The lion’s share of Chinese and Asian hotel industry capitalÊentering Europe of late has derived from publicly listed conglomerates, notably HNA Tourism Group and Jin Jiang International, but midsize players are trying to make a play in the region, as well.
Despite the capital behind these behemoths appearing sizable, the number of challenges for smaller and private hotel companies seeking a foothold in a competitive region has increased, sources said, and that includes concerns even for private equity. One major challenge for companies of all sizes is Chinese government capital control, while another, which is unique to the United Kingdom, is the labor problems that might follow Brexit.
ÒIt always is difficult to prioritize when moving into a new market,Ó said Hansen Zhao, President of Dossen Hotel Group. ÒEven with a defined brief, that is always changed when feet are on the ground.Ó
Mr Zhao and other panelists representing Asian interests spoke at a panel titled ÒAsian hospitality’s global expansionÓ in early March at the International Hotel Investment Forum.
Bingdong Zhao (no relation to Hansen Zhao), Managing Director at Junson Capital, said he found it difficult to immediately understand European markets and their relevant downsides. With the goal of buying an upscale hotel in Germany, he said his company came away with something completely different.
ÒWe bought an arena, although now it has been designated mixed use, so it will be a hotel buy eventually,Ó said Bingdong Zhao, referring to Junson’s Û440-million ($472.8 million) joint-venture buy of the Lanxess Arena in Cologne,ÊGermany.
MrÊZhao added he was put at ease by European city organizations having all the relevant development and investment numbers readily at hand. Smaller-scale Asian companies, on the other hand, commonly remain close with the European assets they acquire, sources said.
ÒWe’re interested in assets where we can generate value, which means operating the product,Ó said John Connolly, Head of Development at Dorsett Hospitality International. ÒWe moved into Manchester some 18 months ago, and that came about from having civic leadership there and understanding what we were to get. There is a definite need to be flexible and entrepreneurial.Ó
Mr Connolly said DorsettÊtargets assets with room counts and square footage that are compatible with its management team’s experience.
ÒThe size of our European hotels means we can do it ourselves, but you still have to kiss a lot of frogs,Ó he said. ÒOur strategy in the UK is to partner with public bodies to get land unlocked.Ó
But the panel agreed the right model for Asian investment in Europe is still up for debate. Bingdong Zhao cited asset management as ÒcentralÓ to his company’s future success, while Hansen Zhao said Dossen’s strategy is a bit more open-ended.
ÒAll possibilities are open, and we’re still in the early stage trying to find the right hat,ÓÊsaid Mr Zhao, who added his company also plans to increase its 10 million loyalty members.
Competitor advice
Chinese companies often ask established competitors how they can get a foothold into the UK, said Karen Friebe, partner at law firm Berwin Leighton Paisner.
ÒRegard entering any market as a reputation-building scheme,Ó she said. ÒEven if it is a very small project, credibility is extremely important.Ó
Ms Freibe said her experience of Asian capital at this level is after acquiring an asset, most companies follow the deal by either installing an operator or handing the brand back.
ÒI see little appetite for new developments. Building networks take time,Ó said MsÊFriebe, who added European local authorities have become very keen on joint ventures that spur local employment and training, even though more education is needed to have them be more realistic as to what developers and owners can achieve.
Ms Friebe also said she fielded numerous calls from Chinese investors who are very interested in learning the best holding structures in any European market.
Chinese barriers
The panel’s discussion turned to the Chinese government’s regulations on outbound capital, but that has not stifled the interest of investors in European assets.
Bingdong Zhao said Chinese capital controls have always been present, Òbut real estate is real estate, and in September I think currency controls might be relaxed. We’ll always be able to find money to do deals. Currency control is just a name.Ó
Ms Friebe said transactions in the region haven’t slowed down.
ÒWe have done two deals being conditional on getting funds out of China, and there have been no problems as yet,Ó said Ms Friebe. Panelists said pricing is still the biggest obstacle to closing deals, but the UK’s push toward Brexit is not making transactions more difficult.
ÒEuropean currency declines have made buys come with a 20 per centÊdiscount, which just means I have to work 20 per centÊharder to get a return,Ó said Mr Connolly. ÒIf there is a complication with cash, that is not the top priority É Labor is a bigger issue.Ó
The growth in Chinese travelers to Europe is far from being a problem, though.
ÒOnly 5 per centÊto 6 per centÊ(of Chinese) have visas, out of 1.4 billion, so we are always looking for European hotels with a global reach, but that does not necessarily get you the (average daily rate) you think you could achieve,Ó said Mr Connolly. ÒBranding is East meets West, but to attract Chinese at low-occupancy periods the fundamentals have to be there.Ó
By Terence Baker from Hotel News Now
