In this personal opinion, Alex Hadwick, EyeforTravel’s Head of Research puts on his economics hat and takes a look at how hotel investment is playing out in China
Chinese investors may have been beaten in the race to take over Starwood in this year’s hospitality industry mega-deal but that doesn’t seem to have cooled the flow of hot money pouring out of the country. On October 18, China Life Insurance Co was announced as the leading bid in a $2 billion investment for a portfolio of 280 Starwood Capital Group properties. This was shortly followed by the announcement that Chinese conglomerate HNA would buy roughly one quarter of Hilton Worldwide to the tune of $6.5 billion, leaving asset manager Blackstone Group LP the big winner of that deal.
Blackstone is also the beneficiary of an on going sale of Strategic Hotels and Resorts to Anbang Insurance Group, the company previously bidding for Starwood, marking it out as one of the canniest operators in this area. Indeed, its position in Hilton – taken in 2007 – has turned out to be one of the best investments in history. Blackstone took a risky share in Hilton before the downturn, which should have doomed the investment. However, Blackstone doubled down, investing more and restructuring debt for equity. Now, the sale to HNA marks an even better return than Blackstone achieved on the 2013 IPO. In the former, shares were valued at $20 compared to the $26.25 per share that HNA has accepted. This represents a tripling of value for Blackstone, and a nice return for their investors, who have been piling in so that Blackstone now has more than £350 billion of assets under management.
Clearly Hilton represents a stronger brand than when Blackstone invested in 2007, but what is driving the Chinese spree and when will it end? Well, first of all this is part of a wider trend of Chinese outbound investment. Across all industries China spent an estimated $127.8 billion in the first eight months of this year. Outflows have been accelerated over the last two years following restrictions being relaxed in 2014. This already dramatically outpaces 2015, where $61 billion was spent on outside the country on international mergers and acquisitions across the entire year, according to Rhodium Group.
Critically, the location of these investments tells us why so much money is flowing out of China. They are going mainly into the mature markets of the US and Europe and into relatively safe sectors, of which major hotel brands and properties are seen as more secure and established. This demonstrates that Chinese companies are looking to secure themselves against risk in the domestic market and diversify their assets. Although China continues to grow strongly at 6.7% rate at the last release of official figures, there is a wider acceptance that there is an on going slowdown, with China affected by its own rustbelt, and that growth may be slower than expected. Of particular concern, is how to restructure unproductive state companies and rapidly accumulating corporate debt stocks.
Overheating property market
There also seems to be signs of an overheating property market, particularly in major cities. The Telegraph reported that: “Over the last year [property prices] have risen 28% in Bejiing, 33% in Shanghai, 37% in Xiamen, and 47% in Hefei.” It seems likely that this is creating an additional spur to invest in international property markets as security against the bubble potentially bursting.
All of these issues could come to weigh on an economy that is facing a tougher growth environment than pre-2008, both in global and domestic terms.
Those are the push factors but the principal pull factor is the fall in the yuan. This has made long term, safe investments more attractive for Chinese investors. China’s currency has fallen 10.5% against the dollar over the last 24 months, marking a reversal of a long period of appreciation. A hotel group like Hilton Worldwide has a solid dollar cash flow, making $2.224 billion in adjusted Earnings Before Interest, Tax, Deductables and Allowances (EBITDA) in the first nine months of the year. This translates to earnings per share of $0.74 across the period and a healthy margin of 41.6% in the third quarter of this year. So, while initial purchases are more expensive, the long-term rewards are expected to more than offset the increasing dollar cost.
Hotel investment is becoming more attractive not just because of a more buoyant travel market, but also due to the huge growth in Chinese international travel. Official statistics estimate that there were 109 million outbound journeys in 2015, which represents a 9% year-on-year growth rate and spending is growing even faster, representing further opportunities for growth in online travel. There seem to be few signs of this easing up this year, with key markets reporting little slowdown.
Protectionism in the air?
However, could this now be coming to an end? Protectionism is in the air, with the election of Donald Trump, being the most obvious manifestation. President-elect Trump has made political capital over popular fears of China in a bid to gain votes, a large part of which focused on anti-free trade measures. If he does follow through with threats to put hefty tariffs on Chinese goods, that could sour relations in more ways that one. UK Prime Minister Theresa May has also talked about a more robust approach to international takeovers.
A focus on trade could also translate into increased scrutiny on any inward investment deals. Already Anbang was blocked in its attempt to buy the Hotel del Coronado in the US, as the government raised concerns about the property’s proximity to military facilities.
Chinese investors will therefore have to weigh up what concerns them more – a slowing Chinese economy reliant on signals from a Chinese government that will increasingly struggle to solve structural economic flaws, or uncertainty over the status of their investments abroad as a wave of populist candidates and parties sweep the West.
On the balance of things, it is probably the former that will be the overriding fear factor. The policy environment in Europe and the US may have got riskier for Chinese investors but they will feel the need to diversify their assets and safeguard against a variety of domestic concerns. Realistically, it also seems unlikely that Trump will genuinely spark a trade war, as that will be far more damaging to his core constituency than continuing with the status quo or even negotiating to reduce Chinese tariffs on US goods. China has already made threats to retaliate and has the will to do so, as can be seen in on going battles over steel tariffs. Already, he has backtracked on several core campaign trail narratives. There is also the attractive prospect of improving returns from strong brands that will grow further if the renminbi continues to depreciate as expected. So, although some of the enthusiasm may be dampened, don’t be surprised if more hospitality deals can be traced back to the Middle Kingdom in 2017.
This is a personal opinion by Alex Hadwick and does not reflect the views of EyeforTravel