies, and institutional investors.
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HVS poses the question: Will the recent trend of Chinese investment be a repeat of Japanese investment in U.S. real estate in the early 1990s? The answer is unclear.
"While there are some similarities between the two cycles of investment, there are also distinctions," according to the report. "For one, individual Chinese investors are more conservative in buying in at reasonable prices and express a cautious interest in learning how to maintain real estate in the U.S. Furthermore, Chinese institutional investors have demonstrated an investment approach that values capital preservation and long-term business goals.
"There have also been concerns about whether the investments from China are sustainable given the slowing Chinese economy. But it should be emphasized again that Chinese companies are looking at U.S. real estate as a stable way to diversify outside their own economy. Chinese buyers continue to invest heavily in U.S. real estate, especially in gateway markets in New York and California. Hence, the wave of Chinese investment in U.S. real estate appears anything but negligible or short-lived."