Chinese hotel buying is larger than the Japanese 1980s push: Colliers International

The emergence of China as a source of hotel property capital has major implications for Australia, according to industry veteran Stephen Burt, the Colliers International Asia Pacific Hotels managing director.

"This phenomenon of a concentrated source of capital is nothing new," said Burt.

"In the mid to late 1980s it was Japanese capital dominating Australian hotel property, and the 1990s post-1992 was dominated by Singaporean investors.

"However, on this occasion the capital flow is larger and more pervasive in terms of property profile.

"During 2015 China based capital (mainland and Hong Kong) may account for over 60% of major hotel transactions throughout Australia.

"This will range from $4 million motels to $400 million plus hotels."

Burt identified four major implications:

• "Many Chinese companies buying now are new to hotel investment. They are institutions with minimal or no existing hotel investment exposure or often companies that created wealth through non-hotel industries. Therefore, hotel operators will need to ensure their new owners understand the key terms of the hotel operating agreement; namely the budget approval process, cash flow management, approval process for senior executive appointments, the capital expenditure approval process including owner’s contractual obligations;

• "The majority of the CEO and chairpersons for the new Chinese investors cannot speak English. This is not a criticism, just a fact, just as most Australian senior executives doing business in China cannot speak a Chinese dialect. However the point is, an important ingredient for successful hotel investment is good communication between the owner and operator. Clearly, there will be bilingual intermediaries but we know what happens when a story is told to one person, who then passes the story to another person. Therefore, make sure key messages (hotel may fail to make budget!) are correctly conveyed to the appropriate operative in China whom will be the person ultimately approving the annual trading and cap ex budget;

• "The degree of foreign ownership of Australian hotels over the next few years will be extensive. This may lead to calls from certain non-aligned sectors to restrict foreign ownership. I would warn (and conflict acknowledged) this would be a negative outcome for the hotel industry. Hotel investment is like mining investment; it offers the opportunity for good returns but requires significant capital. Our mining industry would not have its current scale if it had to rely too much on domestic capital. It is the same for hotel property; and

• "Chinese investment in the hard assets will further stimulate Chinese visitation to Australia. The challenge will be not to fall over ourselves to overtly pamper Chinese visitors so that their Australian experience is diluted and becomes an extended China experience. This was a mistake with the Japanese visitor boom of the 1980s which failed to be sustainable. Chinese visitors come to a foreign country to experience local cuisine, and to meet the locals and other international visitors; not to be herded on tours exclusively for Chinese. They like to shop independently and not be forced into specific shops."

The influx of Chinese investors was headlined by the $463 million sale of Sydney's Sheraton on the Park hotel to Chinese insurer Sunrise.

JLL recently noted Chinese outbound capital surged to over US$16.5 billion in 2014 as institutions, as developers and private investors sought to take advantage of the buoyant real estate market across the globe. 

For the first time ever, in 2014 Chinese buyers spent more on commercial real estate outside of China than domestically, a significant milestone and a sign that the domestic market is entering a new phase.

It noted following a slower year for transactional activity in China in 2014, outbound investments made up 52% of all real estate transactions of Chinese investors within the commercial sector.

Office and residential land acquisitions accounted for 85% of all Chinese purchasing activity, although JLL noted strong demand for hotel and hospitality assets. 

While Europe topped the list of favourite investment destinations, attracting over US$5.5 billion, Australia emerged as a new favourite among Chinese investors in 2014 with over US$3 billion flowing into the country.