Tragic start to 2024 fails to dampen Japan hotels’ allure for investors

The brisk recovery has been a boon to Japan’s hotel investment market. Although hotels only account for 6 per cent of Asia’s commercial property transaction volumes, they comprised 15 per cent of investment activity in Japan in the first three-quarters of last year, according to JLL.

Yet, while the sharp rebound in inbound tourism has been a key factor contributing to the investment appeal of Japan’s hotel market, there are more important sources of resilience.

01:58

American tourists flock to Japan to take advantage of weak yen, strong US dollar

American tourists flock to Japan to take advantage of weak yen, strong US dollar

In an unpredictable global economy facing acute geopolitical and financial threats, Japan is as close as it gets to a safe haven. The country boasts political stability and world-renowned infrastructure. Moreover, its obsession with hygiene and cleanliness has taken on added significance in the post-pandemic world.

“We didn’t used to think about these things that much, but now they are very important,” said Chedli Boujellabia, founder and chief executive of Alyssa Partners, a real estate investment manager focused on Japan.

Furthermore, Japan remains an outlier in global monetary policy. The persistence of negative interest rates in the face of dramatic increases in borrowing costs the world over allows investors to generate exceptionally attractive cash-on-cash returns despite the relatively low rental yields on Japanese commercial properties. The steep slide in the yen, moreover, has made assets cheaper in US dollar terms.
Although there is intense speculation about the timing of a normalisation in policy, the Bank of Japan (BOJ) has little choice but to exit its ultra-loose monetary regime in a cautious and gradual manner, given the nation’s high public debt burden and the large proportion of floating-rate mortgages.

Pressure is building for Japan to give up ultra-loose monetary policy

Another key source of resilience is Japan’s large domestic travel and tourism market. While China – whose outbound travel market has been slow to recover – was the main international source market for Japan in 2019, Chinese tourists accounted for only 6 per cent of total room nights in the country, according to JLL data. Domestic travellers’ more than 80 per cent share of room nights not only proved a lifeline for hoteliers during the pandemic, it turbocharged the recovery.
Hotels in Osaka – which hosts the World Expo next year and recently won approval to build Japan’s first casino resort, which is expected to be completed in 2029 – have proved popular among domestic and foreign investors. Japan’s third-largest city has accounted for between 13 and 20 per cent of the country’s commercial property transaction volumes during the past four years.
Japanese Prime Minister Fumio Kishida (front row, second from right) waves during an event in Tokyo on July 18, 2022, to promote the Osaka World Expo. Photo: Kyodo

While Japan has proved a challenging market for foreign buyers, partly because of its strong domestic institutional investor base, the fallout from the pandemic created opportunities for some overseas investors.

“We entered Japan when it was still under lockdown,” said Kin Lee, chief executive of Anglo Fortune Capital Group, which has advised and partnered private Singaporean buyers on acquisitions of midscale limited-service hotels.

Alan Kam, founder and chief executive of Hong Kong-based AB Capital, which set up shop during the pandemic to deploy capital in Japan’s hotel sector, said another source of resilience was the favourable supply-demand balance in the sector.

According to JLL, the current development pipeline of new hotels in the main Japanese cities is one of the lowest among leading Asian markets, partly because of intense competition from the popular multifamily rental housing market. This underpins the strong fundamentals of Japan’s hotel sector. “Despite a thriving market, there is a limited supply of well-located hotels,” Kam said.

01:14

Japan fully reopens to tourists after dropping Covid test, easing visa requirements

Japan fully reopens to tourists after dropping Covid test, easing visa requirements

To be sure, operators and investors face challenges. The most acute is the severe shortage of skilled workers, particularly at high-end hotels. This has forced many properties to put a cap on occupancy levels as the priority shifts from filling every room to maximising daily rates.

There are also concerns about the impact of global monetary policy. While the BOJ is walking a tightrope, a weaker-than-expected US economy this year could cause a sharp appreciation in the yen, dampening international travel to Japan.

However, the resilience and appeal of Japan’s hotel sector – and the nation’s commercial real estate industry as a whole – is one of the big themes in Asian real estate. There are significant opportunities to reposition underperforming properties by bringing in international brands. Moreover, the depth, liquidity and stability of the Japanese market are highly valued.

“It’s a safe bet and it’s scalable,” Boujellabia said. Few big markets tick all the right boxes, especially in Asia, but Japan comes close.

Nicholas Spiro is a partner at Lauressa Advisory

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