RREEF, H&Q in $550 mln China hotel deal

SINGAPORE (Reuters) - RREEF, the property investment arm of Deutsche Bank (DBKGn.DE), said on Monday it planned to develop at least 25 hotels in China at a cost of US$550 million, along with private equity partner H&Q Asia Pacific.

In the hope of tapping surging business travel, the partners in the 50-50 joint venture said they planned to acquire at least 15 sites in the next three years.

"We find there's a niche," Brian Chinappi, a managing director at RREEF, told the Reuters Real Estate Summit in Singapore. "There's a lot of talk of all these hotels being built in China, but only 10 percent are internationally branded."

The hotels, which will cater largely to business travelers, will be managed under the mid-range Hilton Garden Inn brand under a development agreement with Hilton Hotels Corp. HLT.N.

The Chinese hotel market, worth around $15 billion in annual gross revenue, is growing at an annual rate of about 15 percent, thanks mostly to a surge in domestic travel as a booming economy feeds into disposable income.

But the number of foreign visitors to China was also increasing at around 16 percent annually, Chinappi said, and most were there on business.

But building five-star hotels made little investment sense.

"The situation with land prices and room rates, means that it's very hard to make those investments work," Chinappi said.

RREEF, one of the world's biggest property fund managers, had announced plans in December to expand into China's hotel sector, but it had not released a dollar figure for the investment until Monday.

Koos Klein, Hilton's Asia-Pacific president, said most hotels coming onto the Chinese market were low quality.

"There are plenty of unbranded hotels in China, where you might want to sleep next to the bed rather than in it," Klein said.

He added that the partnership between RREEF and H&Q would allow Hilton Garden Inn to popularize its brand in just a couple of years.

"For us the key is to build up a critical mass as quickly as we can," Klein said.

GREAT JUMP AHEAD

Several international hotel brands are on a hunt for assets in China. The hotel arm of Wyndham Worldwide Corp. (WYN.N) for example, is aiming to expand its China business at an annual rate of 40 percent in the run-up to the 2008 Olympics.

Chih Wang, managing director at H&Q, hailed the deal as a first for private equity in China's hospitality industry.

"Hilton has jumped ahead," Wang said. "They're the first in China with this kind of partner."

RREEF is building up its presence in China. It announced late last year a $225 million joint venture to build apartments in Zhuhai, which borders the booming gaming enclave of Macau.

And this month it launched a Hong Kong-listed real estate investment, RREEF China Commercial Trust (0625.HK), which owns a Beijing office complex and wants to acquire more commercial buildings in the country.

H&Q has been active in China since the early 1990s, but has had a mixed experience.

The private equity firm led a $50 million investment group including Deutsche Bank in a luxury housing project called Shanghai Links in the late 1990s, but became embroiled in a legal battle against two Canadian brothers it accused of embezzlement and fraud.

H&Q won a series of court cases against the brothers but only managed to extract itself from the project last year by selling its stake to a Chinese state-owned firm.

($1=.7425 Euro)

(See www.reutersrealestate.com for the new global service for

real estate professionals from Reuters)