You know people in Asia expect an end to a crisis when they start shopping for property. And that's what's happening in Hong Kong.
Reports from online property portals Spacious and squarefoot.com.hk made their way into my inbox here on Wednesday, indicating buyers are showing increased purchasing appetite as prices fall. We've had many days now of zero or near-zero new Covid-19 cases, so it must be time to look at apartment listings.
I can vouch for that. I have an apartment tentatively on the market, and this week I got my first call in months from a broker with a potential buyer. I have a history of particularly bad timing for putting properties on the market, by the way. I listed my home for sale one month before Lehman Brothers collapsed in September 2008. I held out and got the price I wanted when values bounced back in 2009. I'll hold again with this investment property.
The bargain hunters are keen to capitalize on distress when owners are forced to sell, and we already are seeing major real estate deals collapse that were struck in pre-virus times.
The troubled Chinese insurer Anbang Insurance sued South Korea-based Mirae Asset Global Investments this week in a Delaware state court for reneging on a deal. Mirae agreed last year to pay US$5.8 billion for a portfolio of 15 high-end U.S. hotels, but the Covid-19 crisis has frozen its financing.
Anbang's successor, Dajia Insurance, which was formed after the Chinese government seized Anbang, filed suit in the Delaware Court of Chancery on Monday after the deal failed to close.
Posh hotels, indeed
The properties include the J.W. Marriott Essex House in Manhattan, the Westin St. Francis in San Francisco, the InterContinental hotels in Chicago and Miami, and the Four Seasons in Jackson Hole, Wyoming. Anbang acquired them in 2016 in its US$5.5 billion deal to buy Strategic Hotels & Resorts from Blackstone Group (BX) .
Anbang had been a "crocodile," one of China's most aggressive purchasers of overseas properties and companies. But the croc bit off more than it could chew. Now the Chinese government is looking to flog off its expensively acquired assets.
The Anbang unit is seeking an order for the defendants, which include various Mirae affiliates, to "specifically perform their obligations" in the sale.
Mirae paid a 10% deposit on the portfolio of hotels in September but it did not go through with the deal, which was supposed to close on April 17. A Mirae spokesman told Reuters that certain conditions had not been met by Anbang. Mirae also said it is still pursuing the deal and coordinating with the seller.
Mirae is suffering from buyer's remorse after a spate of hotel closures caused by the pandemic, according to Bloomberg, which cites sources saying Mirae also has been unable to secure financing on favorable terms. Mirae officials asked for more time to close the deal because the debt financing they required was no longer available.
Plenty of room at the inn
Occupancy rates plunged to 8.8% in the week of April 11 for U.S. luxury hotels, the hardest-hit segment of the hotel sector, according to market intelligence specialists STR. That compares to overall U.S. hotel occupancy of 66.1% in 2019.
Anbang was nationalized in 2018 by the Chinese government after overextending itself and with its chairman jailed for fraud. The government then set up a new company, Dajia Insurance Group, to take over its assets, with an identical structure as Anbang. Dajia means "everyone" in Chinese.
Anbang hit the headlines when it bought the Waldorf Astoria in 2014 for US$1.95 billion. It then lodged a massive bid in 2016 to buy Starwood Hotels & Resorts Worldwide for US$15.5 billion. But its flurry of high-profile deals worried Communist Party officials, who started scrutinizing its source of funds. Anbang then withdrew the bid for Starwood, which ultimately was bought by Marriott International (MAR) .
Chairman Wu Xiaohui started Anbang in 1994 as a regional seller of car insurance. At its peak in 2017 it held 1.97 trillion yuan (US$278 billion) in assets. But its fall was swifter than its rise.
Chinese regulators decided that its high-yield "universal life insurance" wealth-management products flouted rules against risky investment products. They also found the company had diverted insurance premiums into dicey investment deals. Wu, whose third marriage was to former paramount leader Deng Xiaoping's granddaughter Deng Zhuorui, was sentenced in 2018 to 18 years in prison for fraud and embezzlement said to total US$12 billion.
Deal dollars dry up
The potential collapse of the Mirae deal spells trouble for Anbang, which is still paying off the borrowings used to finance its initial 2016 purchase of Strategic Hotels. Anbang is likely desperate to get the hotels off its books, but will struggle to line up an equally deep-pocketed buyer.
Lenders in the hospitality sector are largely focused on providing financing for the hotels they have backed to stay in business. Keeping hotel groups afloat is of greater concern than underwriting big-ticket deals.
The preferred outcome for both parties may be for them to renegotiate on the price and timing of the deal. Anbang has also run aground in its US$1 billion bid to revamp the Waldorf Astoria and convert it into luxury apartments. The refurbishment has had to stop during New York's lockdown, and the sales office is currently closed.
South Korea's economy so far has been far less affected by the coronavirus than you might expect, considering its proximity across the Yellow Sea from China and as site of the first big outbreak of Covid-19 outside China. But its export-oriented companies are braced for slumping sales in the months to come as demand globally dries up.
State-owned South Korean banks have offered the country's two main air carriers, Korean Air and Asiana, up to 2.9 trillion won (US$2.4 billion) as a bailout package to protect jobs at the airlines.
