A panel of real estate and finance experts shared recent developments in the world of foreign investment and what hoteliers can expect in the near future.
NEW YORK—The U.S. hotel industry saw an influx of foreign capital over the past couple of years, but that has changed somewhat as different geopolitical issues have come into play.
During the “The phenomenon of foreign investment” session at the NYU International Hospitality Industry Investment Conference, a group of panelists shed some light on the recent developments within the world of foreign capital.
Who are the investors?
There is no such thing as a typical offshore investor, said Gilda Perez-Alvarado, managing director at Jones Lang LaSalle’s Hotels & Hospitality Group. The industry is in its eighth year of recovery in the cycle, she said, and the types of international capital are different compared to the last cycle.
At the beginning of this cycle, Chinese investors were mostly conglomerates, many of which were insurance companies, she said, that were looking for high-profile corporate mergers and acquisitions as well as high-profile, single-asset trophy deals. Now there’s more tapered outbound investment from China, she said.
Many of these investors weren’t originally in real estate, Perez-Alvarado said, but they’re looking to diversify their revenue through hospitality. Deals will continue, she said, but they’ll smaller than previously seen. Chinse conglomerate will continue to be active, but the speed at deploying capital has been restrained by the Chinese government.
The Middle East saw a big push from sovereign wealth funds, particularly from United Arab Emirates and Qatar, Perez-Alvarado said. They’re heavy investors in infrastructure and other forms of real estate.
There is some activity from private and other smaller investors, she said, who mostly created their fortunes through development and infrastructure. There is some private equity outside of the U.S. and U.K., she said, and they’re targeting high-yield, select-service hotels.
Overall, the foreign investment space is “very different from what we saw eight years ago or five years ago or even 24 months ago,” she said.
The state of Chinese investment
There is always a need to slow down the depreciation of the yuan in China, said Mark Guo, director of business development at CCCG Overseas Real Estate. The country printed too much money in the past 10 years, more than anyone else.
“The only reason the renminbi hasn’t depreciated too much is the central government is controlling that,” he said.
In central China, almost everyone knew it was as matter of time before the yuan would depreciate against the U.S. dollar, Guo said, so people were trying to find ways to exchange their money into dollars through investments in foreign countries. Among their top foreign targets were the U.S., London, Australia and Canada.
Insurance companies, some large developers and financial institutes move forward on deals under supervision of the government, Guo said. When the government realized in 2016 it didn’t have enough U.S. dollars for the outflow of its currency, officials decided to stop the outflow to give themselves time to figure out a solution.
“They opened the door too quickly without a plan in front,” he said. “They have to close the door suddenly.”
While the government has stifled the outflow, Guo said, he believes the government will open the doors again once they have figured something out within a year or two. The opening won’t be as wide as in the past few years, he said, but it will be there.
For those seeking investment from Chinese companies, Guo advised to remain in contact while the central government develops its policy. The government doesn’t always publish changes, he said, and sometimes it can be an overnight verbal communication, so staying in contact is recommended.
“You can always keep in communication with big investors and financial institutes to see the direction from the central government,” he said.
Investment from the Middle East
The Middle East is in a tricky situation at the moment, Perez-Alvarado said, referring to the recent development surrounding Qatar. No one has clarity in how that situation will evolve, she said.
Overall, sovereign wealth funds from the region will remain quiet, she said. Those that invest will need to consider diversifying, she said, as oil prices are no longer going to be at $100 a barrel and OPEC is no longer in control of the oil cartel.
The sovereign wealth funds aren’t looking for “nice, shiny assets with no yield,” Perez-Alvarado said. They want yield.
Sovereign wealth funds are focused on their 892 exceptions, said Steven Lichtenfeld, corporate partner, real estate capital markets and real estate finance groups at Proskauer, because they want to protect themselves from U.S. taxes. They’ll set up a corporation to hold the real estate, he said, so the only tax return filed doesn’t touch the fund itself.
Working with foreign capital
Investors aren’t just looking at the U.S., Perez-Alvarado said. They see the world as one market with preferences for the U.S., U.K., Australia, Canada and some European countries.
“To attract foreign investment to the U.S., you have to take off your blinders and look at it from a global perspective,” she said.
Being late in the market, they’ll want to be able to liquidate quickly, she said, and New York and London are the two most liquid markets.
Be patient with foreign investors, Perez-Alvarado said. They’ll need more time to move forward on a deal than domestic investors because they have additional hoops to jump through, she said. Privacy is important, so they’re not going to want announcements about buying properties for specific prices.
These investors are so private, they won’t want to provide any financial statements, Lichtenfeld said, so it’s important to be able to navigate financing where the existing sponsor is providing the guarantees.