Why Japanese hotels should not be overlooked

Japan’s tourist boom is reverberating with investment opportunity for institutional money, argues Milan Khatri, head of property research for the Asia Pacific region at Aberdeen Standard Investments.

Khatri makes a case for investing in Japan hotels

A strong economy, wealthy cities, high population density and a booming tourist trade.  What’s not to like about Japan?

And yet, curiously, institutional investors have seemed less interested than they might have been, largely because falling yields make property seem expensive.

Now might be a good time to re-consider. We think certain market segments, such as hotels, are currently providing compelling opportunities for investors in the region.

Here are two reasons why: there’s been a huge rise in domestic Asian travel; and a correspondingly rapid growth in inbound tourism since 2011. Japan has experienced a boom in overseas visitors inspired by its distinct culture; unique architectural, natural and spiritual sites of special interest; alongside the more mainstream attractions, such as Disneyland Tokyo. The Japanese government wants more growth actively targeting 40 million visitors by 2020 – a growth rate of 13 percent per year.

Catalyzing this ambition, the government is planning the development of 10 integrated resorts across the country over the next few years. Further, according to a CBRE survey, the number of hotel rooms in major cities is likely to rise 30 percent by 2020.  This may seem high, but continued growth in inbound tourism and renewed growth in domestic tourism is set to match and, probably, exceed this projected level of supply.

When it comes to location, hotel stays are highly focused on Japan’s major cities. However, the rising cost of accommodation has meant visitors are not necessarily fixated on the traditional hotel hotspots within these cities. The country’s excellent transport network means the draw of relatively cheap room rates can trump a specific location and encourage visitors to consider options outside the city centres.

Some of the most popular hotels in Tokyo are near the Imperial Palace, the home of the royal family, and Ginza, the capital’s premier shopping street. In Osaka, the area of Umeda and Shin Osaka are transport gateways to the rest of Japan and are notable for a high concentration of hotels, which is only likely to grow over the coming years given its strong location. Outside Japan’s two major cities, popular destinations such as Fukuoka and Nagoya, and traditional leisure destinations such as Kyoto, Okinawa, Hokkaido, Shizuoka -think Mount Fuji – and Chiba – the location of Disneyland – present interesting investment opportunities.

 The range of hotels in Japan is massive, offering a broad choice for tourists and investors alike. In both cases, it’s about style preferences – size, level of luxury and affordability. Western style hotels largely provide two types of accommodation: full-service – luxury or resort – and limited service – mid-market. The latter segment of the market is growing rapidly, fuelled by the boom in incoming tourism.

Historically, the hotel market was dominated by Japanese traditional Inns, known as ryokan, which offer in-house dining and either a public bath or ‘onsen’ – a hot spring bath.  In many cases, ryokan are being converted to western-style hotels, as investors and operators are already capitalizing on an obvious opportunity. At the budget end of the market, there are hostels and capsule hotels – the famous sleeping pods typically stacked one on top of the other with sufficient room only for a bed.  Price and value are powering the popularity of capsule hotels among tourists.  For investors, the high density and likely volume occupancy rates could be an added incentive to seek out these opportunities.

In general, hotels may still seem to sit too much in the alternatives bucket to be attractive to many institutional investors. Arguably though, in certain markets the hotels story is becoming more and more compelling, with increasing opportunities for investors as the sector ‘beds down’.