GLOBAL REPORT—Global sovereign wealth funds and high-net-worth individual investors are steadily acquiring big-ticket hotel trophy assets around the world, and experts say the trend is likely to continue. While Middle Eastern investors have had the strongest presence recently among such buyers, cash-laden investors are now emerging from China to Norway to Latin America.
Major players such as Starwood Hotels & Resorts Worldwide and Marriott International have sold multiple luxury properties to overseas buyers in recent months, particularly Middle Eastern individual investors and sovereign wealth. At a time when domestic capital markets remain lukewarm for many would-be purchasers, such foreign suitors are finding plentiful opportunities to enter the industry or expand their existing hotel holdings.
“There are an increasing number of sovereign wealth funds and high-net-worth individuals with money to invest, and they have recognized that they need to be true global investors. There are now more of them looking for quality assets around the world,” said Simon Turner, president of global development for Starwood Hotels. “The buyer pool has gotten larger, in that there are more participants, and they’ve also become more efficient and more sophisticated.”
Quite a number of exclusive assets have changed hands as of late, and it’s not just domestic real estate investment trusts and C-Corps getting in on the action. The list of recent deals involving high-priced hotels and foreign buyers is lengthy:
- In January Doha, Qatar-based Al Rayyan Tourism Investment Company purchased the St. Regis Bal Harbour Resort in Miami from Starwood Hotels for $213 million.
- Also in January, the Abu Dhabi Investment Authority paid $815 million for three Marriott Edition hotels: the now-open London Edition and two more Edition hotels under construction in Miami Beach and Manhattan.
- In December, InterContinental Hotels Group sold an 80% interest in its 685-room InterContinental New York Barclay for $240 million to Constellation Hotels Holding Limited, which is indirectly controlled by Qatar Holding.
- ADIA also acquired a portfolio of 31 midscale Australian hotels in September from Tourism Asset Holdings Limited, in which ADIA bought a 100% stake. The hotels are operated by Accor, including brands Pullman, Novotel, Mercure, Ibis, Ibis Styles and Ibis Budget.
- In late 2012, Sahara India Pariwar acquired a 70% stake in the 280-room Plaza Hotel in New York for $600 million and full ownership of the Dream Downtown (also in New York) for $200 million. It also purchased London’s Grosvenor House in 2010 for $726 million.
- 315 East Dean Associates, an affiliate of Thai investment bank OptAsia Capital, purchased the 179-room St. Regis Aspen from Starwood Hotels in September 2010 for $70 million.
Sources told Hotel News Now that for the most part the global sovereign wealth groups and high-net-worth individual investors have been targeting luxury hotel trophy assets in major hub locations. Such buyers are generally seeking steady, reliable returns over the long term, as well as the prestige of owning an elite-class hotel asset.
“Most of them are more collectors rather than traders. They’re buying location and long-term asset appreciation, and not so much short-term growth stories,” said Christoph Harle, Jones Lang LaSalle’s CEO of Continental Europe, Hotels & Hospitality Group. “They have an eye on cash flow, and whether it’s a 5% return, or 3%, or 7%, that very much depends on the individual or the fund or where they’re investing. There’s a view and concentration on long-term, steady returns.”
That’s not to say in the future, sovereign wealth and global individual investors won’t occupy other segments of the hotel market, too. “I think you’ll see them move down to the full-service space,” Turner said. “You might see one of the large funds purchase a couple of billion-dollar portfolios of full-service hotels, for instance. You may even see them dip into the select-service space as a financial investment, if they can get very good current returns.”
Different kind of buyer
Dealing with global buyers can be quite different than selling to institutional investors in the United States, according to sources. Besides potential language and cultural barriers, some overseas investors are relatively new to the hotel business and are still learning the ropes, or they need to fine-tune their approach for operating in the U.S.
“For the most part, (foreign investors) understand the hotel business, the service, the quality, the design that’s necessary to have a successful project anywhere in the country,” said Sean Hennessey, founder and CEO of New York-based Lodging Advisors, “but a lot of them have unrealistic expectations about what they can do, for instance labor-wise, or wage-level wise, here in New York. They might have much lower labor costs where they’re from or the work rules are a lot looser in their home country and that enables them to have superior operating results that can’t be duplicated in a lot of the top-10 market environments in the U.S.”
In other ways, though, the differences can be a blessing, such as when trying to cut through the red tape to get a deal done.
“It’s like dealing, in many instances, with private individuals versus an institutional investor, who tends to have a more structured approach, setting timelines and following certain rules of a transaction,” Harle said. “With some of these funds, and some of these individuals behind that, ultimately there are one or two decision makers. Someone like ADIA is an exception, where they’re structured, but others are a little bit less structured than an institutional investor.”
New players emerge
Although Middle Eastern investors have been consistently active in the U.S. hotel market for some time, sources indicated changes are afoot, with increasing levels of interest in hotel properties now originating from buyers located in other parts of the world. Norway is gearing up to invest big in real estate through its Government Pension Fund of Norway; parties from Russia and Latin America are starting to dip into their own war chests; and Chinese investors are in the beginning stages of buying into hotels.
“A lot of what you’d think of as the traditional sovereign wealth funds out of the Middle East and Asia have been less visible, at least in my world, over the past six months, and it’s increasingly become more oriented toward high-net-worth Chinese, who are coming to New York looking at transactions,” Hennessey said. “There’s an upper echelon of Chinese investment firms that have been given the green light by the political infrastructure to move large sums of money into investments around the world, and at least in the U.S., New York is the destination of choice. We’ve seen a number of people making inquiries, showing up, saying, ‘Can you walk us around to some hotels around town?’”
But Asian, specifically Chinese, investors are targeting the West Coast as well. Starwood’s Turner said when the company was marketing its Westin and Aloft properties near the San Francisco Airport, the level of interest from Chinese suitors was strong and steady. Chinese investors are funneling cash outward in every direction—especially into Africa and Australia—with the West Coast of North America another obvious destination. The types of investors are expanding, too.
“Chinese capital will increasingly move outwards, both in the luxury sector and elsewhere,” Turner said. “And it’s not just necessarily ultra-high net worth. You can see the medium-high-net-worth investors wanting to put money in a hard asset in the Bay Area. I think that trend is going to compound and build, and I think you’ll see much, much more of that activity, particularly in the Bay Area, in Vancouver, and in other places where there’s an established Chinese community.”
“We will see much more activity with the Chinese investment groups stepping up in 2014 and 2015,” Hennessey said. “I still think we have a bit of time yet to go with those firms really getting the institutional knowledge and contacts and structure to be able to execute transactions efficiently here, so it may not be as active over the next few months, but I suspect over the next 12 to 18 months that those groups will become much more pronounced.”