By: Edwin Fuller
Founder and President of Laguna Strategic Advisors
2016 was a banner year for Chinese outbound hotel investment as market participants invested a record-high $9.4 billion in North America, Europe and other global lodging markets, nearly doubling the $4.9 billion they spent during the previous year. There’s every reason to believe their appetite for hotel real estate is as strong as ever despite a less certain global political and economic outlook this year and recently-tightened capital outflow restrictions at home.
Let’s look at 2016. In their quest to build scale and brand recognition, (1) Anbang Insurance Group bought Strategic Hotels & Resorts for $5.5 billion, including virtually all of Strategic’s luxury US hotels. (2) China Life Insurance forged a joint venture with a sovereign-wealth fund to buy a $2 billion portfolio of limited service hotels from Starwood Capital Group. (3) Cindat Capital Management concluded a $571 million joint venture with Hersha Hospitality Trust for seven hotels in New York City. (4) HNA Group (HNA) announced plans to purchase about 25% of Hilton Worldwide Holdings – in addition to its earlier acquisition of Carlson Hotels Inc.
For some companies like HNA Group, these investments supported their other tourism-related businesses. For others, like Anbang, the recent deregulation of China’s insurance industry allowed them to capitalize on stable investment opportunities abroad.
No end in sight for China’s buying spree
Will this spree end anytime soon? Hardly. Across all industries, China spent nearly $2 billion acquiring foreign assets last year, outpacing 2015 when they spent $61 billion on offshore international mergers and acquisitions, according to the Rhodium Group.
The location of these investments explains a lot about why so much money has flowed out of China in recent years. They went mainly into mature markets in the US and Europe and into safe sectors like established hotel brands. This suggests that Chinese companies are interested in protecting themselves against domestic market risks, including the devaluation of the Yuan that has fallen 10.5% against the dollar.
Another contributing factor is the vibrancy of the outbound Chinese travel market on which the Chinese hotel companies want to capitalize. Last year, more than 100 million Chinese tourists visited global gateway cities like New York, London, Paris, Tokyo and Sydney, thanks in part to cheaper airfares and more frequent flight schedules. This volume is expected to grow at an annual rate of 8.5% through 2021.
Hotel industry consolidation expected to continue
Meanwhile, industry experts expect mega-deals such as last year’s Marriott International acquisition of Starwood Hotels & Resorts to make consolidation among the rest of the industry inevitable, even as others contend that the top hotel chains are already too big and too complex to merge. That hasn’t stopped the rumors. Late last year, although denied, industry chatter abounded about InterContinental Hotel Group being pursued by first Anbang, then Accor.
Earlier this year, hospitality development consultant, JLL Hotels & Hospitality Group issued a report predicting that Chinese capital will be on the lookout for opportunities in the US and Europe in 2017 even as fewer deals are expected to be finalized especially on transactions above $5 million due to China’s tightened currency outflow policies.
The Group’s SVP Lauro Ferroni said, “Hotel brands will always look to bolster their supply pipeline and the surest way to grow is by acquiring operators with management and franchise contracts.” He added that portfolios with a full range of offerings from service levels to geography are most attractive to investors. “We expect to see more consolidation among operators and real estate owners alike due to key players’ need to remain competitive – and Chinese investors will always be seeking trophy assets.”
This morning, as I was putting the finishing touches onto this blog, the Wall Street Journal reported that China’s HNA Group had agreed to acquire a 24.9% stake in US investor OM Asset Management for $446 million. OM Asset Management is an arm of UK insurer Old Mutual PLC. The acquisition came on the heels of HNA’s announcement last week that it was buying 245 Park Avenue, a 1.8-milliion-square-foot trophy skyscraper in Manhattan for $2.21 billion.
Looks like we’re in for an interesting year ahead!