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Want to Buy a Luxury Hotel in the U.S.? Try China's Insurance Regulator

25 Feb 2018 12:00 pm
By Craig Karmin 

When Chinese regulators seized control of Anbang Insurance Group Co., they took ownership of more than a dozen luxury U.S. hotels, including New York's famed Waldorf Astoria.

Now, as the Chinese government weighs selling many of these properties, the buildings likely are worth less than what Anbang paid only a couple of years ago, the latest instance of foreign investors rushing into U.S. property only to find the market softening beneath them.

China's insurance regulatory agency said Friday it was assuming control of Anbang to avoid a collapse of the firm after suspected illegal activity by its chairman. In private conversations with hotel brokers and investors, regulators and Anbang have indicated they intend to hold on to the Waldorf, continuing with the insurer's plan to convert more than 1,000 of the hotel's 1,400 guest rooms into condominiums, according to people briefed on the matter.

But Chinese authorities have already started listening to offers for other luxury hotels that Anbang acquired, say people close to the matter. Its portfolio includes the Essex House Hotel overlooking Manhattan's Central Park, Four Seasons Hotels in Austin, Texas., and Jackson Hole, Wyo., and InterContinental Hotels in Chicago and Miami.

An Anbang spokesman said: "We remain fully committed to our overseas subsidiaries, businesses, and investments, including those in the United States."

Hotel revenue in the U.S. is still growing although the rate of growth has slowed considerably since peaking a few years ago, according to data tracker STR Inc. Revenue per available room, a metric that measures room rates and occupancy levels, grew at 8.2% in 2014. It has declined each year since to 3% in 2017. STR projects growth of 2.7% in 2018.

"Expectations of revenue and profit growth have certainly dampened in the last two years," said Sean Hennessey, chief executive of Lodging Advisors, a New York hospitality consulting firm. "That creates a noticeable decrease in pricing if you're trying to sell a hotel today."

The U.S. property market has long been a favored destination for overseas investors, thanks to a broad mix of office buildings, hotels and retail properties. The market also offers better title rights than faster-growing emerging markets and better growth prospects than in Europe.

Foreign investment in U.S. hotels and other real estate has been controversial over the years, especially when it involved high-profile properties. Japanese investors caused a stir in the 1980s when they bought trophy assets in the U.S., including Rockefeller Center in Midtown Manhattan and the Pebble Beach golf resort in California. When the property market collapsed, most Japanese investors sold and suffered huge losses.

Chinese buyers have drawn less scrutiny until a few years ago, when their purchases of U.S. properties started to accelerate. Anbang was at the center of a wave of Chinese insurers and other investors that acquired U.S. real estate and in particular high-end hotels, taking advantage of new rules that allowed them to invest more easily abroad.

Many Chinese buyers view luxury hotels in major cities as long-term investments that can provide steady income during a period of low interest rates, real-estate brokers and hotel analysts said. Some said a number of Chinese buyers believe that owning world-famous properties and luxury brands confers prestige on their owners -- one reason Chinese investors frequently outbid other buyers.

In 2015, Anbang acquired the Waldorf for $1.95 billion, the highest price ever paid for a U.S. hotel. That same year, China's Sunshine Insurance Group Co. also purchased New York's Baccarat Hotel for about $230 million, or about $2 million a room. This made it one of the most highly valued hotels ever by that popular industry metric. The Baccarat hadn't even checked in a single guest when Sunshine agreed to buy it.

Shanghai prosecutors on Friday said they had indicted Wu Xiaohui, Anbang's ex-chairman, for alleged fraudulent fundraising and abuse of power.

As chairman, he once told an audience at Harvard University that he planned to convert Waldorf guest rooms to condos, hinting that there would be an element of exclusivity.

"A potential buyer needs more than money to qualify for our apartments," he boasted to the crowd.

Anbang in 2016 bought a portfolio of luxury hotels from Blackstone Group LP. The New York investment firm had bought those hotels less than a year earlier, turning a profit of about $500 million on the fast sale to Anbang, say people familiar with the situation.

In 2016, at the peak of this buying spree, Chinese companies purchased more than $9 billion of U.S. hotels, up from only about $216 million in 2012, according to real-estate firm JLL. Those sales fell to about $668 million last year after the Chinese government tightened capital controls to prevent companies from moving as much money abroad.

Chinese ownership has caused more unease recently, especially after reports about Anbang's political connections to the Chinese government. President Obama, who had stayed at the Waldorf previously, bypassed it for another hotel during a 2015 visit to New York. While White House officials didn't explain the change, people familiar with the matter cited possible security concerns under Anabang's ownership.

Write to Craig Karmin at craig.karmin@wsj.com

(END) Dow Jones Newswires

February 25, 2018 07:00 ET (12:00 GMT)

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