New York’s Baccarat Hotel fetches record valuation from Chinese buyer
A Chinese insurer agreed to buy New York’s Baccarat Hotel for more than $230 million.
New York’s Baccarat Hotel has yet to check in a single guest, but it is about to become the most highly valued hotel in the U.S. after a Chinese insurer agreed to buy it for more than $230 million.
Sunshine Insurance Group Co. is paying real-estate mogul Barry Sternlicht ’s firm and a partner more than $2 million a room for the Midtown Manhattan property, according to people familiar with the matter.
One person said the valuation beats the previous record set by the Plaza Hotel, the New York landmark that was sold in 2012 to India’s Sahara Group for $2.04 million a room, according to hotel data tracker STR Analytics.
The Baccarat is the latest trophy property to wind up in the hands of Chinese investors in recent months as buyers take advantage of new rules allowing them to invest more easily abroad. Real-estate brokers and analysts said Chinese companies see luxury hotels, especially in major global capitals, as long-term investments that can provide steady income in a period of low interest rates. Moreover, some say the properties confer prestige on their owners.
“Chinese insurers are buying for 50 or 100 years, and they are not worried about value going down in markets like New York,” said Ryan Meliker, hotel analyst for investment bank MLV & Co. “It’s a great place to park money long term.”
China’s Anbang Insurance Group Co. in October agreed to pay $1.95 billion to Hilton Worldwide Holdings Inc. for the famed Waldorf-Astoria on New York’s Park Avenue. China property investor Dalian Wanda Group Co. last year put $900 million toward a Chicago skyscraper with a luxury hotel. Chinese investors also have bought hotels in Sydney, Washington and Los Angeles in the past year.
Real-estate broker JLL estimates Chinese companies will spend more than $5 billion on overseas hotel investments this year, up from $920 million last year and $130 million in 2012.
The Chinese government’s recent liberalization of rules that had limited corporate investments abroad is helping to fuel the buying, said Gilda Perez-Alvarado, head of the Americas for JLL’s global hotel group.
Under the new rules, Chinese firms can invest up to $1 billion without seeking government approval, up from $100 million before last year’s changes.
Mr. Sternlicht’s Starwood Capital Group LLC built the luxury hotel and high-end condominium project with Tribeca Associates, a New York real-estate developer. The two haven’t disclosed how much they spent on the project. Starwood, which acquired French crystal maker Baccarat in 2005, will continue to manage its namesake hotel.
Mr. Sternlicht founded Starwood in 1991, and it has expanded into one of the world’s largest real-estate investment firms. He also was chief executive of Starwood Hotels & Resorts Worldwide Inc. before leaving the company in 2005.
The opulent 114-room property features 15,000 pieces of crystal stemware and 17 chandeliers from France’s Baccarat factory. Minibars are stuffed with treats from Parisian gourmet shop Fauchon, and the property features a spa offering six kinds of facials. Suites are expected to fetch up to $18,000 a night.
The Baccarat is slated to open its doors next month. It is rare for a buyer to commit to a luxury property that has no track record and no guarantee it can get the $900 to $1,000 a night that Starwood plans to charge for standard rooms.
That makes it a more speculative investment than the Plaza Hotel, which has been operating for more than a century.
“This only occurs in very robust market conditions,” said Sean Hennessey, chief executive officer of Lodging Advisors, a hotel-consulting firm. Because hotels aren’t preleased like office buildings, the risk of filling the guest rooms now falls to the new owner, rather than the developer, he said.
Some brokers said that if the Baccarat can charge what it hopes, the hotel could be valued at more than what Sunshine is paying. Hotels also are the most resistant type of property to inflation because room rates can be reset at any time.
A luxury hotel like the Baccarat should produce annual adjusted operating income of about 3% to 4% of the purchase price, or roughly twice the yield of 10-year U.S. Treasury notes, said Mr. Meliker, the MLV analyst.
There are also strategic reasons for closely held Sunshine to buy before the opening, Mr. Hennessey said. The company gets a new asset in a crucial market without having to wait years to develop a similar property.
This isn’t the first wave of foreign buying of trophy U.S. commercial properties. Japanese conglomerates were big buyers during the 1980s, and there has been a steady stream in recent years of petrodollars from Middle Eastern and Asian government funds.
Chinese insurers have been particularly active buying hotels and other real estate overseas. Only about 1% of these insurers’ assets are in real estate, said JLL’s Ms. Perez-Alvarado, who expects that number to climb closer to the 4% she says is more common among Western insurers.
Sunshine was established in 2005 as a property and casualty insurer, later adding a life-insurance unit and asset-management arm. Its website says the company has more than 130 million customers. In November, Sunshine agreed to pay $380 million for a Sheraton hotel in Sydney.
The Baccarat sale would follow a record-breaking year for the hospitality industry. U.S. hotels had their highest-ever average daily rate of $115 a night and revenue per available room of $74, according to STR. Leisure travel remained robust, while group travel rebounded 4.4% in 2014 after a 0.7% decline the year before.
Scott Berman, head of the hospitality group for PricewaterhouseCoopers LLC, said 2015 looks just as strong. He points to an improving U.S. economy aided by falling oil prices, continued strength in business travel and limited new supply in most cities.
In 2013, foreign buyers invested $229 million in Manhattan hotels, just 12% of the total investment that year. Last year, foreign investors accounted for $1.9 billion, or 58%, of Manhattan’s total hotel investment, according to JLL.
The Waldorf Astoria sale alone would match all of last year’s foreign hotel investment in Manhattan. Anbang is expected to close its deal to acquire the landmark property sometime during the first quarter, according to people familiar with the matter. The $1.95 billion price tag, or about $1.4 million a room, would be the highest overall price paid for a U.S. hotel. Broker Eastdil Secured advised the sellers on the Baccarat and Waldorf sales.
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