China Life Joins Overseas Hotel Train With U.S. Buy

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Includes: BEE, BXMT, LFC, MAR, SJJIY
by: Doug Young

Bottom line: China Life's $2 billion investment in a US hotel portfolio could mark the height of a bubble of Chinese offshore hotel buying, and high asset values could start to deflate by the end of next year.

Move over, Anbang. China's largest insurer China Life (LFC, HKEx: 2628; Shanghai: 601628) is joining a recent love affair between Chinese investors and overseas hotels with the announcement that it's leading a group investing in $2 billion worth of properties in the US. People following the trend will know that unlisted insurer Anbang has been leading this overseas charge with its recent purchase of a US hotel portfolio for $6.5 billion and its failed bid earlier this year for hotel operator Starwood (HOT).

China Life is the nation's largest insurer, and also one of its most conservative. The company has been largely absent from the 2-year-old buying binge by other Chinese investors in Western hotel markets ranging from the US to Europe and Australia. But now even this stodgy company is joining the trend, which perhaps is an early indicator that the buying binge has crested and the bubble could soon burst.

We'll return to that part of the story shortly, but first let's review this latest deal and some of the other recent purchases that have pushed global hotel prices up to some of their highest levels of all time. In this case, the group led by China Life is investing in a portfolio of 280 limited-service hotels owned by Starwood Capital Group, which is unrelated to the Starwood that Anbang previously tried to buy (company announcement; English article).

An announcement of the deal says that other investors include unspecified sovereign wealth funds, which probably means that China's own sovereign wealth fund, China Investment Corp. (CIC), was a member of the group. The only other major detail is that hotels in the portfolio are spread across 40 US states, meaning the properties are quite diverse geographically.

Starwood Capital made similar headlines a couple of years ago, when it sold another hotel portfolio in Europe to Jin Jiang (OTC:SJJIY, Shanghai: 600754; HKEx: 2006), one of China's leading hotel operators which has also been quite globally active (previous post). That particular deal saw Jin Jiang buy Starwood's Louvre portfolio of hotels in a deal that was valued at up to 1.2 billion euros ($1.3 billion) at the time.

Both the Louvre deal and now this latest China Life bid differ slightly from many of the other ones because they are targeting large portfolios of lower-quality properties. This latest deal definitely fits that description, since the self-service hotels included in the portfolio are typically lower-end properties in suburban locations targeted at budget-conscious travelers.

Big-Name Buys

By comparison, Anbang has been squarely focused on famous properties and big brands, which is a far more typical Chinese mindset. The insurer first splashed into global headlines with its purchase of the Waldorf Astoria in New York last year for nearly $2 billion. More recently, it paid $6.5 billion this year for Strategic Hotels & Resorts (NYSE:BEE), owner of a portfolio of 15 US luxury hotels, from private equity owner Blackstone (NYSE:BXMT) (previous post).

Others who have jumped on the hotel bandwagon include private equity investor HNA Group, which has made several recent purchases, and Sunshine Insurance, which bought a major Australian property 2 years ago. Those are just some of the largest deals that have been publicly reported, and there are probably many other smaller individual property sales that have also occurred.

The buying binge looks a bit like 2 earlier ones that occurred in the late 1980s and early 1990s in the US, the first fueled by Japanese buyers and the second by Taiwanese. The Japanese wave was also noteworthy for some of the sky-high prices paid for trophy properties, and this latest wave looks quite similar. Accordingly, I do expect that China Life's entry to the game could mark a high point in this latest trend, and the property bubble we're seeing now could start to burst by the end of next year.

Disclosure: None.

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