The past, present and future of cross-border investment

(Cross-border investment )

Much like the hotel business, capital is dynamic, and sources of supply and demand are constantly shifting. Savvy investors and advisors are aware of how these currents play into the success of real estate investments. Here, we look at the top-10 cross-border-equity-capital providers in the hospitality real estate industry each year since the start of the century. The data, compiled by CBRE and Real Capital Analytics, explore the sources and destinations of the funds. First is an overview of exportation of capital since 2001 through year-end 2016, followed by a narrative on the markets benefitting from overseas hotel investment.

Most of us have the pleasure of hosting international guests on a daily basis and, quite frequently, we are stewards of international capital. Since 2001, more than $475 billion (approximately $30 billion per year) has left areas around the globe and landed in a variety of hotel investments in other locales.

The Players

The U.S. was the single-largest international hospitality investor from 2001 to 2016, comprising more than 24 percent of all cross border hospitality acquisitions, more than three times the next closest country. While 24 percent is significant, over the last 16 years, the annual dollar amount has varied dramatically—from a low of about $105 million (7 percent) in 2001, to as high as nearly $10 billion (54 percent) in 2005. Since 2010, the average has been approximately 20 percent of total cross-border deployment, which is in line with the long-term average of 19 percent. 2016, however, experienced a dramatic slowing, with outflows decreasing to just 11 percent, or $3.2 billion.

China was the second-most active overseas hospitality investor at 7.4 percent over the last 16 years. While a dramatically lower figure than the U.S., this investment occurred from 2012 through 2016, thus the share of Chinese investment in each year was substantial. For example, in 2016, Chinese cross-border investment was 30.9 percent (over $9 billion), up from 4 percent in 2012. Singapore consistently deployed capital, doing so 14 of the past 16 years, comprising nearly 7 percent of total investment; Hong Kong capital accounts for just over 5 percent of the long-term average. When combining all outbound capital from the Asia-Pacific (APAC) region, the long-term average through 2016 was over that of the U.S. at 24.6 percent.

Canada is another consistent investor, comprising about 5.3 percent of capital outflows and investing in 10 of the 16 years. The United Kingdom deployed capital 13 of the past 16 years, accounting for nearly 4.7 percent of total investment. Similar to China, Qatar and South Korea are recent significant players in international activity, with Qatar accounting for nearly 11.6 percent of all capital outflows in 2015, and Korea successfully closing on substantial hospitality investments in 2015 and 2016.

Constant Winner

The origins of capital are important, but what does it mean to the hotel owner looking to exit, or the sponsor looking for a partner? Location, location, location. Cross-border investment in hospitality is constantly evolving. And since 2001, there is only one constant—London. London’s large-scale international investment occurred every year and was one of the top two for 12 of the 16 years.

In 2001, European cities, including London, Brussels, Dublin and Madrid, were the beneficiaries of 44 percent of all hospitality investment, followed by APAC, where Kowloon, in particular, captured nearly 20 percent of the capital. Only 7 percent was invested in gateway U.S. cities in 2001, and the vast majority of the remainder was in non-gateway global destinations. The dynamics shifted in 2007, with investment in Japan capturing nearly 7 percent of all overseas hospitality capital (Tokyo, Kyushu and Fukuoka), exceeding London, which remained the most desirable single city investment destination. Chiba, China, also was among the top destinations in 2007.

Financial Crisis and Beyond

Global economic factors shifted dramatically following 2007. As capital tightened and inbound investment subsided to just over $3.6 billion in 2009 (decreasing from $31 billion in 2007 and approximately $11.5 billion in 2008), the market focus changed. While London was still the largest single beneficiary, other top destinations included Hamburg (its first time making the list), Singapore and Sydney.

Contrasting the economic crisis years to today’s preferred hotel markets, inbound capital in 2015 and 2016 exceeded $30 billion. The United States experienced a significant shift, cross-border investment increased from 15.3 percent in 2015 to over 24 percent in 2016. European gateways decreased from nearly 22 percent to just 5.5 percent between 2015 and 2016; and APAC’s approximately 10-percent share dropped to just over 2 percent in the same period.

While investor interest in London remained strong, the 15 percent ($5 billion) inbound figure in 2015 dropped dramatically to just 2.9 percent ($860 million) in 2016, a likely result of the Brexit vote. Manhattan, another consistent recipient of overseas capital, benefitted from nearly 14 percent of inbound capital in 2015 and approximately 9 percent in 2016.

Markets with less consistent large-scale annual investment became greater recipients, including San Francisco, which captured 5.2 percent in 2016, up from just 1.4 percent in 2015 (the only two years over the period that were significant enough to make the list); Chicago accounted for 4.4 percent in 2016, the city’s second time on the list, with the last being 2007; Sydney, which is a relatively constant recipient of capital (eight out of the last 16 years), benefitted from approximately 3.6 percent in 2015; and Paris, another favored investment destination, shepherding capital 11 of the last 16 years (at an average of 6.6 percent in each investment year), benefitted from 3.6 percent in 2015. No significant capital was invested in 2016, a likely byproduct of extremist activity in various French cities. Approximately 53 percent and 65 percent ($17 billion and $19 billion) of capital was invested outside of the top 55 global cities in 2015 and 2016, respectively.

Over the course of this century, international capital has ebbed and flowed into hospitality, with the origination of funds shifting between a handful of countries. Historic data illustrate consistent liquidity in several gateway cities through most parts of the cycle. As the geopolitical environment shifts, global economic markets evolve and commodity prices continue to move, will the sources and destinations of capital change dramatically? Given recent unprecedented global events, time will give us the answer.

Mark Owens is an Executive Vice President and the Head of Hospitality Capital Markets for CBRE Hotels. He is responsible for the origination and placement of hospitality related transactions, including debt, equity, joint venture equity and transaction sales.