MSREI to exit $1bn China hotel business

Morgan Stanley Real Estate Investing is reportedly seeking buyers for its 59 percent stake in Shanghai Motel Management, a China motel business, which is held by its Morgan Stanley Real Estate Funds series.

Citing sources close to the matter, the Wall Street Journal reported that Chinese rival chains Home Inns & Hotel Management and Shanghai International Jin Jiang International Hotels Group were among a number of bidders to have made it to a second round of bidding. A further report by Reuters said that Accor was seeking private equity partners for a bid. The news agency said The Blackstone Group and The Carlyle Group could possibly join the French hotelier in its bid.

MSREI first invested in Shanghai Motel, which operates the Motel 168 budget motel, in 2006 via a $20 million investment into a 20 percent stake in the business. It since increased that position to 59 percent. According to the WSJ, the motelier’s other shareholders have agreed to a sale.

Shanghai Motel is China’s third largest motelier. It operates 266 motels and recorded an EBITDA of $60.8 million last year, significantly up on previous years. Its occupancy rate is currently approximately 75 percent.

A sale to international buyers would mean a rare foray into China’s burgeoning hotels sector from investors outside of China. Domestic business travel has become increasingly popular among investors. Citing a senior Chinese tourism official, the WSJ said domestic travel generated $175 billion last year, reflecting a between 12 percent and 13 percent year on year increase.

MSREI made its initial investment in Shanghai Motel one year before it closed its $8 billion Morgan Stanley Real Estate Fund VI Global fund, which was then the world’s largest private equity real estate fund. The fund suffered significant capital write-downs during what was a poor vintage year for the sector as it came shortly before the global economic crisis. MSREI managed to retain enough investor support to raise $4.7 billion for its follow-on fund, of which 20 percent has reportedly already been invested.

MSREI was a net seller of real estate over the past 12 months. According to data from Real Capital Analytics, the Wall Street bank sold 35 assets, valued at $3.9 billion during that period.