The Wal­dorf ’s hefty price tag

It’s the most ever paid for a New York City ho­tel: $1.95 bil­lion for the Wal­dorf As­to­ria. Is the price right? Will it set a new bar for prices paid by Chi­nese in­vestors? Liu Lian re­ports from New York

China Daily (Canada) - - IN DEPTH -

B‘Unique op­por­tu­nity’

“The Wal­dorf is a unique op­por­tu­nity, not only be­cause it’s a five-star lux­ury ho­tel that en­com­passes an en­tire city block in Mid­town Man­hat­tan, but also be­cause the project in­volves re­de­ploy­ment and repo­si­tion­ing of the as­set,” said Daniel Lesser, pres­i­dent and CEO of New York-based LW Hos­pi­tal­ity Ad­vi­sors. “The mere fact that it’s a scarce op­por­tu­nity is go­ing to put up­ward pres­sure on value eval­u­a­tion.”

Gabriel R. Hunger­ford, a se­nior re­search an­a­lyst at Los An­ge­les-based CBRE Global Re­search and Con­sult­ing, called the Wal­dorf “one the most-prized pieces of real es­tate prop­er­ties in mod­ern Amer­i­can his­tory.’’

“It’s re­ally one of the most sta­ble in­vest­ments they can make,” he said. “An­bang is mostly likely mo­ti­vated by di­ver­si­fi­ca­tion and cap­i­tal preser­va­tion rather than purely by re­turns.”

The Wall Street Jour­nal cal­cu­lated that An­bang is pay­ing about $1.4 mil­lion per room. Mar­go­lis said An­bang is pay­ing a lit­tle bit higher, but not a great deal higher than paid for other first-class prop­er­ties.

By com­par­i­son, in Jan­uary of this year Star­wood Ho­tels & Re­sorts Inc sold the 207-room St. Regis Bal Har­bour Re­sort in Mi­ami for $213 mil­lion to Qatar-based Al Rayyan Tourism De­vel­op­ment Company, mak­ing the per room rate ap­prox­i­mately $1.03 mil­lion.

The Stan­dard Ho­tel in lower Man­hat­tan’s Meat­pack­ing dis­trict was pur­chased in Fe­bru­ary for more than $400 mil­lion by a group of in­vestors, which rep­re­sented at least $1.2 mil­lion a room.

The Plaza Ho­tel, another trophy in Man­hat­tan, was bought by In­dian bil­lion­aire Subrata Roy, head of prop­erty em­pire Sa­hara Group, for $2 mil­lion per room in 2012, ac­cord­ing to ho­tel data tracker STR An­a­lyt­ics. The Sul­tan of Brunei re­cently ac­quired the ho­tel’s mort­gage, ac­cord­ing to a source who asked not to be iden­ti­fied and who de­clined to give the amount of the mort­gage.

To some ob­servers, the Wal­dorf deal re­called Mit­subishi Company’s $2 bil­lion pur­chase in 1989 of Rock­e­feller Cen­ter, another New York land­mark. The build­ing com­plex was val­ued at $6 bil­lion when ac­quired and fell to $1.5 bil­lion when Mit­subishi ex­ited the deal six years later, said Fer­reira.

Other ac­qui­si­tions in the Ja­panese real es­tate ei­jing-based An­bang In­surance Group made a big splash last month when it agreed to buy New York City’s iconic Wal­dorf As­to­ria ho­tel for $1.95 bil­lion from Hil­ton World­wide Hold­ings Inc, the largest sale ever of a US ho­tel.

When the Black­stone Group – Hil­ton’s majority share­holder – was ap­proached by po­ten­tial bid­ders a few months ago, sources said val­u­a­tion ex­perts put an es­ti­mate of $1.2 to $1.3 bil­lion on the prop­erty. The sources de­clined to be iden­ti­fied by name. Black­stone de­clined a re­quest for com­ment.

Did pri­vately held An­bang, China’s eighth­largest in­surer, over­pay for the Wal­dorf? What does the deal mean for fu­ture Chi­nese in­vest­ments in the US real es­tate mar­ket? And could the swarm of Chi­nese real es­tate deals an­nounced in New York over the last two years ex­pe­ri­ence the same fate that hap­pened to the Ja­panese real es­tate binge of the 1980s?

Banks tend to be on the con­ser­va­tive side when it comes to prop­erty val­u­a­tions, said Michael B. Mar­go­lis, a part­ner at Blank Rome law firm and based at its Los An­ge­les of­fice. “Their in­ter­est is more fo­cused on pro­tect­ing the bank’s loan rather than as­sess­ing op­por­tu­ni­ties look­ing up for an as­set,” he said.

“In gen­eral, for­eign in­vestors – no mat­ter who they are – Chi­nese, Ja­panese or from South Amer­ica – are more likely to over­pay for prop­erty or buy prop­er­ties that un­der­per­form,” said Fer­nando Fer­reira, as­so­ciate pro­fes­sor of real es­tate at the Whar­ton School. “Real es­tate is very lo­cal. You re­ally need to know the mar­ket block by block. Almost by def­i­ni­tion, no lo­cal in­vestors have less knowl­edge or do worse about the lo­cal mar­ket than for­eign buy­ers.’’

An­bang also has com­mit­ted to a ma­jor ren­o­va­tion of the ho­tel, which may ratchet up to $400 mil­lion to $500 mil­lion, ac­cord­ing to sources who asked not to be named. That, would bring the to­tal ac­qui­si­tion tab to ap­prox­i­mately $2.5 bil­lion.

“Con­sid­er­ing the brand recog­ni­tion and the qual­ity of the as­set, I def­i­nitely think the Wal­dorf is a fair value in terms of what they are pay­ing,” said Mar­isha Clin­ton, di­rec­tor of re­search of cap­i­tal mar­kets at New York- based Jones Lang LaSalle (JLL) Prop­erty Con­sul­tants. It’s a mat­ter of sup­ply and de­mand, she said. binge of the 1980s in­cluded the Tif­fany build­ing, Univer­sal Stu­dios and Columbia Records. All were sub­se­quently sold at great losses.

The fall­out from the Ja­panese melt­down two decades ago war­rants cau­tion for Chi­nese in­vestors, ex­perts said.

“I think most deals we saw be­fore in real es­tate by Chi­nese com­pa­nies were priced at the up­per end,” said Thilo Hane­mann, di­rec­tor of re­search on cross-bor­der in­vest­ments for the Rhodium Group, “Peo­ple have said that they can­not make a lot com­mer­cial sense of the eval­u­a­tions.”

“The Chi­nese and the Ja­panese pe­riod only looked the same on the sur­face. The Chi­nese gov­ern­ment over the past 20 to 25 years has built up enor­mous fi­nan­cial strength and enor­mous fi­nan­cial re­serve. And its pol­icy is now to di­ver­sify and en­cour­age out­bound in­vest­ment. The Wal­dorf deal is a good ex­am­ple of how the pol­icy is im­ple­mented,” said Daniel M Cash­dan, head of in­vest­ment bank­ing at HFF Se­cu­ri­ties LP.

“The Chi­nese are not only buy­ing land­mark build­ings. They are also do­ing de­vel­op­ments, and in­vest­ing not only in first-tier but sec­ond-tier ci­ties,” he said, “the Chi­nese in­vestors are com­ing to the US with a much broader ap­proach which will make the to­tal re­sults safer.”

“The Ja­panese spree was re­ally hin­dered by the flow­ing of the US econ­omy, of the re­ces­sion in the early 1990s. Their fall was not nec­es­sar­ily as a re­sult of bad in­vest­ments,” said Hunger­ford. Sim­i­lar­i­ties with Ja­panese

“There are a lot of sim­i­lar­i­ties be­tween what’s hap­pen­ing for Chi­nese in­vestors and what hap­pened for the Ja­panese in late 1990s,” said Jonathan J. Miller, pres­i­dent and CEO of Miller Sa­muel Inc, a New York-based real es­tate con­sult­ing firm. “There’s a sim­i­lar feel to that now, although I don’t know the dif­fer­ence on in­di­vid­ual bases.”

“One of my fa­vorite say­ing is by Mark Twain. ‘His­tory does not re­peat it­self, but it of­ten rhymes,’” said Miller.

With vo­latil­ity in fi­nan­cial mar­ket chal­leng­ing eco­nomic con­di­tions world­wide, the New York mar­ket has be­come a global safe haven for in­vestors, said Miller.

“Whether it is lo­cal, mean­ing do­mes­tic or for­eign buy­ers of hard as­sets, every­body is scram­bling for the high­est qual­ity as­sets they can find,” he said. “I don’t think it’s unique to for­eign in­vestors. The for­eign in­vestor el­e­ment in terms of par­tic­i­pat­ing in the mar­ket and pay­ing pre­mi­ums is greatly ex­ag­ger­ated.”

Price de­vel­op­ment has been so rapid in Man­hat­tan over the last two decades, said Hane­mann. “If you go back 20 or 30 years, if you would have told some­one what an of­fice tower th­ese days goes in Man­hat­tan, they would have said you are crazy,’’ he said.

“An­bang sells life in­surance poli­cies. The li­a­bil­i­ties will per­sist for decades. If you buy An­bang in­surance to­day, as you prob­a­bly will have a life ex­pectancy maybe over 70 years, An­bang will be pre­pared to have as­sets to pay for that li­a­bil­ity very far in the fu­ture,”

g‘ In en­eral, for­eign in­vestors — no mat­ter who they are — Chi­nese, Ja­panese or from South Amer­ica — are more likely to over­pay for prop­erty or buy prop­er­ties that un­der­per­form.” FER­NANDO FER­REIRA AS­SO­CIATE PRO­FES­SOR OF REAL ES­TATE AT THE WHAR­TON SCHOOL

said Mar­go­lis. “Nat­u­rally there is a hori­zon for in­vest­ing, and it will also be very long. It makes sense for them to be in­vest­ing in long term as­sets.”

An­bang en­tered into a long-term man­age­ment con­tract with Hil­ton that al­lows it to op­er­ate the Wal­dorf for the next 100 years.

“That’s a re­flec­tion of a very long-term in­vest­ing hori­zon,” said Mar­go­lis, “in that back­ground, what may be viewed as a pre­mium paid for trophy prop­er­ties may not be that huge a pre­mium if it is be­ing amor­tized over decades.”

“There are for­eign in­vestors that do hold those prop­er­ties for a long pe­riod of time. They are not buy­ing and trad­ing them right away. You are more than likely able to ex­tract val­ues not only on the ap­pre­ci­a­tions, but also un­der the re­cur­rent rev­enue mea­sures as well,” said Clin­ton.

“Another ques­tion to ask is what the al­ter­na­tives are for the Chi­nese in­vestors,” said Fer­reira, “per­haps, the al­ter­na­tive is to con­struct another ho­tel in China? From a port­fo­lio per­spec­tive, maybe they are will­ing to pay a lit­tle bit more in or­der to get the safety of the Man­hat­tan mar­ket.”

In Global Hous­ing Watch­ing re­leased in Oc­to­ber, the In­ter­na­tional Mon­e­tary Fund re­ported that in large ci­ties in China, house prices showed signs of over­val­u­a­tion de­spite gov­ern­ment mea­sures to re­strict spec­u­la­tive de­mand, whereas many smaller ci­ties ex­pe­ri­enced over­sup­ply.

“By some mea­sures, year-on-year, 2014 over 2013, there’s been a sig­nif­i­cant drop of more than 20 per­cent in the to­tal dol­lar in­vested in the Chi­nese real es­tate mar­ket whereas in the US, there’s an in­crease,” said Mar­go­lis.

David Colen, man­ag­ing di­rec­tor at New­mark Grubb Knight Frank, said yields in New York for sta­bi­lized, well per­form­ing as­sets ranged from 4 per­cent to 4.5 per­cent de­pend­ing on as­set class, whereas yields in other ma­ture mar­kets such as London, Hong Kong and Sin­ga­pore may be more com­pressed.

“There’s also the ques­tion of do­mes­tic un­cer­tainly, in­clud­ing things that may not di­rectly af­fect the fi­nan­cial mar­ket but af­fect it in­di­rectly, such as the ex­tent of the well-known anti-cor­rup­tion cam­paign, food safety is­sues and en­vi­ron­men­tal chal­lenges,” said Mar­go­lis.

All those fac­tors are play­ing against the back­ground of the cen­tral gov­ern­ment en­cour­ag­ing out­bound in­vest­ments. In the in­surance in­dus­try, since 2012, the China In­surance Reg­u­la­tory Com­mis­sion (CIRC) has in­creased in­vest­ment op­tions for Chi­nese in­sur­ers. They are al­lowed to trade in­dex fu­tures and de­riv­a­tives in the do­mes­tic mar­ket and bans on in­vest­ing abroad have been lifted.

Start­ing in Fe­bru­ary, the CIRC al­lowed Chi­nese in­surance com­pa­nies to invest up to 30 per­cent from 20 per­cent of their to­tal as­sets to real es­tate. The ceil­ing for over­seas in­vest­ment also was in­creased to 15 per­cent of to­tal as­sets.

Ping An, China’s largest in­surer, bought the Lloyd’s Build­ing in London in July 2013 for $388 mil­lion (260 mil­lion pounds). In June, China Life, the world’s big­gest in­surer by mar­ket cap­i­tal­iza­tion took a 70 per­cent stake with Qatar Hold­ing, a sov­er­eign wealth-fund sub­sidiary, and paid $1.4 bil­lion (795 mil­lion pounds) to ac­quire 10 Up­per Bank Street in London from Ca­nary Wharf Group. An­bang’s rank­ing

As of Septem­ber 2014, ac­cord­ing to the CIRC web­site, An­bang was ranked 17th among Chi­nese prop­erty in­sur­ers and 35th among life in­surance com­pa­nies based on this year’s pre­mium in­come.

In May, the CIRC ap­proved An­bang to in­crease its regis­tered cap­i­tal of $2.95 bil­lion (18 bil­lion yuan), $1.31 bil­lion (8 bil­lion), and $1.64 bil­lion (10 bil­lion), re­spec­tively, in the par­ent group, life in­surance unit and prop­erty in­surance unit. It made the to­tal regis­tered cap­i­tal in the three en­ti­ties to $4.91 bil­lion (30 bil­lion), $1.93 bil­lion (11.79 bil­lion), and $3.11 bil­lion (19 bil­lion), re­spec­tively.

The regis­tered cap­i­tal of An­bang prop­erty in­surance is the largest among peers, far ahead of Ping An’s $2.78 bil­lion (17 bil­lion).

Pre­mi­ums in An­bang’s life in­surance rep­re­sented 8 per­cent of as­sets by end of 2013, com­pared with 16 per­cent at China Life. “That sug­gests An­bang is us­ing eq­uity cap­i­tal, rather than pre­mi­ums, to fi­nance its pur­chases,” the Fi­nan­cial Times re­ported.

One week after the Wal­dorf ac­qui­si­tion, An­bang and US pri­vate eq­uity- firm J.C. Flow­ers & Co agreed to ac­quire Bel­gian in­surer Fidea for an undis­closed amount. The deal must be ap­proved by the Na­tional Bank of Bel­gium.

Although ren­o­va­tion plans for the Wal­dorf As­to­ria have not been re­leased, many spec­u­late that An­bang may con­vert part of the ho­tel into con­dos.

“While the Wal­dorf is po­si­tioned to be a ‘lux­ury’ fa­cil­ity, it is a chal­lenge to op­er­ate in such a man­ner with an inventory of 1,413 guest units, price de­vel­op­ment has been so rapid in Man­hat­tan over the last two decades,” said Lesser.

“Tremen­dous value cre­ation op­por­tu­ni­ties ex­ist to sig­nif­i­cantly re­duce the size of the ho­tel and cre­ate lux­ury res­i­den­tial as well as high­end re­tail on the ground floor of the prop­erty.”

There is no city reg­u­la­tion re­strict­ing condo con­ver­sion or the per­cent­age of a con­ver­sion, ac­cord­ing to Jonathan H. Can­ter, a part­ner at New York-based Kramer Levin Naf­talis & Frankel LLP, who rep­re­sented El-Ad Prop­er­ties in the con­ver­sion of the Plaza.

An­bang’s agree­ment with the Hil­ton does not af­fect the num­ber of rooms un­der its man­age­ment, ac­cord­ing to peo­ple fa­mil­iar with the mat­ter.

The Plaza Ho­tel is an ex­am­ple of the re­de­vel­op­ment op­por­tu­nity that ex­ists for the Wal­dorf, said Lesser. The 100-year-old, 805-room Mid­town ho­tel was closed in 2005 and re­opened in 2006 with about 150 ho­tel rooms, 200 con­do­mini­ums and a re­tail sec­tion. Buy­ers had closed on nearly 100 of the condo con­ver­sions within weeks, ac­cord­ing to me­dia re­ports.

There are 18 apart­ments at the Plaza now listed for sale, ac­cord­ing to data pro­vided by Ci­tyRealty, at an av­er­age price of $4,126 per square foot.

“Lux­u­ri­ous apart­ments in New York are highly sought after among Chi­nese and wealthy Americans and for­eign­ers from Brazil to Ukraine,” said Lesser.

JLL con­firmed the condo ver­sion trend as one of the three key pre­dic­tions for 2015. It re­ported that the trend had taken hold of New York City with new condo projects sell­ing for $2,000 per square foot in the Fi­nan­cial Dis­trict to more than $8,000 per square foot near Cen­tral Park.

“If that’s what An­bang chooses to do, that’s a great idea,” said Clin­ton.

There are also val­ues that the Chi­nese in­vestor could cre­ate, said Hane­mann. “If they can gen­er­ate a lot of busi­nesses through their lo­cal Chi­nese con­nec­tions or po­si­tions in the Chi­nese mar­ket, say, for ex­am­ple, the Wal­dorf is run­ning at 60 per­cent ca­pac­ity, and the owner is able to get it up to 95 per­cent ca­pac­ity by bring­ing in a lot of wealthy Chi­nese guests, then the high eval­u­a­tion would po­ten­tially make sense.” Oc­cu­pancy rates

The oc­cu­pancy rate of the Wal­dorf was not avail­able. But the av­er­age oc­cu­pancy rate for all Man­hat­tan ho­tels in this year’s sec­ond quar­ter com­piled by PwC showed a 3.3 per­cent in­crease to 91.6 per­cent. The av­er­age oc­cu­pancy rate for Man­hat­tan lux­ury ho­tels was 87.8 per­cent; and for ho­tels on Mid­town East, where the Wal­dorf is lo­cated, was 91.9 per­cent.

As for Chi­nese trav­el­ers to the US, the Of­fice of Travel and Tourism In­dus­tries fore­cast in Oc­to­ber that ar­rivals from China would in­crease to 2.24 mil­lion this year.

“You have a lot tourism com­ing to the area. At that spe­cific ho­tel, you have a lot of diplo­mats stay­ing there like the Amer­i­can am­bas­sador to the United Na­tions,” said Clin­ton, “An­bang is at a great po­si­tion to make their re­turn tar­get.”

On up­grad­ing the Wal­dorf, Colen said “there are sig­nif­i­cant de­mands with the food and bev­er­age business there which can use some up­dates,” and he said per­haps, the Wal­dorf can in­tro­duce a food hall like the Plaza.

The Plaza Food hall launched in 2010 has been deemed a huge suc­cess for its Euro­peanstyle mar­ket of­fer­ing of an ex­ten­sive ar­ray of eater­ies, and has be­come a main at­trac­tion for lo­cals and tourists.

“Com­mit­ting to a ma­jor ren­o­va­tion alone would in­volve a whole con­struc­tion process, se­lect­ing con­trac­tors, in­surance for ex­am­ple. All th­ese can be dif­fi­cult wa­ter for for­eign in­vestors who are not versed in the do­mes­tic le­gal cli­mate,” said Mar­go­lis, the dif­fi­cul­ties as such were plenty dur­ing the Ja­panese real es­tate spree in the 1980s.

An­bang has not yet re­vealed a fund­ing plan for the Wal­dorf’s ac­qui­si­tion. “Since An­bang is an in­surance company, I would as­sume they use as­sets on the man­age­ment from the in­surance fees that they col­lected. Maybe they will bring some part­ner,” said Hane­mann.

Com­pa­nies like to an­nounce big num­bers, said Hane­mann, “but you have to be care­ful to take those num­bers on a face value. You also have to con­sider that a lot of th­ese deals are us­ing lo­cal fi­nanc­ing. There have been sev­eral multi-mil­lion dol­lar projects that were an­nounced by Chi­nese in­vestors over the past 18 months. We have to wait and see how much those projects are ac­tu­ally ma­te­ri­al­ized.”

Fi­nanc­ing has been an is­sue for some Chi­nese projects, said Hane­mann, with com­pa­nies not able to raise funds within the time that they were ex­pected to.

“If An­bang en­coun­ters any fi­nan­cial stress, it be­comes a prob­lem when they need to sell the prop­erty,” said Fer­reira, “when you need to sell in the sit­u­a­tion of stress, that’s when you re­al­ize you were over­pay­ing.” Con­tact the writer at lian­liu@chi­nadai­lyusa. com


The Wal­dorf As­to­ria is pic­tured at 301 Park Av­enue in New York on Oct 6. Hil­ton World­wide Hold­ings Inc said it would sell its flag­ship Wal­dorf As­to­ria New York ho­tel to a Chi­nese in­surance company for $1.95 bil­lion, one of the high­est prices per room ever paid for a US ho­tel.

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