LEISURE: Anbang Closes Waldorf Buy, Heats Up Real Estate
Bottom line: Washington’s approval of the purchase of the Waldorf Astoria hotel by a Chinese insurer indicates a wave of similar real estate buying by Chinese investors will accelerate, resulting in a bubble likely to burst over the next decade.
Washington has just sent an important signal that it won’t seek to halt the growing tide of Chinese investment in US real estate, with word that Anbang Insurance has just closed its purchase of New York’s storied Waldorf Astoria hotel for nearly $2 billion. I was quite surprised at how quickly this deal closed, since the amount of money is huge and the deal itself also sparked some controversy over potential national security issues. More precisely, it took just over 4 months to close the purchase of one of the world’s most famous hotels at a record-setting price.
That lightning speed shows not only that Chinese investors like Anbang have easy access to lots of cash, but also that western governments probably won’t try to block this growing tide of investment. One of the big questions for the future will be whether the Chinese companies are overpaying for these assets, and whether we’re likely to see a spectacularly bursting bubble similar to what happened with Japanese firms that invested in western real estate in the late 1980s. The answer to that question is probably “yes”, though I’ll return to that at the bottom of this post.
First let’s look at the latest headlines that say Anbang has formally closed its purchase of the Waldorf, paying a princely $1.95 billion for the hotel. Anbang first announced the deal in October, when it agreed to purchase the property from US hotel giant Hilton Worldwide (NYSE: HLT). (previous post) As part of that deal, Anbang agreed to let Hilton continue to manage the property for the next 100 years — a condition that looked foolish for Anbang because it would reduce the hotel’s attractiveness for potential future buyers.
Almost immediately after the sale was announced, reports emerged that US diplomats had expressed some concern about the sale since many global leaders often stayed at the hotel during visits to New York to attend UN events. (previous post) Such concerns seemed a bit alarmist, but could have easily led to a veto of the deal by Washington, where some politicians worry that big Chinese firms are just spying arms of Beijing.
Anbang certainly fits that definition, since it’s not only a major firm but is also state owned with very strong ties to the central government in Beijing. The fact that it could close the deal so quickly, despite a lack of experience doing similar major purchases, reflects its strong state connections. It almost certainly obtained most of the financing for the deal from big state-owned banks that traditionally take their orders from Beijing and other government stakeholders.
This particular deal is just the latest in a string of similar purchases of trophy western properties by Chinese firms. Earlier this week Sunshine Insurance, another previously unknown Chinese firm, announced it would purchase another landmark New York hotel, the Baccarat, for a smaller but still sizable $230 million. Back in November, Sunshine also announced it would buy the Sheraton On The Park hotel in Sydney for the equivalent of $400 million. (previous post)
Both Anbang and Sunshine have appeared quite suddenly on the global investment scene, and it seems inevitable that other Chinese insurers and institutional investors could join the buying binge. They would join an existing smaller group of Chinese buyers that includes the likes of Fosun International (HKEx: 656) and HNA Group that have also been active on the global stage. All the Chinese names are looking to diversify beyond their home market, but the result is that their fondness for big name global assets is driving up prices to levels that probably aren’t sustainable.
If and when China’s own real estate market slowdown starts to accelerate over the next decade, these same companies may need to quickly liquidate some of their overseas purchases to meet their financial obligations. When that happens they’re almost certain to sell these global properties at a loss, touching off a downward spiral similar to what happened with the Japanese firms nearly 3 decades ago.
Related posts:
