The news recently that Beijing-based Anbang Insurance Group agreed to buy the storied Waldorf Astoria New York for $1.95 billion reveals a lot about the current flow of international capital to U.S.commercial real estate.
Foreign buyers are showing an insatiable appetite for world-class core real estate investments and dropping bags of money on some of the biggest properties in the U.S.
The 1,413-room, 1.68 million square-foot Waldorf Astoria price comes to a stunning $1.38 million per room, the equivalent of $3,780 per night per room for one year. The sale is believed to qualify as the highest price ever paid for a single hotel and is the largest U.S. property purchase by a Chinese firm ever.
The Waldorf Astoria New York per room price surpasses the $1.03 million per room Qatar-based investors paid for the St. Regis Bal Harbour this past January. In that deal, Al Rayyan Tourism Investment Co. (with the incongruous acronym of ARTIC) and Starwood Hotels & Resorts Worldwide acquired the Miami resort for a mere $213 million.
“This acquisition complements our investment focus on world class assets in prime locations as we continue to expand our presence around the globe,” said H.E. Sheikh Faisal Bin Qassim Al Thani, chairman of ARTIC.
Sandwiched between those transactions was the acquisition of the former Robinsons-May department store site on Wilshire Boulevard in tony Beverly Hills by Wanda Group, China’s largest property developer. Wanda said it plans to build a luxury five-star Wanda Vista hotel and apartments at the location.
The sale of the former Robinsons-May department store site qualifies as one of the largest on the West Coast in recent years as Asian investors, particularly Chinese developers, have diversified their commercial real estate acquisitions in the U.S. According to CBRE, which has been tracking the increase of Asian investment in U.S. commercial real estate, overall investment in U.S. real estate by Asian investors in 2014 (for all property sectors) is expected to surpass the previous record in 2013.
In fact, with the acquisition of The Waldorf Astoria by Anbang, Asian investment in New York commercial real estate has already surpassed figures for the entire year of 2013. Hotel transactions by Asian investors in the U.S. to date this year have also surpassed volumes for the entire year of 2013.
An analysis of more than 225 hotel property sales of more than $10 million this year tracked by CoStar Group shows that foreign investors accounted for nearly 10% of the deals by deal volume but more than 20% of the dollar volume.
The average sale price of foreign investor hotel purchases this year was $65.9 million at an average of $208,532 per room. That beats the average prices of hotels purchased by domestic buyers, which came in at $61.4 million and $185,082 respectively.
Overseas Investors Driving U.S. Price Increases
According to DZT, Chinese capital is now being invested across all of the eight core gateway U.S. cities, with Boston, San Francisco and Los Angeles in the lead.
“The U.S. market continues its upward trend, reaching a new post-crisis record of $267 billion, representing a 33% increase on the same period a year ago,” said John Wickes, head of Americas Research at DTZ. who noted that sales volumes rose by 38% over the quarter, pushing volumes over the past year to 23% higher than the same period a year ago.
While more than a quarter (27%) of the capital targeting the main eight cities originated from Asia Pacific, investors from different continents also are on a spending spree.
Nearly half (47% or $9.2 billion) of non-North American investment came from internationally sourced capital, including some U.S.-headquartered fund managers who raised capital in multiple jurisdictions, DZT noted.
Moving Beyond the Core Markets
While core cities still dominate, investment activity by overseas investors is spreading to an increased number of other markets as investors relax their risk tolerance and the number of available premier properties on the market dwindles, according Cushman & Wakefield’s annual Winning in Growth Cities report released this week.
“While gateway cities remain a primary focus for investors, interest in a broader spread of locations is increasingly apparent due to improved confidence and finance availability as well as a lack of supply in core cities, said Cushman & Wakefield’s International CEO, Carlo Barel di Sant’Albano. “Risk appetites have expanded in the U.S. and buyers in Europe and Asia are following suit, particularly where local partners can be found.
The Cushman & Wakefield report also stated competition to buy will continue to push up prices, with prime yields down 13 basis points globally to 7% last year and likely to at least match this in the year ahead.
With better signs emerging in the U.S. that the economic recovery is picking up and much of the increased investment to date driven by higher pension fund allocations and growing international demand from high net worth investors, in both cases notably from Asia, the global real estate services firm expects foreign demand for U.S. real estate is likely to escalate in the year ahead.
All of this global capital is impacting U.S. property prices, DZT researchers noted. The strong weight of capital has pushed office cap rates to near 10-year lows.
“Looking ahead, we see U.S. volumes and prices rising further. With a new record of nearly $150 billion of new capital targeting the U.S. markets, investors will need to move up the risk curve to achieve the same returns,” said Nigel Almond, head of Capital Markets Research at DTZ.
As with all real estate cycles, there are concerns over how long it will last. DTZ’s Almond noted that relative value remains good for the moment, which he attributes to low government bond yields. But he said time might be running out for investors to take advantage, as bond yields are expected to increase at some point in the next few years.