RREEF, H&Q to finance Hilton Hotels in China

Chinese properties are not overpriced, says RREEFÆs chief bargain hunter.
RREEF, the alternative asset management arm of Deutsche Bank, has formed a joint venture with private-equity group H&Q Capital to bring the Hilton brand into mid-market hotel development in China. Both parties hold a 50% stake in the new JV and will contribute a matching amount of capital that forms the $550 million initial investment fund, which will be used to develop 25 Hilton Garden Inn hotels in over 15 growing cities around the Yangtze River Delta region, including Beijing, Shanghai and Tianjin. Further developments will be expanded into other areas in China once it has reached a critical mass of customers.

Capturing strong domestic economic growth and increasing inward travels, the JV will be a first that is created to roll out a specific brand in China. It aims at introducing the æfocused-serviceÆ concept into the Chinese hospitality industry by tapping into the mid-market space between 5-star luxury hotels and low budget unbranded stays. Currently only 10% of all hotels in China are labeled with international brands; that could translate to tremendous growth potential when compared to more mature markets, such as North America, which has a 60% brand saturation.

The frills-free Hilton Garden Inn Hotels, strategically placed around city centers, business parks, industrial zones and airports, offers an alternative choice for multinationals and business travelers in terms of consistent service standards and cost efficiency. The brand embraces æeat well, sleep well, work smart and stay fitÆ as its four key tenets.

ôCertainly international travelers will appreciate the difference in quality that having a standardised brand approach in managing the asset,ö says Brian Chinappi, head of acquisition at RREEF, adding that branded products typically perform at a 60% premium of unbranded ones, in terms of room occupancy and daily rate

He dismisses naysayers who claim that China real estate assets are overpriced: ôWe always caution our investors that you canÆt generalize about the China market. You have to be very specific what sector you are talking about, also in what geography and which asset class in that market. Certainly, there are some markets or assets that are overpriced but China is a very big market. And it is a very long term market in our view.ö

He cites the number of fast-growing cities along the Yangtze and the growing number of multinational corporations and high-quality domestic ones with offices located there and are creating employment. ôWe distill down to where the jobs are because jobs ultimately drive real estate in China,ö Chinappi says.

The JVÆs focus on focus-service hospitality represents one of the three key growth areas that RREEF focuses on in the China market. RREEF is also active in the development of middle-income residential houses and institutional-quality office space. Its partnership with H&Q in this deal signifies a longstanding relationship between the two parties and brings on an investment opportunity in a new product concept that defers from the marketÆs preference to residential housing.

ôThe hotel business is really a combination of real-estate skills, as well as operating skills,ö Chinappi explains. ôWe believe by joining forces with H&Q, we are really combining RREEFÆs real-estate development skills and hospitality skills with H&QÆs experience in operating businesses in China. We believe itÆs a very powerful relationship that will deliver strong returns for investors.ö

This also offers Hilton the chance to lend a global brand to China hospitality. It will provide the JV with technical expertise in site selection, development, staff training, operational support and brand marketing. The JV has the exclusive right to develop HiltonÆs Garden Inn brand in China for the next five years.
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