Some of the most iconic American hotel brands like Sheraton, Westin and St. Regis may soon get a new owner from the Middle Kingdom.
At least three Chinese companies, including the country's sovereign wealth fund, are hoping to bid for Starwood Hotels and Resorts Worldwide, according to multiple reports. The hotel operator, which manages Sheratons and Westins around the globe and currently has a market cap of $12.6 billion, could be the largest-ever Chinese acquisition in the U.S.
If the deal goes through, this would mark the second mega hotel deal by Chinese investors in a year, after Anbang Insurance made headlines with its $1.95 billion purchase of New York City's Waldorf Astoria in October 2014.
But the eye-popping deal size is only part of a larger trend of rising Chinese investments in the U.S. real estate market. The potential bidding for hotel operators like Starwood signals an interesting shift of strategy for Chinese investors, according to Philip Feder, chair of the Global Real Estate practice of Paul Hastings LLP. "Rather than buying trophy assets with limited upside potential, this is completely different since it's a cash-flow play," Feder said in an interview with FORBES.
One key difference from the past, according to Feder, is Chinese companies' search for good returns for cash, like the steady stream of income from fees generated by hotel operators. In the last few years, Chinese investors have gained a reputation for acquiring trophy commercial real estate assets, including the Waldorf Astoria and Chinese billionaire Zhang Xin's $1.4 billion deal for a 40% stake in the General Motors Building in 2013. "A Starwood bid shows that Chinese investors are looking at deals in a more complex way – something that the Japanese investors failed to do in the 1980s," Feder says, noting that long-term prospect of a potential deal.
While trophy assets may no longer be the priority, Chinese investors do still care a lot about brands, which makes Starwood a good fit given its collection of well-known names such as St. Regis, Sheraton, and W. Given these brands' strong reputation in Asia, a buyer could potentially expand the existing network and add more hotels in China. The company currently has 150 hotels (both managed and franchised locations) in Greater China alone – that's nearly as many as that in Europe.
In the first half of 2015, the real estate and hospitality sector has continued to be the biggest drivers for Chinese investment in the U.S., accounting for 65% of the $6.4 billion foreign-direct investment transaction in the U.S., according to the Rhodium Group. Unlike other sectors such as the semiconductor industry, investments in real estate and hospitality attract less regulatory scrutiny over concerns of national security. Thus, a Chinese acquisition of Starwood is unlikely to face significant hurdles from U.S. policymakers, according to Feder.
Whether or not Chinese investors succeed in buying Starwood Hotels, their deep pockets and a strong desire to diversify their global portfolio keep them hunting.
"It's a healthy time for the market that the Chinese are in it for the long haul and they're looking at it from a very complex way," Feder says.