LEISURE – China’s Hotel Appetite Grows With Starwood Sale
Bottom line: The record-breaking purchase of an Australian trophy hotel by a China buyer is part of a growing Chinese foreign real estate buying binge, which could ultimately produce a global bubble.
China’s nascent but rapidly growing appetite for foreign hotels continues to grow, with word that another previously unknown Chinese insurer has snapped up a trophy property in Australia for a record price. In this case it’s China’s Sunshine Insurance Group that’s buying a major Sheraton property in Sydney from global giant Starwood Hotels (NYSE: HOT) for an inflated price of A$463 million, or about $400 million. This sale is the third of a major western hotel asset to a Chinese buyer in just the last 2 months, and looks a lot like similar waves from the past 30 years that saw Asian buyers purchase trophy western real estate at inflated prices.
Of course historians will recall that the most famous of those buying waves saw Japanese companies purchase boatloads of major US commercial properties in the late 1980s. That resulted in a huge real estate bubble that ultimately burst, sending US property prices plunging and leaving many Japanese investors and banks with huge piles of highly overvalued properties and bad debt.
I’ll look shortly at the question of whether the next real estate bubble could be building, but first let’s look at the news that has Starwood selling its 557-room Sheraton on the Park as part of its own drive to focus on hotel management rather than ownership. (company announcement; English article) That kind of trend has been quite common among major US hotel brands for a while, as these companies recognize that hotel management is more lucrative and requires far less cash than real estate ownership.
As part of the deal, Sunshine Insurance has agreed to a separate deal that will give Sheraton, one of Starwood’s major brands, a long-term contract to manage the property, with one report saying the term was 50 years. The same report says the sale attracted interested buyers from Singapore, Malaysia and the Middle East, and that the price represented a record.
Some people reading about this deal may be feeling a sense of deja vu, since it looks quite similar to a hotel sale that occurred less than 2 months ago. That deal saw another relatively unknown Chinese buyer, Anbang Insurance, agree to pay Hilton Worldwide (NYSE: HLT) a record price of nearly $2 billion for the historical Waldorf-Astoria hotel in New York. (previous post) As part of that deal, Anbang also agreed to give Hilton a long-term contract to manage the property.
And in yet another similar deal, Chinese hotel operator Jin Jiang (Shanghai: 600754; HKEx: 2006) agreed earlier this month to pay up to 1.2 billion euros ($1.5 billion) for the parent of Louvre Hotels Group, one of Europe’s leading operators. (previous post) Jin Jiang is also a hotel operator and thus sees its purchase as a strategic expansion, unlike the 2 Chinese insurance companies that see their purchases as more pure investments. But all 3 companies share the common point of being state-run firms that have relatively easy access cash and are trying to diversify beyond their home China market.
From a broader perspective, all 3 of these sales reflect the trend of foreign hotel operators trying to sell assets to focus on property management. The fact that the Chinese companies are doing much of the buying at record prices suggests they are making aggressive bids that are quite possibly too high. The fact that they’re also signing long-term management contracts also looks questionable, since such contracts could be a deterrent for future potential buyers.
Against all of that backdrop, this current wave of buying certainly does have many signs of a bubble that looks set to accelerate as more Chinese companies continue this recent trend of buying major western properties. So far the bubble hasn’t inflated too much, largely because the world is still recovering from the financial crisis that began in 2008. But if Chinese firms keep paying record prices for properties, we could easily see a new bubble build up quickly and finally burst by 2020.
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