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Facing capital controls, Chinese hotel investors step back and shift strategies

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Facing capital controls, Chinese hotel investors step back and shift strategies

New restrictions by the Chinese government on overseas investment have already led to broken real estate deals, and will continue to disrupt acquisitions by some Chinese companies in the coming months, market participants say.

Chinese companies, some state-owned, have been among the most high-profile investors in hotel properties in recent years. At least some could be sidelined in the near term by capital controls, however, and others may adjust their investment strategies, or reconsider their aversion to debt, as a way of executing deals, observers said.

China's central bank announced greater scrutiny of overseas transactions at the end of 2016. Though the country's state news service has disputed the characterization that the new rules amount to capital controls, there are reports that they are influencing Chinese investors' ability to execute deals.

The flow of Chinese capital to the U.S. slowed after the Chinese conglomerate HNA Group bought a 25% stake in Hilton Worldwide Holdings Inc. in October, largely as a result of capital controls, Lawrence Kwon, a managing director at Moelis & Co., said in a panel appearance at the Americas Lodging Investment Summit in Los Angeles.

On a different panel, Eastdil Secured Managing Director Mark Schoenholtz said the restrictions are having a significant impact.

"I'm sure, collectively, we can probably pick four, five, six deals that aren't going to occur in the market, and the reason is because they can't get the money out of the country," Schoenholtz said. "People have lost deposits on transactions."

The disruption could continue for at least the next 90 days, though state-owned companies or those that have offshore subsidiaries will likely be able to work around the new rules, he added.

Gilda Perez-Alvarado, managing director at JLL Hotels & Hospitality, noted a change in tone from the Chinese government, and predicted that large sources of Chinese money, especially corporations, will step back for a while. Yet, she said, for state-owned entities, the situation should be "business as usual." Even corporations, facing pressure to generate yield for their own investors, will continue to invest indirectly alongside other firms and in joint ventures, she said.

The restrictions also could prompt Chinese investors to raise debt, a strategy that some have avoided — most notably in the case of Anbang Insurance Group Co.'s $1.95 billion all-cash purchase of the Waldorf Astoria New York.

Perez-Alvarado said some Chinese investors could pay all cash for overseas assets immediately, in response to pressure to close deals quickly, and then could seek to generate liquidity by adding leverage later.

"We're selling a C$1.2 billion portfolio that's going to go to a Chinese investor, all equity," she said. "The urgency was to move the cash, and then they're going to refinance it at 60%, 65%. They liberate that cash, and then they're going to move it somewhere else."

Another Chinese conglomerate said in a conversation at the conference that it planned to make an all-cash investment, leaving open the possibility of freeing up capital by refinancing later, she said.

The desire for overseas hotel investments remains strong among Chinese investors, observers said. Referring to HNA's investment in Hilton, Morgan Stanley managing director Michael Bluhm said on a panel that there is at least one other situation in which parties are "having a similar-type dialogue."

"I think as foreign investors look for smart places to put capital in what's probably the best-growing economy in the world, taking large stakes in businesses that are really leveraged to this recovery could be the main focus," he said.