Sternlicht and Gray riff on foreign investment in NYC hotels

"The market will burp" if the Fed raises rate, Starwood founder says

TRD New York /
Jun.June 01, 2015 02:25 PM

Chinese insurer Anbang’s $1.95 billion purchase of the Waldorf Astoria is only the beginning of a wave of foreign investment in New York hotels, according to real estate bigwigs Jonathan Gray and Barry Sternlicht.

“I think it’s early days in terms of foreign, and particularly Chinese, investment,” said Gray, Blackstone’s head of real estate, at NYU’s Hospitality Conference at the Marriott Marquis Monday morning. He also defended the large sums some foreign investor shave paid for trophy properties, arguing that “buying in markets like New York and London has proven to be rational.”

Blackstone holds a majority stake in hotel chain Hilton Worldwide, which sold the Waldorf Astoria to Anbang in February for around $1.4 million per room. As The Real Deal previously reported, Gray negotiated the deal directly with Anbang chairman Wu Xiaohui.

The high price raised some eyebrows at the time, but Gray said the insurer is getting its money’s worth. “I think it will be a great thing for the city, and I think (Anbang) will get a great return,” he said.

Barry Sternlicht, head of private fund manager Starwood Capital Group, also just sold a New York hotel to a Chinese insurer. In February, Sunshine Insurance Group bought the 114-room Baccarat Hotel at 20 West 53rd Street from Starwood for $230 million – before it was even finished. At more than $2 million per room, the price set a record for a New York hotel sale. Like Gray, he implied the buyers got a good deal. “I had some sell regrets, honestly,” he said.

Sternlicht joked that he sees Blackstone and Starwood as “papa bear and baby bear” in regard to two recent hotel deals. “[Jonathan] did a big deal with the Waldorf and I did a little deal with the Baccarat,” Sternlicht said.

According to Sternlicht, the influx of foreign capital has much to do with central banks pumping economies across the globe. “If you have distortions of capital, you quickly parlay that into something that’s real,” he said. In effect, he argued that the artificial inflation of asset prices in certain countries has pushed foreign capital into New York real estate, which is seen as less overvalued. This, in turn, raises prices to a level locals consider “crazy.”

Central bank stimuli and the resulting fall in bond yields have also made it easier for Starwood to raise cash from investors, Sternlicht claimed. “We’ve raised large funds form investors that have kind of tossed in the towel (on fixed-income assets),” he said.

But while Sternlicht expects the influx of foreign money to continue, he also cautioned that the expected rise in U.S. interest rates and a likely appreciation of the Dollar could create problems for hotel investors in New York. “The thing for New York City is you’re going to hit this new supply (of hotels) at the same time as the Dollar appreciates dramatically,” he said. He argued that a rising dollar could have a depressing effect on travel as well as property values, which would be bad news for hotel investors.

“If the Fed does decide to raise rates this fall,” he said, “I think the markets will burp.”

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