in PAGE 20 | Frid ay-Sunddepthay, November 14-16, 2014 chinadailyUSA.com CHINA DAILY 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

eijing-based Anbang Insurance at New York-based Kramer Levin Naftalis & Group made a big splash last Frankel LLP, who represented El-Ad Proper- month when it agreed to buy ties in the conversion of the Plaza. New York City’s iconic Waldorf Anbang’s agreement with the Hilton does Astoria hotel for $1.95 billion not affect the number of rooms under its man- from Hilton Worldwide Holdings Inc, the agement, according to people familiar with largestB sale ever of a US hotel. the matter. When the Blackstone Group – Hilton’s The Plaza Hotel is an example of the redevel- majority shareholder – was approached by opment opportunity that exists for the Waldorf, potential bidders a few months ago, sources said Lesser. The 100-year-old, 805-room Mid- said valuation experts put an estimate of $1.2 town hotel was closed in 2005 and reopened in to $1.3 billion on the property. The sources 2006 with about 150 hotel rooms, 200 condo- declined to be identified by name. Blackstone miniums and a retail section. Buyers had closed declined a request for comment. on nearly 100 of the condo conversions within Did privately held Anbang, China’s eighth- weeks, according to media reports. largest insurer, overpay for the Waldorf? There are 18 apartments at the Plaza now What does the deal mean for future Chinese listed for sale, according to data provided by investments in the US real estate market? And CityRealty, at an average price of $4,126 per could the swarm of Chinese real estate deals square foot. announced in New York over the last two “Luxurious apartments in New York are years experience the same fate that happened highly sought after among Chinese and to the Japanese real estate binge of the 1980s? wealthy Americans and foreigners from Brazil Banks tend to be on the conservative side to Ukraine,” said Lesser. when it comes to property valuations, said JLL confirmed the condo version trend Michael B. Margolis, a partner at Blank Rome as one of the three key predictions for 2015. law firm and based at its Los Angeles office. It reported that the trend had taken hold of “Their interest is more focused on protecting New York City with new condo projects sell- the bank’s loan rather than assessing opportu- ing for $2,000 per square foot in the Financial nities looking up for an asset,” he said. District to more than $8,000 per square foot “In general, foreign investors – no matter near Central Park. who they are – Chinese, Japanese or from “If that’s what Anbang chooses to do, that’s South America – are more likely to overpay a great idea,” said Clinton. for property or buy properties that under- guan liming for / china daily There are also values that the Chinese inves- perform,” said Fernando Ferreira, associate 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 tor could create, said Hanemann. “If they can professor of real estate at the Wharton School. 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 generate a lot of businesses through their local “Real estate is very local. You really need to hotel. Chinese connections or positions in the Chi- know the market block by block. Almost by nese market, say, for example, the Waldorf is definition, no local investors have less knowl- binge of the 1980s included the Tiffany build- background of the central government running at 60 percent capacity, and the owner edge or do worse about the local market than ing, Universal Studios and Columbia Records. encouraging outbound investments. In the is able to get it up to 95 percent capacity by foreign buyers.’’ All were subsequently sold at great losses. insurance industry, since 2012, the China bringing in a lot of wealthy Chinese guests, Anbang also has committed to a major The fallout from the Japanese meltdown Insurance Regulatory Commission (CIRC) then the high evaluation would potentially renovation of the hotel, which may ratchet two decades ago warrants caution for Chinese has increased investment options for Chi- make sense.” up to $400 million to $500 million, accord- investors, experts said. In general, foreign investors — nese insurers. They are allowed to trade index ing to sources who asked not to be named. “I think most deals we saw before in real no matter who they are — Chi- futures and derivatives in the domestic market Occupancy rates That, would bring the total acquisition tab to estate by Chinese companies were priced at nese, Japanese or from South and bans on investing abroad have been lifted. The occupancy rate of the Waldorf was approximately $2.5 billion. the upper end,” said Thilo Hanemann, director America — are more likely to Starting in February, the CIRC allowed not available. But the average occupancy rate “Considering the brand recognition and of research on cross-border investments for Chinese insurance companies to invest up for all Manhattan hotels in this year’s second the quality of the asset, I definitely think the the Rhodium Group, “People have said that overpay for property or buy to 30 percent from 20 percent of their total quarter compiled by PwC showed a 3.3 per- Waldorf is a fair value in terms of what they they cannot make a lot commercial sense of properties that underperform.” assets to real estate. The ceiling for overseas cent increase to 91.6 percent. The average are paying,” said Marisha Clinton, director of the evaluations.” ‘‘ investment also was increased to 15 percent occupancy rate for Manhattan luxury hotels FERNANDO FERREIRA research of capital markets at New York- based “The Chinese and the Japanese period only ASSOCIATE PROFESSOR OF REAL ESTATE AT THE of total assets. was 87.8 percent; and for hotels on Midtown Jones Lang LaSalle (JLL) Property Consultants. looked the same on the surface. The Chi- WHARTON SCHOOL Ping An, China’s largest insurer, bought the East, where the Waldorf is located, was 91.9 It’s a matter of supply and demand, she said. nese government over the past 20 to 25 years Lloyd’s Building in London in July 2013 for percent. has built up enormous financial strength and $388 million (260 million pounds). In June, As for Chinese travelers to the US, the Office ‘Unique opportunity’ enormous financial reserve. And its policy China Life, the world’s biggest insurer by mar- of Travel and Tourism Industries forecast “The Waldorf is a unique opportunity, not is now to diversify and encourage outbound said Margolis. “Naturally there is a horizon ket capitalization took a 70 percent stake with in October that arrivals from China would only because it’s a five-star luxury hotel that investment. The Waldorf deal is a good exam- for investing, and it will also be very long. It Qatar Holding, a sovereign wealth-fund subsid- increase to 2.24 million this year. encompasses an entire city block in Mid- ple of how the policy is implemented,” said makes sense for them to be investing in long iary, and paid $1.4 billion (795 million pounds) “You have a lot tourism coming to the area. town Manhattan, but also because the proj- Daniel M Cashdan, head of investment bank- term assets.” to acquire 10 Upper Bank Street in London At that specific hotel, you have a lot of diplo- ect involves redeployment and reposition- ing at HFF Securities LP. Anbang entered into a long-term manage- from Canary Wharf Group. mats staying there like the American ambas- ing of the asset,” said Daniel Lesser, president “The Chinese are not only buying land- ment contract with Hilton that allows it to sador to the United Nations,” said Clinton, and CEO of New York-based LW Hospital- mark buildings. They are also doing devel- operate the Waldorf for the next 100 years. Anbang’s ranking “Anbang is at a great position to make their ity Advisors. “The mere fact that it’s a scarce opments, and investing not only in first-tier “That’s a reflection of a very long-term As of September 2014, according to the return target.” opportunity is going to put upward pressure but second-tier cities,” he said, “the Chinese investing horizon,” said Margolis, “in that CIRC website, Anbang was ranked 17th On upgrading the Waldorf, Colen said on value evaluation.” investors are coming to the US with a much background, what may be viewed as a pre- among Chinese property insurers and 35th “there are significant demands with the food Gabriel R. Hungerford, a senior research broader approach which will make the total mium paid for trophy properties may not be among life insurance companies based on this and beverage business there which can use analyst at Los Angeles-based CBRE Global results safer.” that huge a premium if it is being amortized year’s premium income. some updates,” and he said perhaps, the Wal- Research and Consulting, called the Waldorf “The Japanese spree was really hindered by over decades.” In May, the CIRC approved Anbang to dorf can introduce a food hall like the Plaza. “one the most-prized pieces of real estate prop- the flowing of the US economy, of the reces- “There are foreign investors that do hold increase its registered capital of $2.95 billion The Plaza Food hall launched in 2010 has erties in modern American history.’’ sion in the early 1990s. Their fall was not nec- those properties for a long period of time. (18 billion yuan), $1.31 billion (8 billion), and been deemed a huge success for its European- “It’s really one of the most stable invest- essarily as a result of bad investments,” said They are not buying and trading them right $1.64 billion (10 billion), respectively, in the style market offering of an extensive array of ments they can make,” he said. “Anbang is Hungerford. away. You are more than likely able to extract parent group, life insurance unit and property eateries, and has become a main attraction for mostly likely motivated by diversification and values not only on the appreciations, but also insurance unit. It made the total registered locals and tourists. capital preservation rather than purely by Similarities with Japanese under the recurrent revenue measures as well,” capital in the three entities to $4.91 billion (30 “Committing to a major renovation alone returns.” “There are a lot of similarities between said Clinton. billion), $1.93 billion (11.79 billion), and $3.11 would involve a whole construction process, The Wall Street Journal calculated that what’s happening for Chinese investors and “Another question to ask is what the alter- billion (19 billion), respectively. selecting contractors, insurance for example. Anbang is paying about $1.4 million per what happened for the Japanese in late 1990s,” natives are for the Chinese investors,” said The registered capital of Anbang property All these can be difficult water for foreign room. Margolis said Anbang is paying a little said Jonathan J. Miller, president and CEO Ferreira, “perhaps, the alternative is to con- insurance is the largest among peers, far ahead investors who are not versed in the domestic bit higher, but not a great deal higher than paid of Miller Samuel Inc, a New York-based real struct another hotel in China? From a portfo- of Ping An’s $2.78 billion (17 billion). legal climate,” said Margolis, the difficulties for other first-class properties. estate consulting firm. “There’s a similar feel to lio perspective, maybe they are willing to pay Premiums in Anbang’s life insurance rep- as such were plenty during the Japanese real By comparison, in January of this year Star- that now, although I don’t know the difference a little bit more in order to get the safety of the resented 8 percent of assets by end of 2013, estate spree in the 1980s. wood Hotels & Resorts Inc sold the 207-room on individual bases.” Manhattan market.” compared with 16 percent at China Life. “That Anbang has not yet revealed a funding plan St. Regis Bal Harbour Resort in Miami for “One of my favorite saying is by Mark In Global Housing Watching released in suggests Anbang is using equity capital, rather for the Waldorf’s acquisition. “Since Anbang $213 million to Qatar-based Al Rayyan Tour- Twain. ‘History does not repeat itself, but it October, the International Monetary Fund than premiums, to finance its purchases,” the is an insurance company, I would assume they ism Development Company, making the per often rhymes,’” said Miller. reported that in large cities in China, house Financial Times reported. use assets on the management from the insur- room rate approximately $1.03 million. With volatility in financial market challeng- prices showed signs of overvaluation despite One week after the Waldorf acquisition, ance fees that they collected. Maybe they will The Standard Hotel in lower Manhattan’s ing economic conditions worldwide, the New government measures to restrict speculative Anbang and US private equity- firm J.C. Flow- bring some partner,” said Hanemann. Meatpacking district was purchased in Feb- York market has become a global safe haven demand, whereas many smaller cities experi- ers & Co agreed to acquire Belgian insurer Companies like to announce big numbers, ruary for more than $400 million by a group for investors, said Miller. enced oversupply. Fidea for an undisclosed amount. The deal said Hanemann, “but you have to be careful of investors, which represented at least $1.2 “Whether it is local, meaning domestic or “By some measures, year-on-year, 2014 must be approved by the National Bank of to take those numbers on a face value. You million a room. foreign buyers of hard assets, everybody is over 2013, there’s been a significant drop of Belgium. also have to consider that a lot of these deals The Plaza Hotel, another trophy in Manhat- scrambling for the highest quality assets they more than 20 percent in the total dollar invest- Although renovation plans for the Waldorf are using local financing. There have been tan, was bought by Indian billionaire Subrata can find,” he said. “I don’t think it’s unique to ed in the Chinese real estate market whereas Astoria have not been released, many specu- several multi-million dollar projects that were Roy, head of property empire Sahara Group, foreign investors. The foreign investor element in the US, there’s an increase,” said Margolis. late that Anbang may convert part of the hotel announced by Chinese investors over the past for $2 million per room in 2012, according to in terms of participating in the market and David Colen, managing director at New- into condos. 18 months. We have to wait and see how much hotel data tracker STR Analytics. The Sultan paying premiums is greatly exaggerated.” mark Grubb Knight Frank, said yields in New “While the Waldorf is positioned to be a those projects are actually materialized.” of Brunei recently acquired the hotel’s mort- Price development has been so rapid in York for stabilized, well performing assets ‘luxury’ facility, it is a challenge to operate in Financing has been an issue for some Chi- gage, according to a source who asked not Manhattan over the last two decades, said ranged from 4 percent to 4.5 percent depend- such a manner with an inventory of 1,413 nese projects, said Hanemann, with compa- to be identified and who declined to give the Hanemann. “If you go back 20 or 30 years, if ing on asset class, whereas yields in other guest units, price development has been so nies not able to raise funds within the time amount of the mortgage. you would have told someone what an office mature markets such as London, Hong Kong rapid in Manhattan over the last two decades,” that they were expected to. To some observers, the Waldorf deal tower these days goes in Manhattan, they and Singapore may be more compressed. said Lesser. “If Anbang encounters any financial stress, recalled Mitsubishi Company’s $2 billion pur- would have said you are crazy,’’ he said. “There’s also the question of domestic “Tremendous value creation opportunities it becomes a problem when they need to sell chase in 1989 of Rockefeller Center, another “Anbang sells life insurance policies. The uncertainly, including things that may not exist to significantly reduce the size of the hotel the property,” said Ferreira, “when you need New York landmark. The building complex liabilities will persist for decades. If you buy directly affect the financial market but affect it and create luxury residential as well as high- to sell in the situation of stress, that’s when you was valued at $6 billion when acquired and fell Anbang insurance today, as you probably indirectly, such as the extent of the well-known end retail on the ground floor of the property.” realize you were overpaying.” to $1.5 billion when Mitsubishi exited the deal will have a life expectancy maybe over 70 anti-corruption campaign, food safety issues There is no city regulation restricting condo six years later, said Ferreira. years, Anbang will be prepared to have assets and environmental challenges,” said Margolis. conversion or the percentage of a conversion, Contact the writer at lianliu@chinadailyusa. Other acquisitions in the Japanese real estate to pay for that liability very far in the future,” All those factors are playing against the according to Jonathan H. Canter, a partner com