Adiscussion of Chinese real estate investment in the US should include two of the most significant, groundbreaking transactions in the hotel sector: Anbang Insurance’s purchase of the Waldorf Astoria, and Sunshine Group Insurance’s purchase of the Baccarat Hotel.
As reported, the Anbang transaction involved the highest price ever paid for a hotel property in US history. In Sunshine Group’s purchase, we saw the highest price per room ever paid for a hotel in the US. The author’s law firm was involved in both of these landmark deals.
Beyond historic, the Anbang deal was so high-profile because it also touched on issues relating to national security. The Committee on Foreign Investment in the US (CFIUS) stepped in to review the transaction because the residence of the US Ambassador to the United Nations has always been located in the hotel. US presidents have also stayed there on visits to New York since the hotel’s completion in the 1930s.
CFIUS reviews, investigates, and can block any transaction that would result in the control of a US business or asset by a foreign purchaser that raises serious national security risks. The closing of the deal was delayed for several months due to the CFIUS review. The transaction was ultimately approved and the sale closed only after the CFIUS review was completed.
Anbang’s acquisition demonstrated that in the past two years, the hotel sector investment in the US market has been extremely active. With regard to Chinese investors, the various record-shattering transactions are largely the result of two major developments:
(1) Relaxation of the regulations applicable to Chinese insurance companies for outbound investment into the US for real estate; and (2) recognition of the investment potential in the US hotel sector as an asset class, particularly for “trophy” hotel assets.
China’s loosening of its outbound investment restrictions is definitely one major development. The relaxation of such restrictions is not just limited to individual investors, but also private firms, public companies and, most recently, heavily regulated insurance companies. This crucial development has led to a tremendous increase in capital flows into US real estate as direct investment.
Since the recession, the US has seen capital flows in this sector jump from about US$5 billion in calendar year 2009 to nearly US$90 billion in calendar year 2015.
Capital flows from Asia into the US increased to more than US$66 billion in 2015. Of that, 27% was invested in Manhattan, New York; about 25% more flowed into the US real estate than was invested in the UK from Asia in 2015. This preference for US real estate will likely only increase, given other recent economic and political developments.
However, Chinese investors’ initial interest in real estate was not focused on the hotel sector until recently. Stabilized properties, mostly office buildings in major US gateway markets, were their primary focus at the very beginning. That investment focus has expanded to other property types, with a significant movement into residential development, primarily condominium or multi-family rental projects in gateway markets.
Some demographic trends in the US, and a change in how companies utilize their office space, seem to have cooled the initial focus on office properties.
Similarly, concerns about overbuilding in certain gateway markets in condominium development projects have somewhat decreased the appetite of Chinese (and other) investors in those projects in the first half of 2016. Nonetheless, the slowdown in the condominium market, while pronounced, is more likely to be temporary, as a reflection of overbuilding in some markets. Development and further inbound investment will likely rebound when supply and demand fundamentals improve, and the oversupply of new condominiums is absorbed.
KEY REGULATION ISSUES
In general, the US does not have a tremendous number of legal or regulatory prohibitions or challenges for investors into US real estate. Tax laws and treaties, however, are the main regulations that require considerable attention by foreign real estate investors from China into the US. These laws are critical when expatriating funds back to China. It is advisable that the parties involved consult an expert in cross-border tax solutions.
Through properly structuring the acquisition from inception, experts may help legally minimize the taxes imposed on Chinese investors in the US.
In addition, the CFIUS review, although extremely rare, may affect the acquisition of an asset in the US if national security interests are implicated.
Finally, although the EB-5 programme is expiring at the end of September, Chinese commercial real estate investors do not typically use it. Therefore, changes to the programme that might be part of its extension would not likely have a significant affect on the appetite of investors from China for commercial real estate in the US.
Robert J. Ivanhoe is a shareholder in the New York office of Greenberg Traurig and the firm’s global real estate practice chair. He can be contacted on +1 212 801 9333 or by email at email@example.com