Chinese investment in foreign commercial real estate is booming.
Hilton Worldwide Holdings just announced it is selling the iconic Waldorf Astoria hotel in Manhattan to the Anbang Insurance Group of China for $US1.95 billion. As part of the deal, Hilton has signed on to manage the hotel for the next 100 years and Anbang has committed to major renovations to the building.
While on its face the deal seems bizarre, it isn’t that far from being an extension of the boom in luxury residential real estate in Manhattan. Instead of parking money in one luxury Manhattan condo and getting someone to rent it out, Anbang bought a whole city block worth of real estate (some of which can be converted into condos!) and is going to get Hilton to manage it for them (nearly) indefinitely. It has the added bonus of being a trophy property.
Since the Chinese government announced its Go Global policy in 2012, encouraging Chinese companies to invest overseas, there’s been a rush into both residential and commercial properties. The less rosy way to frame it is China is experiencing a huge amount of capital flight, and U.S. real estate is a great place to park money that wealthy Chinese want to keep out of the country. Last year, the Shanghai-based Fosun International Ltd. made a splash when it bought One Chase Manhattan Plaza from JPMorgan for $US725 billion.
Global direct real estate investment volumes were $US165 billion in the third quarter — a 4% increase over Q2 and 13% more than the third quarter of 2013 — according to Jones Lang LaSalle. Earlier this year, JLL noted that Chinese buyers purchased $US7.6 billion in foreign commercial real estate in 2013, a 125 per cent increase from the year before. That number could reach $US10 billion in 2014.
As for Anbang itself: It’s a relatively minor Chinese insurance company, which has recently also branched into financial services. Bruce Einhorn writes in Businessweek that, “in a market dominated by big, state-owned insurers, Anbang until recently was an extremely minor player. At the end of 2013, its share of life-insurance premiums was 0.1 per cent.” It has recently experienced a lot of growth, but still only has 3.6 per cent market share in China. According to its English language website, Anbang has assets of 700 billion yuan (about $US114 billion).
The question that remains unanswered is how Anbang is going to pay for its new property. There’s no word in reports on the deal about financing. Back in July, Andrew Collier, managing director at Orient Capital Research floated the idea that loans from the Chinese shadow banking sector — where a lot of the financing for foreign deals is coming from — could cripple the international property markets if they started going bad.
This deal is drawing some comparisons to the $US2 billion stake the Mitsubishi Company took in Rockefeller Center back in 1989. The Mitsubishi walked away from the investment in 1995 after the partnerships through which it owned the group of properties filed for bankruptcy protection.
While this is the largest U.S. hotel transaction on record, according to the WSJ, the sale price per room (roughly $US1.4 million) was actually a lot lower than the $US570 million sale of the Plaza to the Indian Sahara group back in 2012, which came out to more than $US2 million per room. The Plaza is reportedly on the market again, as of August.