The growing trend of hotel investment in the United States
The American hotel industry continues to attract foreign investment with 90 percent of overseas capital coming from China.
By Harry Pflueger
Hotel investment in the United States is a growing trend. During 2016, over $10 billion was invested into the U.S. hotel industry, a sharp increase over the $2.5 billion invested in 2015. Chinese investors accounted for about 90 percent of overseas capital invested in U.S. hotels.
Investment came in three primary forms, including capital into U.S. hotel companies, acquisitions of large single assets and EB-5 investment. Major transactions included China Life’s $2 billion investment into Starwood Capital, HNA’s $6.5 billion investment into Hilton and Anyang Insurance’s $6.5 billion investment in Strategic Hotel Capital.
There has also been some major single transactions as well over the past few years, highlighted by the reported $1.95 billion purchase of the Waldorf Astoria in New York during early 2015. While that transaction was impressive in size, numerous Chinese investors sought hotel investments in the $60 to $120 million range during 2016, mostly in California and New York. In addition, EB-5 continued to provide a reliable source of capital for qualified development projects in the U.S.
WHY THE HOTEL INDUSTRY ATTRACTS FOREIGN INVESTORS
There are six primary factors why the American hotel industry continues to attract foreign investment. First, Chinese tourism in the U.S. continues to grow and the Chinese investors believe they can capitalize on that trend by owning hotels. Second, hotels generally offer a high return potential relative to other real estate segments, often several hundred basis points higher with the opportunity to improve the business of the hotel. Third, U.S. based hotels offer stability with numerous proven well-known brands and operators offering predictable outcomes. Fourth, U.S. property law provides the type of protection that is unparalleled around the world. Fifth, many Chinese investors seek to diversify their holdings. Finally, investment in American assets is a way to lock into the strong U.S. dollar and hedge against future currency fluctuation.
VENTURING INTO THE INDUSTRY
Chinese investors can start by having money ready overseas. However, while access to capital is a major hurdle to cross, it does not guaranty success. In order to achieve the goal of a U.S. hotel investment, investors should set up a solid advisory team including a good attorney, hospitality broker and asset manager. The broker selected should be willing to invest the time you need to work with you and understand what type of hotel fits your stated parameters. Most hospitality brokers in the U.S. fit into two categories – one serves as a clearing house to market and sell listings on behalf of institutional or private sellers.
The other category will selectively work with qualified buyers to identify acquisition targets. Ideally, your selected broker will invest the time to understand your goals and represent you to find strong investments, but he will also have enough relationships in the industry to be able to source good deals. Together, your advisory team must have the right market knowledge and experience to guide you through the acquisition process, find the right deal, present your qualifications correctly in order to be chosen by the seller and provide trusted guidance on valuation with adequate support. You want to avoid the numerous pitfalls that can result in a failed transaction.
MOVE MONEY FIRST
There are numerous examples of deals in recent years that entered escrow but failed to close because the money was unable to be moved into the United States on time. Sellers in the U.S. will typically agree to allow a due diligence inspection period of 30 to 45 days after executing a purchase agreement before requiring the deposit to become non-refundable. The closing will typically follow about 30 days later. Sometimes sellers will agree to extensions, but time passes quickly during a transaction and there is not enough time to worry about moving your money after you make the deal, particularly considering all of the responsibilities and you will have to conduct due diligence and obtain your financing.
BUILD ADVISORY TEAM EARLY
It is never too early to meet and interview prospective members of your team. Sellers are usually much more receptive to a foreign buyer’s interest in their properties if they are told the name of the buyer’s attorney or asset manager upfront. The seller will often know or recognize members of the advisory team and lining up those relationships before making an offer on a property demonstrates a buyer’s seriousness.
FOCUS ON A REALISTIC GOAL
With some help from your advisory team, try to determine what you are really seeking. Are you more interested in a steady return or a value-add opportunity? Do you know which regions of the United States interest you? Sometimes flexibility can pay off. Remember, when many people seek property in the same location, prices tend to increase.
Be realistic about the deal size. If you have $10 million of equity, perhaps focus on a $17 to $20 million deal rather than a $50 million deal. Lower leverage increases likelihood for success, particularly for first-time investors. Some first-time investors will purchase all-cash and worry about financing later.
Position. Understand your budget and try not to seek a five-star hotel with a two-star budget. There are many solid investments in the middle to upper-middle hotel segments. There are very few 5-star hotels, and those put up for sale attract a very competitive market of investors, particularly in major markets. Full Service or Select Service. Understand if you are comfortable having a food and beverage component to your hotel operation. Several brands offer a very stream-lined food and beverage offering that maximizes profitability. Are there any particular brands that interest you? Hilton, Marriott, Hyatt, IHG, Wyndham and Carlson are examples of brand families that offer numerous brands across all segments.
After putting some thought into your strategy, and have consulted with your advisors, act decisively when presented an opportunity that fits. Sometimes putting enough thought and planning into the acquisition effort will give an investor confidence to move quickly, but other times investors get bogged down, always holding out for the perfect deal. In an upward trending competitive market, the deal from 12 months ago often looks like a great opportunity when looking back, compared to the current opportunity. Plan well, have confidence in your plan and when the opportunity presents itself, act decisively.
Remember, the first deal is always the most difficult. Investing in a foreign place can be uncomfortable at first, however the Unites States presents wonderful investment opportunities for foreign investors. After the first deal is completed, more and more opportunities will arise to further expand your footprint into this vibrant and exciting market. Having a strong and competent advisory team is essential to ensure your success.