This is the second installment in a three-part series examining the impact of the Chinese market on Canada’s lodging industry, with special emphasis on the city of Vancouver (Read first installment here). In this installment, we examine the unique context that informs the decisions of the Chinese investor, the motivations these investors have for investing in foreign markets, and why the Vancouver hotel market is poised to see an influx of Chinese capital.
Chinese investors and Chinese tourists have a strong tendency to take an interest in the same locals as places to spend their money. In particular, they prefer cities and regions that have a well-established and visible Chinese expatriate community. Vancouver, with the largest Chinese community in Canada, has been experiencing year-over-year double-digit growth in tourism from China, which means that a surge in Chinese investment into hotel assets in Vancouver is likely on the horizon. At present, Chinese investors have only a small stake in Vancouver hotels, but the number of Chinese investors on the hunt for hotel acquisition opportunities is on the rise. The influx of Chinese capital and tourist dollars has already transformed cities with large Chinese communities and transparent property markets, such as Sydney, London, and New York. With the depletion of opportunities in these markets, Vancouver is well positioned to emerge as a desirable market for Chinese investment into hotel assets. Together, investors and tourists from China have the potential to change the tourism and investment landscape of Vancouver.
Chinese investors are highly capitalized but also uniquely motivated in the investments they pursue in established foreign markets. Having insight into these underlying motivations is essential to understanding the appeal of Vancouver for Chinese investors. Five general motivations can be said to shape the decision-making process guiding Chinese investors in how they move into established foreign markets:
- they are seeking to create the opportunity to immigrate to an area;
- they are looking for political, social, and economic stability in the market;
- they want to use the investment to increase the credibility and status of their other existing businesses;
- they want to diversify capital outside of China; and
- they are leveraging their strong purchasing power and China’s currency appreciation to pursue not only their individual interests but also the national interests of China.
With these motivations in mind, we will see how Vancouver is emerging as a potential hot spot for Chinese investment, but first we will examine the unique context that shapes the character of Chinese investors.
Understanding the Chinese Investor
As a result of decades of stringent government regulations that deterred outbound investments, Chinese investors are still not the most experienced and sophisticated of foreign investors. Many Chinese investors still prefer to invest domestically based on their familiarity with the market, the associated quick returns, and the minimal competitive bidding process. They also dislike the length of time that goes into negotiations in foreign markets, even though they have the ability to win deals based on their astonishingly high bid prices.
Two factors have stimulated an increase in foreign real estate investment: currency appreciation and policy changes initiated by the People’s Republic of China (PRC) government. The currency appreciation of the Renminbi since the revaluation in 2005, which moved the currency away from being pegged to the US dollar, has increased the purchasing power of Chinese investors. In conjunction with this, the PRC government has begun to encourage privately owned companies to make outbound investments through the “Go Out Policy,” which has provided investors with greater confidence to pursue deals. The PRC government established this policy in 1999 to help companies compete on the global stage, to increase the brand recognition of Chinese businesses and the country as a whole, and to balance out the influx of foreign direct investment into China with outbound investment.
In the past, foreign investment by the PRC government was centered on securing raw materials through state-owned enterprises (SOEs), and stringent regulations requiring government approval were in place for private investors and companies wanting to make outbound investments. The PRC government has also been known for selecting certain industries and markets for outbound investment with the intention of aligning investment with the country’s long-term development strategy. The targeted industries were predominantly ones that China lacked within its own borders and/or areas where China was facing shortages. At the turn of the millennium, the PRC government shifted its focus and began to heavily encourage private domestic companies to engage in outbound investment. The National Development and Revolution Committee (NDRC) and the Ministry of Commerce (MOC) have made Chinese outbound investment easier through improvements to the filing and approval processes. With these changes, the PRC government hoped to slow the accumulation of its foreign currency reserves and also help Chinese companies compete globally. Projects under US $1-billion without ties to sensitive countries or industries are no longer subject to approval, although businesses still need to be registered with authorities.
The increase in purchasing power and the encouragement to make outbound investments have generated an increased interest in foreign property investment. It should be noted that Chinese investors are not looking directly at investing in hotel assets, but rather in stable income-producing real estate assets—hotels just happen to be a subset of this form of property investment. In actuality, many Chinese investors are leery of hotel investments because of the associated long payback period, which essentially ties down capital. Hotels are nevertheless an asset class that Chinese investors consider for investment, especially since they can expect a premium on their return in this asset class once a hotel is operating at a stabilized level with competent management. Hotels also tend to have the highest capitalization rates in real estate, thus producing the highest returns. When adjusting for risk, there is potential for returns to be lower than other forms of real estate; however, as an absolute number returns are generally higher.
Chinese investors that are looking to invest in hotels are not only interested in first tier markets like Vancouver, but also highly interested in developing and purchasing hotels in secondary markets as a way of parking their money in an asset without drawing the attention of the PRC government, at the same time taking advantage of low entry costs. Purchasing a timeshare in a resort also appears to be an option that the Chinese favour. With limited knowledge of local markets, investors tend to look toward acquisitions instead of new builds, as they do not like dealing with the long process of developing a property, which includes land acquisition, high construction costs, and overseeing the entire development.
Today, Chinese investors can come from both private and institutional spheres in the form of individuals of high net worth, insurance companies, sovereign wealth funds, and private equity firms that actively seek investments in developed and emerging markets. Chinese investors are also noticing where their fellow citizens are travelling and are making hotel purchases in these foreign markets, having the advantage of knowing what the Chinese guest expects in hotel accommodation.
The Motivations for Investment
Markets like Vancouver are attractive to Chinese investors for reasons that go beyond the presence of an established Chinese community, for they also represent opportunities that Chinese investors are uniquely primed to pursue. Now that we have established the highly capitalized, foreign-market-oriented position of the Chinese investor, we will examine the motivations that make Vancouver and foreign markets an attractive place for Chinese investment. Note that motivations four and five are more general motivations that apply to foreign markets, not necessarily Vancouver.
Motivation 1: The Opportunity to Immigrate
Pursuing a better way life for future generations is a philosophy imbedded in Chinese culture. Chinese middle and upper class adults with families have never been afraid to leave their homeland to pursue a better life in a foreign country in order to create a brighter future for their children. Better living conditions, coupled with opportunities for work and a sound education system, could be said to form “prerequisites” for seeking to immigrate to a new country. Canada fulfills these three prerequisites without hesitation. Having investments in a foreign country makes immigration to that country easier for investors and their families. As such, investing in Canada can act as means of creating security for immigration if investors decide to leave China in pursuit of political or economic stability. For the Chinese investor, diversifying capital into a country like Canada to some extent foreshadows plans for immigration and illustrates a view of Canada as a potential safe haven offering a high quality of life. With respect to Vancouver, the city has consistently been ranked as one of the best cities in the world to live in. This factor alone provides may motivate investment and immigration decisions for Chinese investors and their families.
Motivation 2: Seeking Stability in Foreign Markets
China’s recent economic slowdown has led to a decline in real estate activity in that country. Land prices continue to escalate despite government reforms trying to decelerate growth in market prices. With the tightening of real estate regulations (aimed at lowering high real estate prices caused by overinvestment), developers in China are finding it increasingly difficult to obtain approvals for projects and financing through banks. As a result, investors are turning to China’s growing shadow banking industry, in which alternative financiers offer unconventional lending to companies that are unable to obtain financing from banks. According to the Institute of Finance and Banking, Chinese Academy of Social Sciences—a main think tank of the PRC government—the shadow banking industry in China is valued at $4.4-trillion, which is equal to one-fifth of the domestic banking sector’s total assets. Investors may therefore find it easier to obtain conventional financing in Canada, which illustrate economic stability.
Despite being one of the more expensive real estate markets in the world, Chinese investors see Vancouver as an attractive place for investment because of its relative stability. As returns are becoming harder to find in China, Chinese developers are finding higher and more stable yields in Canada, complemented by a lower cost of financing, a fairer political process, and less regulation of real estate. (With that said, many wealthy Mainland Chinese people do not even require financing because of the large amount of equity available.) In addition, Canada’s relatively conservative stance on international politics and reluctance to get involved in the internal politics of other countries foster a favourable environment for investment in the eyes of Chinese investors. Although Canada’s economy is dependent on global financial health, the stable government and policy environment give investors greater confidence in diversifying their capital through investments into the country. For diversifying capital, Canada is a safe alternative for investment compared to other countries. The country’s economic resilience and fast emergence out of the great recession further cemented the perception among investors that Canada offers economic stability.
Motivation 3: To Increase Credibility and Status
For an investor looking to list companies abroad, purchasing hotel assets in a city like Vancouver increases the credibility of the investor’s other businesses. It also provides reassurance to potential stock buyers who may not otherwise wish to invest in the company’s existing businesses because the company operates primarily in secondary markets in China. These investors are status driven. If purchasing a luxury hotel asset in Vancouver will help to develop other aspects of their business, then they may consider it to be a worthy investment. Owning a luxury hotel asset will also provide prestige and a sense of pride, which are motivating factors for the Chinese investor.
Collecting and holding assets while looking at the actual returns as secondary may come into play because creating an international image and entering established foreign markets provide Chinese investors with future return opportunities through increased credibility. However, Chinese investors will always consider potential returns when purchasing hotel assets, especially since hotels are one of the riskier asset classes for investment, but the main motivation for acquiring the asset may be to increase the value of the investor’s portfolio as a whole. The potential for credibility may provide the upside that outshines other negative factors about the asset itself.
Motivation 4: To Diversify Capital Outside of China
To lessen the impact of a sudden economic downturn and create a stronger foundation for the future, the PRC government has instituted reforms and encouraged outbound investment. Diversifying capital geographically allows investors to mitigate risk. The PRC government is also undergoing an intensive anti-corruption campaign, which may be a motivating reason for investors to diversify their capital outside of China, where it may be harder for the PRC government to investigate.
Diversifying capital to create offshore businesses allows investors to create local bank accounts that will serve as collateral in the future. Typically, once capital has left China, investors look for intermediaries like banks to park their money. Given the low interest rates in Canada, investors are left to ponder other investment opportunities that would offer greater returns, such as property investments, with hotels being one potential option.
Motivation 5: To Achieve the National Interests of China
Chinese investment has never held as important a role in developing global markets as it does now. Sovereign wealth funds and SOEs have always been mandated to act in the best interest of the PRC and invest in industries and markets beneficial to the PRC government’s strategy. Historically, Chinese SOEs have been able to gain favour in Third World economies through engaging in investments like hotels in return for resources that China lacks within its own borders, such as food and energy, but their role in First World economies is functionally different. First-World economies are not as dependent on Chinese investment as Third-World economies, but investment from China is still highly desirable. The Government of Canada has indicated that they would not allow any further foreign takeover of Canadian oil sands, as this would essentially undermine Canada’s sovereign interests. This type of activity would mainly involve SOEs, not private investors.
As discussed above, the PRC government’s “Go Out Policy” has provided private Chinese investors with the opportunity to compete in the global value chain, joining China’s already established SOEs and sovereign wealth funds on the world stage. As the second largest economy in the world, China is making bold strides to increase brand awareness of the country and brand recognition of Chinese companies through continual reform and policy changes that call for increased autonomy and freedoms for international business, which would allow companies to expand their global reach. In response to this, Chinese outbound investment continues to grow, increasing the PRC government’s power and influence on the world stage, which is all part of China’s long-term economic development strategy.
Canada is an ideal country for foreign investment. On the international stage, the country is viewed as safe, peaceful, and prosperous, which are all factors that the Chinese investor favours. As China’s Renminbi continues to appreciate and the economy continues to grow, it is expected that the PRC government will continue to legislate new policies and reforms to promote outbound investment. As a result, Canada will begin to see a greater share of interest and investments from these highly capitalized investors. Although Chinese investors have yet to transform the hotel investment market in Vancouver as they have in Sydney, London, and New York, Vancouver has all the necessary ingredients that Chinese investors are looking for in hotel investments. In addition to being a desirable place for immigration with a well-established Chinese community, a globally competitive university, an advanced economy, an appealing environment, and effective administration, Vancouver offers the Chinese investor a stable environment for investment and the status associated with owning world-class hotel assets in a world-renowned city. Chinese outbound investments have already changed the landscape of similar hotel markets in other first tier markets, and they are poised to do the same in Vancouver.
In the next and final installment of this series, we will look at the Chinese market’s contribution to Vancouver’s tourism industry by the numbers, examine the characteristics of the Chinese traveller, and look at what hoteliers must do to obtain their fair share of this market.
HVS will be at the Western Canadian Hotel & Resort Investment Conference….will you?
HVS is proud to be a Platinum Sponsor. Join us and our speakers Carrie Russell, Monique Rosszell and Jason Wight. Please check the session time and locations here.