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Latest Round of High-Priced Real Estate Buys by Overseas Investors Prompting New Round of Price Discovery by Lodging Industry

Chinese Insurer's $19.3 Billion Buying Spree Boosts U.S. Hotel Pricing, M&A Activity
March 16, 2016
The Blackstone portfolio reportedly being acquired by Anbang Insurance Group Co. for $6.5 billion includes the Montage Laguna, a high-end resort in coastal Orange County, CA.
The Blackstone portfolio reportedly being acquired by Anbang Insurance Group Co. for $6.5 billion includes the Montage Laguna, a high-end resort in coastal Orange County, CA.
Just over a year after its $2 billion purchase of New York City's Waldorf Astoria signalled a new era of competition (and higher prices) for trophy properties in top U.S. markets, Anbang Insurance Group Co. upped the ante this past week with two potential deals valued at more than $19 billion.

Reports surfaced last weekend of Anbang's agreement to pay $6.5 billion to buy a hotel portfolio acquired by Blackstone in its buyout last fall of Strategic Hotels & Resorts. Blackstone paid about $6 billion for the portfolio of 16 high-end hotels, including the Hotel del Coronado, the Montage Laguna Beach and the Ritz-Carlton Laguna Niguel, both in Orange County.

On Monday, Starwood Hotels & Resorts dropped an even bigger bombshell when it revealed a non-binding buyout offer valued at $12.8 billion from Anbang, potentially undoing a $12.2 billion bid offered by Marriott International last November. A Starwood-Marriott combination would have created the world's largest hotel chain, with a mindboggling 5,500 hotels with 1.1 million rooms across 30 brands.

Despite record-high investment volume for the year by both domestic and foreign investors, the two recent real estate plays by Anbang have refocused industry and Wall Street attention on lodging investment activity, which slowed in the second half of 2015 as hotel REITs slowed acquisitions and became net sellers.

Powered by marquee deals like the Waldorf Astoria purchase, foreign investment in U.S. hotels surged from $3.3 billion in 2014 to almost $8 billion in 2015, according to CoStar Portfolio Strategy. By comparison, foreign lodging investment fell to a cyclical low of $465 million in 2009.

Record strong hotel occupancy last year is expected to continue in 2016, boosting the case for resumed investment activity in 2016, R. Mark Woodworth, senior managing director of PKF-HR, a research unit of CBRE Hotels.

"A lot of investment capital moved to the sidelines in the second half of 2016, and we’re very much in a period of price discovery by investors today," Woodworth tells CoStar. "The latest Chinese transactions are causing the market to really focus on that."

"While the pricing is rich, so are the economics behind the hotel industry right now,” added Jack Corgel, professor at the Cornell University School of Hotel Administration and senior advisor to PKF-HR. "That the Chinese coming in and paying high prices is a good thing -- though maybe not for competitive domestic investors."

The buying spree by well-funded Anbang comes as a combination of widening spreads in the fixed-income market, a dysfunctional CMBS market, slowing global growth and unresolved U.S. regulatory issues are spooking lenders, Corgel noted.

In just 10 years under Chairman Wu Xiaohui, Anbang has grown from an obscure seller of auto and home insurance in China's Pingyang province to become one of China’s largest insurers, with $253 billion in assets and 31,000 worldwide employees. Raising funds chiefly through the sale of insurance and wealth management products, Anbang first drew attention in global commercial real estate circles with its $1.95 billion acquisition of the Waldorf Astoria from Hilton Worldwide Holdings in February of last year. Chinese investors so far this year have already doubled their 2015 investments in U.S. assets in search of a safe haven for capital to make up for the slowing growth of China's economy.

Total global hotel investment volume is projected to reach $70 billion in 2016, with $37 billion in transactions in the Americas, in no small part from Chinese investors in America and Western Europe, according to JLL’s Hotel Investment Outlook. Continuing last year's trend capped by the bidding war for Starwood, JLL expects to see more consolidation among both hotel owners and operators through portfolio transactions or public-to-private trades.

REITs have become net sellers of lodging properties for the first time in five years as they sell non-core assets and buy back their stock, noted Arthur Adler, managing director and CEO of JLL’s Americas Hotels & Hospitality Group.

"We expect to see additional privatizations of REITs given that they are trading below net asset value and hotel assets being privately held are currently worth more those being held publically." Adler said. "Given this dynamic, offshore investors and others stand to become the second-largest buyer type after private equity."
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