Starwood bid hints at Chinese global property push

Anbang's $12.8 billion bid for the New York-listed hotel chain extends its property-buying binge and highlights margin pressures as competition between Chinese insurers heats up.

Anbang Insurance Group's $12.8 billion bid for New York-listed hotel chain Starwood Hotels & Resorts Worldwide comes as Chinese insurers struggle with fierce competition, falling returns, and slower economic growth at home.

It also indicates that the sector is increasingly looking abroad as Chinese insurers seek to diversify their investments in search of more yield that better matches their liabilities. 

The Anbang-led bid for Starwood follows Anbang's acquisition last year of the Waldorf Astoria Hotel in New York for $1.95 billion. According to a person familiar with the matter on Monday, the company is also on the verge of buying Strategic Hotels & Resorts for $6.5 billion, a US real estate investment trust, potentially adding an even more international flavour to its already large real estate portfolio.

Helping to fuel this emerging global property expansion drive within the Chinese insurance sector are domestic factors as new entrants put margins under growing pressure.

Xiang Junbo, the chairman of the China Insurance Regulatory Commission, said on February 13 that the agency is processing nearly 200 applications for insurance licenses. Anbang itself was only founded in 2004.

To attract clients, insurers have been selling wealth management products that promise higher returns and to meet these liabilities they are investing in ever-riskier assets.

That includes looking abroad with the tacit approval of the authorities. The CIRC's Xiang wrote in January in China Finance, a biweekly journal run by the People's Bank of China, that Beijing wanted Chinese insurers to “go out” and increase their investments overseas. 

As a result, Chinese insurers are rapidly shifting their asset mix towards equities and alternative investments such as property. These investments potentially help to improve returns but also make insurers more vulnerable to economic and financial market shocks, as well as reducing the transparency and liquidity of their portfolios.

Anbang's bid for Starwood is the most prominent example to date of the Chinese insurance sector's international hunt for yield.

But it's not the only one. Fosun, another Chinese insurer, invested in Japanese property manager Idera Capital in 2014 and London-headquartered Resolution Property Plc in 2015. 

Why property

Starwood said on March 10 that it had received a non-binding proposal from a consortium of companies to acquire all of the outstanding shares of common stock of Starwood for $76.00 per share in cash. A person involved in the deal said J.C. Flowers and Primavera Capital also form part of the bidding group led by Anbang which has made a revised binding and fully financed proposal.

The move extends Anbang's real estate acquisition binge. Aside from the $6.5 billion it is set to pay US private equity group Blackstone for Strategic Hotels & Resorts and the $1.95 billion it also paid Blackstone for the Waldorf Astoria, the company owns shares in a number of Chinese property developers.

Anbang owns a 20.77% stake in Financial Street, 19.96% of Gemdale, 5% of Vanke, and bought a 29.98% stake in Sino-Ocean Land in December.

Anbang is not alone in China in pushing into property.

Sino-Life also has a 29.94% shareholding in Gemdale and unlisted Foresea Life and its parent company hold 22.45% of Vanke, while Ping An bought 9.9% of Country Garden in April last year and China Jinmao placed 9.5% stake with New China Life on June 9.

According to Nomura analyst Shengbo Tang, insurers are attracted by the relatively high dividend yields offered by developers because they help to cover regular policyholder payouts. Developers offer about 5% dividend yield on average versus insurers’ 3% to 4% funding cost. 

China insurers' use of funds

Their relatively high return-on-equity also gives a fillip to investment returns and gives insurers the opportunity to securitise matured investment properties.

Hotels represent another sub-sector of the real estate investment universe that offer potentially higher returns and diversification benefits, much like buying property abroad.

Rising risks

The shift in Chinese insurer portfolios prompted the head of the industry watchdog, the CIRC's Xiang, to warn in December of "emerging risks along with the rising number of market players and the expansion of their investment channels."

Falling asset quality means a tougher transition to China’s Risk-Oriented Solvency System, whose first pillar of quantitative capital requirements officially became effective January 1.

"Some insurance firms will face risks like weakened solvency capability under the new regulatory regime that will be implemented next year," Xiang said after meeting with big insurance firms.

More broadly, insurance company profits also suffer when the economy slows and interest rates fall.

Moody’s credit rating agency downgraded its outlook for the Chinese life insurance industry on March 14 to negative from stable as it expects the overall creditworthiness of Chinese life insurers will deteriorate in the next 12 to 18 months.

The shift to riskier assets took off in 2014 when CIRC increased the investment cap on real estate/equity to 30% of the total assets of insurance companies. The Chinese government is keen to see its insurers meet their financial obligations as the country's population ages.

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