Market trends dictate Chinese financing
Chinese investors typically follow trending market parameters on loan-to-debt ratios, although they diverge slightly in their preference for Chinese-backed banks, sources said.
GLOBAL REPORT—Chinese investors increasingly are looking to diversity and export capital for safe harbor in more robust economies throughout the world, but that does not mean they are funding acquisitions all cash, sources said.
Loan-to-value ratios generally fall in line with trending market parameters, usually in the range of 60% to 70% debt. The source of debt financing, however, often is biased toward subsidiaries of Chinese banks that have expanded throughout Europe and the United States, according to sources.
“They’re absolutely in the business of putting out money. They’re much more concerned about the security of their investment than they are the risk. They do not want a high beta on funds,” explained Marty Collins, founder of developer Gatehouse Capital Corporation, which has used Chinese-backed funding to develop several projects, including the W Hollywood Hotel.
That particular project was one of the first in the U.S. hotel industry to employ EB-5 financing, in which foreign nationals contribute $500,000 toward projects in targeted employment areas in exchange for a visa.
Chinese nationals fueled the rise of that platform, Collins said, although it has waned in popularity as financing has become more readily available in the recent up cycle.
Rolf Tweeten, chairman of Alliance Hospitality Hotel Management, had a similar take on the investment vehicle. Chinese firms, he said, are looking for direct investment rather than dealing with the often prolonged and complicated EB-5 application process.
The majority of Chinese investors are funding acquisitions with 30% to 40% equity and 60% to 70% financing, sources said.
“The Chinese investors that I’ve dealt with … they tend to want to finance about 60% to 70% of their acquisition with debt. They’re not looking to do all equity transactions,” said John Strauss, managing director of JLL’s Hotel & Hospitality office in Los Angeles.
The same is true in Europe, said Erlend Heiberg, managing director of Horwath HTL in London.
“I have not encountered any Chinese investor that is using all equity,” he said. “The normal debt-to-equity ratio is 30% equity and 70% debt. However, if the development/acquisition calls for a stronger equity position then they will comply with the requirements.”
Heiberg did note that some Chinese investors initially will close with equity and then seek financing later.
The reason? “To move capital out of China, and when financing they leave the equity released offshore. The renminbi is currently seen as overvalued, and is therefore beneficial for them to maximize the capital export,” he said.
Collins has noted a different trend in some U.S. West Coast gateways.
“(Chinese investors are) not going out to Morgan Stanley and Wells Fargo and getting land loans,” he said referring to a number of mixed-use development projects in Los Angeles. “Most of these acquisitions are styled as all equity. If there’s any debt involved, it’s very little.”
Heiberg and Strauss noted a propensity for Chinese investors to seek debt financing from subsidiaries of Chinese banks.
“In many cases, the largest of China’s banks like China Merchants Bank now have subsidiary bank branches in key gateway U.S. cities. These China lenders that have huge balance sheets in China also now have branches in the U.S. It’s a very relationship-driven model. …
“Generally there’s a leaning toward a Chinese lender,” he added.
During a recent Chinese-backed deal brokered by JLL, however, Strauss said the buyer chose to finance with a U.S. bank instead of a comparable Chinese bank subsidiary.
Heiberg has noted similar transactions in Europe.
“Chinese investors are commercially driven, and would consider the best available deal, it being a domestic or international source,” he said.
Discipline in deal making
“Chinese investors stick to certain return requirements and are less likely to lower them significantly in order to acquire trophy assets, and as a result we see more activity in the mid to upscale segments, as well as boutique operations,” Heiberg said.
Global brands play a major role, Strauss said.
“The Chinese investors that we’re looking at are tending to look at full-service hotels with notable, recognized international brands like Marriott or Hilton or Hyatt or Starwood or Holiday Inn,” he said. “They’re definitely focused on branded versus unbranded. They’re definitely focused on top 25 markets … more urban locations.”
Coastal cities usually top the list, as they are more accessible to international, inbound demand, an increasing proportion of which comes from China, Strauss added.
Chinese investors are also very yield-driven, he said. “Definitely has to have a yield—anywhere from 6(%) to circa 8% going-in yield.”
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