With the limited information provided and with a good prior fund performance, marketing a new fund in China, based on mid-range hotel brand would not be received negatively.
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Will Chinese investors continue to look for “trophy” properties and luxury brands in 2018, or can a mid-range hotel brand successfully market to Chinese investors?
We are a U.S. hospitality brand weighing options for attracting Chinese investors for mid-range hotel brand expanding in 2018. We had some interest from investors in 2016 but that cooled as smaller Chinese groups got hit with China's capital restrictions. We will launch a $300 million fund in Q2 2018. Would a mid-range hotel brand be wasting time traveling to and marketing to Chinese institutional investors for 2018?
Answers
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First, the Chinese governmental restrictions on foreign investment have and will continue to have a dramatic effect on the ability of Chinese investors to invest in offshore real estate related investments. Until these restrictions are reduced or rescinded, which is hard to predict from here in the US, I would think raising capital in this manner would be a challenge. As I understand it from Chinese clients, if the core business of a Chinese company includes hospitality, there will be less interference in restricting them from investing in their core business. This would mean a Chinese hotel company who is seeking to expand outside of China might be permitted to make an investment in a US hotel brand, where others, likely not. Consequently, the best approach might be to seek out these firms for investment, though I doubt a fund structure would be a suitable form for them to invest.
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Chinese investors are much less likely to be involved in trophy purchases nowadays because that will grab headlines and bring attention to their company. Midrange hotel development plays or portfolio acquisitions or capital investments could still be very attractive. If you target the right institutional investors, this could be very fruitful.
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You are right, most Chinese investors are looking for luxury brands and this is going to continue, whereas a mid-range hotel brands also have their own market in China.
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Thanks for the inquiry. My answer is positive. With the tax reform in the US, it will be very attractive to Chinese companies.
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I think it would be very challenging in the current regulatory environment for Chinese investors to invest in an overseas hotel brand. The only exception would be if the mid-range hotel brand is focused on expanding in China.
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I suggest you consider a couple of ideas. First, some Chinese investors already have capital offshore. They are not the investors in the spotlight like HNA and Anbang, but those who are looking for reliable partners and who have operations outside China. Second, are you prepared to consider an EB-5 pool of investors? I cannot make further suggestions without additional information. Make sure your venture is structured so as to not require CIFIUS approval. I do not know the status of your relationships in China, but I would think about coming over in connection with a meeting sponsored by The China Investor. I would read the questions submitted by potential Chinese investors and structure with a view towards addressing the concerns raised by investors and answered in posted responses.
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Since the capital restrictions is a governmental level policy, it will get more strictly in near future. However, as China complies with CRS, China investors are willing to invest into US which is not participating the CRS. The word "attracting" should not be interpreted as a brand name. Chinese investors focus on ROI, leverage, and capital security.
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Whether Chinese investors are interested in mid-market hotels is really a matter of appetite for secondary markets where many are located. One big player in this space in recent years has been an outfit called Magna Hospitality run by Bob Indeglia. Magna has jointly developed sites with a well-known Chinese investor Sam Chang. The benefit of the mid-tier limited service hotel segment is the consistency of returns and ease of management. Without luxury amenities, these hotels appeal to business customers and the budget conscious and held up well in the Great Recession to the extent not over-levered. These hotels must be flagged to attract business travelers - who collect miles, rewards, etc. i.e. Choice Hotels. I have negotiated with several flags and can assist with specific questions.
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Thanks for the inquiry. My answer is positive. With the tax reform in the US, it will be very attractive to Chinese companies. We are open for any future detailed questions.
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This is more of a business question so, as an attorney, I can only offer my own observations. To me, a mid-range hotel brand can successfully market to Chinese investors if structured in the right way. From what I see, Chinese investors are maturing and getting less excited about high-end hotel brands. Institutional investors are now focusing more on the actual ROI as opposed to the PR effect of a large acquisition. For high net worth investors, they have begun to understand that, even though a hotel looks great, it may not have much to do with how much money they can get back. The fallouts of certain luxury hotel projects in the EB-5 world is awakening to the stakeholders, to say the least.
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Single hotel investment will be difficult under the new "guideline" unless the Chinese buyers themselves run hospitality business and it would consider as a "strategic expansion". Also, a "blind-pool" fund raising is typically difficult for Chinese investors as they would prefer to start with one actual project first to establish trust and "chemistry".
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