It is no secret that China has experienced massive capital outflows over the past year, and it also isn’t a secret where a lot of this capital is going. Capital flows from China to the U.S. have occurred at record levels in 2015 and the first quarter of 2016, with a large portion of these flows going into real estate and other hard assets. What is particularly interesting, however, is the recent acceleration of Chinese investment in the hospitality industry of the U.S., mainly hotels. It isn’t an entirely new phenomena, as evidenced by the Chinese purchase of the historic Waldorf Astoria in 2014 for $1.95 Billion. It is striking, however, how quickly the pace of investments has increased. Much of the high profile purchasing comes from one company, Anbang Insurance, but represents a larger ideal within China.
Slowing growth and a weak yuan have caused many rich investors and companies of China to look abroad for assets. One company in particular who has taken this premise to the extreme is Anbang, a Chinese insurer. They have a track record of buying U.S. properties dating back a few years, but have ramped up their purchases in 2016. In the first three months of 2016 alone, they purchased the Real Estate Investment Trust Strategic Hotels from Blackstone for $6.5 Billion. Even more recently, they have jumped into the bidding process for Starwood Hotels, and currently have an offer standing at $14 billion. This isn’t only a comment on Anbang’s practices, however, but more of an indication perhaps of where we are in the market cycle, and is perhaps a retread of what Japan experienced during the 1980’s. China, like Japan, in the 1980s is a high growth economy and one of the leaders of the world in terms of economic might. Also like Japan in the 80s, the Chinese are purchasing trophy properties throughout the U.S. at a time when commercial real estate prices at are relatively elevated levels. This is where the story will get interesting.
Japan suffered from their investments, due to a downturn in commercial real estate prices, which contributed to their overall economic woes that still plague them today. Now China may not necessarily be on the brink of a massive bubble in its own economy, but it certainly is following the plot of buying trophy properties at possibly inflated prices, and that could come back to bite them. Anbang, and many companies like it, however, may be in a slightly better position to absorb such a downturn, due to their close ties to the government, which may act as a shield comparatively to the private enterprise of 1980s Japan. In fact, who truly owns Anbang is a mystery that likely includes the government. This is something to keep an eye going forward, not just for Anbang, but the broad based commercial real estate purchases that the Chinese are undertaking in the United States.
Overall, real estate investments in the U.S. make sense for Chinese investors because of its relatively high quality and security compared to many investments domestically in China. This does not mean, however, that investment at elevated price levels is necessarily safer. It remains to be seen how the story will unfold, but until economic improvement in China occurs or we see severe issues in the U.S. commercial real estate market, capital inflows from China will continue to flood into the U.S.