Yearning for Yuan - Chinese Investment in the U.S. Hospitality Sector
By Lynn K. Cadwalader Partner, DLA Piper | February 27, 2011
The news has been full of headlines recently heralding the significant increase in Chinese investment in the United States. Chinese companies are increasingly looking to the United States as a place to invest in property or to set up business in order to take advantage of depressed asset pricing and "Buy American" provisions in government contracting, avoid trade barriers, and to allow better service of U.S. customers by establishing manufacturing plants in the U.S. Although there have been several high profile examples where the Committee on Foreign Investment in the United States (CFIUS) and the Foreign Investment National Security Act (FINSA) have forced Chinese companies to abandon their investment and acquisition plans in the U.S., these cases presented unique circumstances relating to national security concerns. The reality is that the United States is one of the world's economies most open to foreign investment, including from China. Further, with unemployment hovering at 10 percent, the U.S. government has put aside concerns about unfair Chinese competition and rolled-out the red carpet for Chinese investors, hoping that their investment will help maintain and create jobs in the U.S.
Chinese Appetite for Real Estate Investment
The Chinese government has evidenced an appetite for investment in U.S. real estate through Chinese Investment Corp. (CIC), China's $300 billion sovereign investment wealth fund, which began investing in the U.S. as the credit crunch took hold in 2007. Recent investments include a 7.6 percent stake in General Growth Properties in November 2010 and CIC's recent backing of Carlyle Group's refinance of the 650 Madison Avenue office tower in New York. Chinese real estate acquisitions jumped to $127 million in 2010 up from $18 million in 2009 as reported by Bloomberg last month, including Shenzhen New World Group Ltd.'s acquisition of the Los Angeles Marriott Downtown, and SouFun Holdings Ltd.'s $46 million acquisition of a Lower Manhattan building once owned by AIG. These figures do not include purchases through property funds which are much more opaque, a route that Chinese investors typically prefer.
Why Invest in Hospitality?
As evidenced by Shenzhen's recent investment in the hospitality sector through its acquisition of the Universal Sheraton Hotel in January of 2011 and the Los Angeles Marriott Downtown 10 months prior, hospitality has been targeted by Chinese investors as a preferred investment opportunity. The good news about investing in the hospitality sector is that this industry presents no national security issues which have thwarted several recent high profile investment attempts by the Chinese. Further, hotels are operating businesses, which if purchased for the right price, can operate upon acquisition at positive EBITDA with little or no additional capital outlay.
Investment in the hospitality sector is also attractive to Chinese investors due to the still depressed real estate pricing and number of distressed assets on the market, the significant amount of available cash Chinese companies have to invest which translates into low debt to equity ratios, preferred pricing from Chinese banks and the continuing appreciation of the Chinese yuan resulting in a favorable exchange rate relative to the U.S. dollar. With an increase in Chinese tourists traveling abroad and the attractiveness of many U.S. cities as popular destination venues, hotels have recently become targets for Chinese investors entering the U.S. real estate market.