Foreign investors will remain interested in U.S. hotels in 2017, but new supply and new administration policies are two wild cards for international investment.
Foreign investors appear to have sufficient capital to continue purchasing hotel real estate in the United States in 2017. With an inevitable future of higher interest rates, as well as the lodging industry attaining the peak of what’s been a long and fruitful cycle and the unpredictability of the political atmosphere, are foreign investors likely to now look elsewhere?
Beth Mattson-Teig’s article last month in National Real Estate Investor indicated foreign investors pouring money into U.S. hotel real estate will remain virtually unchanged. She detailed in an annual survey by the Association of Foreign Investors in Real Estate (AFIRE) released in January that 95% of respondents intend to maintain if not increase their investment in the United States this year.
By year-end 2016, we witnessed a rapid pace of consolidation and acquisition, and not just Marriott International’s acquisition of Starwood Hotels & Resorts Worldwide. China’s shipping and aviation leader HNA Group made news when it purchased a 25% stake in Hilton from the Blackstone Group for $6.5 billion. That was only after one of its divisions acquired Carlson Hotels. Prior to that it also acquired a 15% share in Red Lion Hotels. Hilton then created a real estate investment trust, splitting up the company into two parts.
China’s Anbang Insurance Group had completed a $6.5-billion acquisition for 15 of Blackstone’s Strategic Hotels & Resorts properties. Anbang is owner of the New York Waldorf Astoria, which it purchased in 2014 for $1.95 billion.
Will we continue to see more Chinese capital coming into the U.S.? My answer here is a definite “yes!” Based in large part on continued Chinese government stimulus in 2017, the International Monetary Fund in January upgraded its 2017 growth forecast for China’s economy to 6.5%, which is 0.3 percentage points higher than its October forecast. This expected growth should enable China to continue exporting capital to both the U.S. and global hospitality market, favoring big, blockbuster-oriented transactions.
According to the Middle Eastern investors and their investment advisors with whom we work, we expect Gulf Cooperation Council countries to continue exporting capital into both European and U.S. hotel real estate as seen throughout 2016. Activity should continue, focused on full-service single-asset acquisitions rather than the huge, blockbuster deals more common with Chinese investors.
Overall, investing in U.S. hotels continues to offer international investors what we believe they desire most: a relatively lower-risk “safe harbor.” The U.S. economy remains strong, unemployment is low and capital markets remain open and attractive even with Federal Reserve’s recent increases to interest rates.
The wild cards in this international investor equation are two-fold:
- New supply: Underwriting the effect of new hotel supply on future market performance is essential, particularly given foreign investors’ preference for investing in major U.S. markets where the incidence of new rooms supply is greatest.
- New administration policies: Determining to what extent, if any, new administration policies might negatively affect global investor sentiment is yet to be seen. Early signs suggest there’s likely to be no major impact, but given our world where change is the only constant, stay tuned.
Tom Engel is principal of Boston-based T.R. ENGEL Group (TRE), a hospitality and real estate advisory specializing in transaction services and project and asset management for hotels, convention centers, and mixed-use commercial real estate. As investment advisors, TRE also provides due diligence and buyer and seller know-how for the sale of hotels in North America, Europe and the Middle East. Tom can be contacted at email@example.com.
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