Decelerating industry fundamentals and weakness in forward-looking equity market prices for hotel-related companies hasn't kept Chinese companies from dominating the hotel investment landscape recently, according to Fitch Ratings.
“prudently underwritten, low-risk commercial real estate loans.”
Chinese investors have been aggressively bidding on mostly upper-tier hotel assets in core markets. Historically, this type of activity, rich property valuations paid by less-established (often international) market participants, has corresponded with U.S. CRE cycle peaks. This cycle could be shaping up to follow a similar path.
Last Monday, Chinese insurer Anbang Group offered to purchase the former Strategic Hotels & Resorts assets from Blackstone for $6.5 billion—a $450 million premium to Blackstone's purchase price three months ago (closed in December 2015).
Also the same day, Starwood Hotels & Resorts disclosed the receipt of an unsolicited, highly conditional and non-binding indication of interest in purchasing the company from an Anbang-led investor consortium that includes U.S. private equity firm J.C. Flowers & Co. and China-based Primavera Capital Group.
Last Friday, Starwood announced that it determined Anbang's revised offer, of $78 per share, to be a superior proposal and notified Marriott that it intends to terminate the previous merger agreement. This was followed by Starwood's latest decision that improved offer at $13.6 billion from Marriott is superior compared to previous proposal led by Anbang consortium at $13.2 billion. But the on-going race is still catching attentions from all over the globe.
Hotels in non-core markets are unlikely to benefit from increased international investment, at least with respect to China. Several of the largest institutional Chinese investors have publicly discussed what Fitch views as a "core-at-any-cost" investment mentality with respect to hotel investments that generally dovetails with the recent Chinese-led investment activity.
Separately, Anbang's purchase of Strategic will presumably delay (or scuttle) the planned large loan/single borrower (LL/SB) U.S. CMBS transaction related to Blackstone's acquisition of the company. We had been looking to the market's reception of that deal (and a few others) for a contemporaneous window into hotel lender appetites.
Relatedly, hotels may have sidestepped some regulatory uncertainty/disruption relating to CMBS risk retention, which is set to take effect in December. On March 2, the House Financial Services Committee passed H.R. 4620 (aka the Preserving Access to CRE Capital Act of 2016), which modified Dodd-Frank's risk retention requirements for "prudently underwritten, low-risk commercial real estate loans." LL/SB CMBS transactions, an important financing avenue for hotels during this recovery, generally fit this description.
Absent risk retention relief, we believe the common one-year term with multiple-year extension options for hotel loans may have proven unpalatable to B-Piece buyers, resulting in less available and more expensive debt capital for hotels.
Fitch made widespread downward revisions to growth forecasts in its latest Global Economic Outlook published on March 7. We lowered our 2016 growth outlook for advanced emerging economies to 4.0% from 4.4% in December, due primarily to large downward revisions for emerging market commodity producers such as Brazil, Russia and South Africa. We also lowered our 2016 growth outlook for advanced economies to 1.7% from 2.1%, a level that remains above global recession territory.
Nevertheless, by most measures, this cycle looks long in the tooth. Indeed, the US is in its seventh year of economic expansion, making this the fourth-longest post-war recovery based on recession dating by the National Bureau of Economic Research. Concerns are mounting: major equity indices have declined during the past year and credit spreads have gapped wider.