March 20, 2016 China’s Anbang Insurance: Just The Tip Of The Iceberg For Foreign Investment In U.S. Real Estate
China’s Anbang Insurance Group is hungry for U.S. hotels – but it’s far from the only foreign institution dipping into the U.S. real estate market right now. In some cases, Chinese lenders are financing acquisition or development by other China-based institutions, such as Anbang.
Though Anbang is looking to buy, and buy quickly, non-U.S. lenders from China and elsewhere have also been active all across the U.S. Like the Chinese insurer, they aren’t just interested in trophy office towers but also in hospitality as well as other property types such as industrial, retail and multifamily – and the timing right now is particularly favorable for those outside the U.S. to get in on U.S. commercial real estate.
What is Anbang up to?
In February 2015, Anbang purchased the world-famous Waldorf Astoria in New York for $1.95 billion – the highest price ever for a U.S. hotel, brokers told the Wall Street Journal. But, apparently, that was just the appetizer for Anbang, one of China’s largest insurance groups.
Over the weekend, news broke that Blackstone has agreed to sell Strategic Hotels & Resorts to Anbang for about $6.5 billion, just three months after Blackstone completed its acquisition of Strategic and its portfolio of 17 luxury hotels. In flipping all 7,921 rooms in the portfolio – which includes facilities in resort areas such as Laguna Beach, California, and Jackson Hole, Wyoming, as well as major cities such as New York, Chicago and San Francisco – Blackstone will make almost half a billion dollars more than it paid, according to Bloomberg.
Then, on Monday, Starwood Hotels & Resorts announced that it had received a takeover bid from a consortium led by none other than Anbang, which tops an earlier offer from Marriott and could derail the $12.2 billion Marriott buyout that was to create the largest hotel chain in the world.
The Anbang-led consortium, which reportedly also includes private equity firms J.C. Flowers & Co. and Primavera Capital Group, values Starwood at $12.84 billion.
Marriott’s offer had valued Starwood at $12.18 billion in November, but that offer is now worth about $11 billion because Marriott shares have since dropped 6.5%, Reuters reported.
In the wake of Anbang’s bid, Marriott on Monday reaffirmed its commitment to the deal and said it has granted Starwood a waiver until Thursday to allow it to evaluate the offer. Marriott and Starwood stockholders are scheduled to vote on the merger March 28.
Nevertheless, Starwood said Monday its board of directors has not changed its recommendation supporting the merger with Marriott. If Starwood terminates its merger agreement with Marriott or withdraws its recommendation that shareholders vote for it, Starwood would have to pay Marriott a $400 million cash termination fee, Marriott said in a statement.
A few months after Anbang’s purchase of the Waldorf, the Chinese insurer sealed the deal on its second major New York City purchase – the office portion of 717 Fifth Avenue, for which it paid Blackstone $415 million. The 26-story tower recently became home to the offices of luxury jeweler Harry Winston, just across the street from the brand’s flagship retail store.
Of that sum, Bank of China financed a $260 million acquisition loan for 717 Fifth Ave. in May of last year.
Bank of China’s New York loans last year totaled more than $1.4 billion, including a $169 million refinancing loan for 295 Madison Avenue, a 47-astory office tower, and a $30 million loan for Club Quarters, World Trade Center, a business traveler’s hotel on the south side of the World Trade Center. Bank of China’s loans between 2012 and 2015 came to approximately $10 billion.
Also in New York last year, the Industrial and Commercial Bank of China issued a $100 million loan for Bush Tower at 130 West 42nd Street. Chinese property developer China Vanke reportedly paid a majority stake for $125 million in the office tower and is also developing the 61-story luxury residential tower 100 East 53rd Street (formerly 610 Lexington Avenue), for which Industrial and Commercial issued a $290 million construction loan and four subordinated mortgages worth an additional $70 million.
Though Bank of China has issued significant loans in New York, the Big Apple is not its only target market. Bank of China was one of the biggest foreign lenders in Chicago last year, issuing more than half a billion dollars in just three loans.
In February 2015, Bank of China issued a $95 million loan for Echelon at K Station, a luxury apartment complex on North Desplaines Street, near the River North and West Loop neighborhoods. The bank issued a $245 million loan in May for a Zeller Realty Group 65-story office tower at 311 South Wacker Drive in the West Loop. And, in August, it issued a $208 million loan for five office buildings on North Michigan Avenue.
In the hospitality sector, Bank of China issued an $87 million loan for a hotel on Sansome Street in San Francisco’s financial district in September about half a year after the Mandarin Oriental hotel was bought by Loews Hotels & Resorts and became the Loews Regency San Francisco. The hotel takes up the top 11 floors of a 48-story office tower.
Who is Anbang?
Anbang is a Chinese insurance company that initially focused on car insurance when it was founded in 2004, but has recently “transformed itself into one of the biggest Chinese firms in the industry and easily the boldest;’ The Economist reported last year.
Anbang excels at navigating China’s bureaucracy, with company chairman Wu Xiaohui aiming to transform Anbang into a conglomerate that includes banking, securities and fund management, as well as insurance, according to the report. It says Anbang raised about $8 billion in 2014, quintupling its registered capital and boosting it above that of the two biggest state-owned insurers.
News reports indicate that in recent years Anbang has agreed to buy U.S. insurer Fidelity & Guaranty Life for $1.57 billion, purchased Belgian and Dutch insurance companies and a majority stake in a South Korean insure and has built up a sizeable stake in Minsheng Bank, China’s largest private lender.
Once the Strategic deal goes through, Anbang will own hotels including the Hotel Del Coronado near San Diego – a red-roofed historic landmark built more than a century ago whose claims to fame include being the site where the 1959 Marilyn Monroe comedy “Some Like It Hot” was filmed. Other hotels in the portfolio include the Intercontinental Miami, a 641-room Florida hotel originally designed as a casino, and five Four Seasons properties.
Good Timing For Foreign Investment
In several ways, the timing is particularly favorable for foreign institutions to get involved in commercial real estate in the U.S.
A tax law passed in December, known as the PATH Act, exempts certain foreign pension funds from being taxed on capital gains from investment in U.S. real estate and allows foreign investors to invest up to 10% in REIT stocks – up from 5% before the law was passed – without having to pay U.S. capital gains tax.
”The PATH Act should result in increased foreign investment in U.S. REITs and commercial real estate, since it eliminates the tax qualified foreign pension funds are required to pay on real estate and REIT capital gains;’ said Moody’s vice president-senior analyst Christopher Pappas.
There are other positive signs for foreign lenders as well. Foreign banks are not subject to the same, recently increased, capital surcharge regulations as are eight of the largest U.S. banks, giving foreign lenders something of an edge. And the uncertainty surrounding the June referendum on Britain’s membership in the European Union, the so-vcalled Brexit, has raised concerns about economic stability in the U.K. Indeed, property investors are saying the U.K. would be a less attractive place to invest if Britain bolts, according to commercial real estate services firm CBRE. And if commercial real estate in the U.K. becomes less desirable, foreign banks could take a closer look at the U.S.
This potentially reduced investment in Britain, together with the PATH Act benefits and the capital surcharge advantage over big U.S. banks, could prompt foreign lenders – as well as other foreign players like Anbang and China Vanke – to put (more of) their money on U.S. commercial real estate in the near future.