As society becomes more globalized, people are traveling more – whether for work or pleasure. By some estimates, global travel is going to increase by 35% over the next decade. This has been a boon to commercial real estate’s hospitality sector, particularly here in the United States. Foreign commercial real estate investors have picked up on the opportunity hospitality offers as an asset class, and in recent years, have started flocking to this market segment.
In 2015, U.S hotel transactions exceeded $43 billion. During the first three-quarters of 2015 alone, foreign investors pumped $6.3 billion into hotel investments—or 20% of total deal volume. The amount of cross-border capital flowing to the hospitality sector was up 165% year over year.
A bulk of the investment stems from a few high-profile transactions. The most notable of which was Anbang Insurance Group’s $1.95 billion purchase of the Waldorf Astoria hotel in 2015. In 2016, the Chinese insurance group acquired Strategic Hotels & Resorts for $6.5 billion in an effort to expand its U.S. hotel portfolio. The purchase included the Four Seasons in Washington, D.C., the Westin St. Francis in San Francisco, and the Ritz-Carlton Laguna Niguel in Orange County.
We wanted to take a look at what, and who, is driving this new trend.
Foreign Commercial Real Estate Investors Continue to be Attracted to U.S. Real Estate
There’s been an uptick in foreign investment in U.S. real estate over the past several years. This is true in the hospitality segment, but it’s true for the commercial real estate generally. Foreign investors bought record levels of U.S. property in 2015—or $78 billion worth of property, to be exact. This is staggeringly high when compared with 2009, a year in which foreign investors only purchased $5 billion worth of U.S. commercial real estate.
The uptick in cross-border capital is being driven by a number of factors, the largest of which is market instability abroad. The collapse of crude oil from over $100 a barrel to less than $50 a barrel in January 2015 had a tremendous impact on oil-producing countries like Canada, Mexico, and Brazil where many foreign buyers originate. As their currencies devalued, U.S. real estate became more attractive.
Economic slowdowns have affected European and Asian markets, as well. The European Central Bank, Danish National Bank, Swiss National Bank, and Bank of Japan all slashed deposit rates, hoping that negative interest rates would bolster their respective economies. Instead, it spooked investors. Political turmoil (e.g., the British referendum to exit the European Union, known as “Brexit”) only exacerbated the matter.
Compared to European and Asian markets, the U.S. real estate market is considered a safe and stable place to invest.
Lastly, changes to the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) created additional incentives for foreign pension funds to invest in the U.S., further mobilizing capital for investment and development projects throughout the country.
Why Foreign Commercial Real Estate Investment in Hospitality is on the Rise
While foreign investment in hospitality is still well below foreign investment in apartments, office, or industrial – it’s on the rise. There are a number of reasons for this:
- The federal government’s EB-5 program. This program allows immigrants to obtain U.S. citizenship if they invest a certain amount in commercial real estate. Their investment must create a certain number of jobs, which is easier to do when investing in hotels compared to other asset classes.
- Hotel industry fundamentals are improving. Despite the growth of Airbnb and other room-sharing services, the U.S. hotel industry remains strong. Hotel occupancy reached record levels in 2016 despite increases in supply. Room prices seem poised to continue their upward climb.
- The hospitality sector is undervalued. Hotel values plunged upwards of 40 percent in 2008 and 2009, and many hotels have yet to fully recover. This creates an opportunity for foreign investors to scoop up hospitality assets at a discount.
- Internationally-recognized brands. Buying hotels allows foreign investors to gain broader recognition, customer base, and market intelligence when associated with internationally-recognized brands such as the Four Seasons or Hilton. These hotels also serve as a base for their country’s international travelers—a demographic on the rise. International travelers around the globe grew by 3% last year alone.
- It enables vertical integration in the tourism agency. It’s not just foreign pension funds and insurance groups buying U.S. hospitality assets. Foreign aviation companies have started scooping up hotels, too. HNA, which was founded in 1993 as a regional airline on the island of Hainan, now has $100 billion in assets and even greater ambitions within the tourist industry. The firm wants to become one of the top 100 companies in the world by 2020. Buying hotels is one way to get there, enabling vertical integration in the tourism industry.
Asian Investors are the Biggest Hotel Buyers, with China Leading the Way
Historically, it was buyers from Canada, the UK, Norway, Singapore, Japan, and the Middle East who clamored to get their hands on U.S. commercial real estate. In fact, until 2010, Chinese investment in U.S. real estate was relatively limited. How quickly things can change in six short years. Today, and for the first time ever, Chinese buyers are the most active foreign investors in the U.S. real estate market, in terms of both the amount invested and volume of transactions completed.
As noted previously, the Anbang Insurance Group has been one of the most prolific buyers of U.S. hotels. The Sunshine Insurance Group and Sichuan Xinglida Group are other active Chinese buyers. New regulations have made it easier for Chinese insurance companies to invest outside their borders. “We expect there’s a lot more money that will come from the Chinese insurance companies as a result," says Rick S. Kirkbride of Paul Hastings, LLP.
But Chinese firms are not the only companies grabbing headlines when it comes to U.S. hotel investment. Buyers from several Asian and Middle Eastern nations have recently joined the fray.
Korea’s Lotte Group purchased the New York Palace hotel for a cool $805 million. Al Faisal Holdings, based in Qatar, purchased The Manhattan at Times Square for $535 million. And Mirae Global Investments in South Korea inked a deal to purchase the Fairmont San Francisco for $350 million.
How the Influx of Foreign Commercial Real Estate Buyers are Impacting the Hospitality Sector
As we’ve seen, many of the foreign buyers investing in hospitality are pension funds, insurance companies, and other groups whose holdings and businesses span beyond hotel real estate. According to real estate services firm JLL, in 2016, a record 72% of deals over the $50 million mark were purchased by such generalist investors. These investors will need to rely on highly-qualified hotel operators to provide the amenities and level of service that today’s consumer demand. Increasingly, visitors want their hotels to offer a full-fledged “experience” rather than merely a place to rest one’s head. Whether generalist investors will be able to provide that remains to be seen.
The movement among global real estate’s heavy hitters may also force a growing number of mergers and acquisitions. Hotel acquisitions and mergers announced since 2014 involving a publicly-traded or large-scale global company total nearly one million hotel rooms, JLL finds. The full-service brands that changed ownership at the parent company accounted for approximately 30% of all full-service branded hotel rooms globally. Consolidation among operators and real estate owners could cause several local, independently-owned hotels to disappear.
Look no further than what happened to the Waldorf Astoria. Only two years after being scooped up by Anbang, the Chinese insurance company announced it would be shuttering the iconic hotel to make way for 400+ condos.
Foreign investment in U.S. commercial real estate has started to slow over the past 18 months. Within the fiscal year ending March 31, foreign investment in U.S. commercial real estate was down 33% from its 2015 peak, according to Real Capital Analytics reports, totaling $66.7 billion. We suspect foreign investment in hospitality will slow just the same.
Nonetheless, the slowdown is no major concern. Cross-border capital is still hovering above near-record highs. Even a shallow dip puts investment well above historical averages, which is good for the U.S. real estate market as a whole.