UBS launches value-add Japan hotel strategy

The Swiss bank is targeting a $400m fundraising to invest in limited service hotels to tap into the domestic traveller segment.

UBS Asset Management’s Real Estate & Private Markets business is targeting a $400 million capital raise to make value-add and development-related investments in Japan’s hotel sector.

The real estate investment arm of the Swiss bank is launching the strategy through the private funds platform of its Japanese joint venture with Mitsubishi Corp, called Mitsubishi Corp – UBS Realty, which will source and manage assets for the strategy.

“With our unique edge in sourcing assets locally through our JV and partnering with local developers, we are able to offer international investors an opportunity to access such a compelling strategy,” Graham Mackie, head of real estate Asia Pacific at UBS-AM, told PERE.

The strategy will target assets with potential for refurbishment, repositioning or conversion in Tokyo, Osaka, Nagoya, Fukuoka and Hokkaido, among other regional centers. The strategy will also invest in developments where there is a third-party operator in place.

While UBS-AM will be taking on some development exposure and repositioning, Mackie pointed to two reasons the strategy follows the lower risk categorization of value-add.Mcak Japan is one of the most reliable countries in the world for development completion, plus hotel operators in Japan take space on a long lease basis so there is not the operational vacancy fluctuation typical in hotel markets elsewhere in the world, Mackie said.

Backing hotel strategies in Japan are robust tourist arrival numbers, which reached a historical high of 24 million in 2016, and are expected to hit 40 million by 2020, with Asian tourists being the main driver behind this growth as the emerging middle class continues to propel regional tourism, UBS-AM said.

Oaktree Capital Management and Trinity Investments, for instance, are expanding their partnership with a $3 billion hotel joint venture which will invest in value-added hotels globally, including Japan. Ian Hally, the former chief executive officer of Aviva Investors’ Asian real estate business, too launched a hospitality-focused private equity real estate fund for investing in Japan’s hotel sector last year.

Yet, UBS-AM will focus on limited service hotels due to the bulk of accommodation demand in Japan being driven by the domestic traveler.

“The opportunity lies less in the high-end hotel space and more in the mid-scale limited service hotel segment in Japan. That’s where we see supply still playing catch-up with the exponential growth in demand,” said Mackie.

According to a recent research paper from UBS-AM, the demand for accommodation by domestic travelers is almost six times that of international tourists, and has been stable in the last few years. In 2016, domestic travelers made up close to 80 percent of total hotel stays, at almost 423 million.

“What we really like is that it is not a tourism driven market, it is a domestic traveler driven market which is much more resilient and stable. While a lot of headlines have been on the surge in inbound tourists we believe it is more evergreen to also focus on the domestic traveller,” Shaowei Toh, director for research & strategy – Asia Pacific global real estate at UBS-AM.

UBS-AM expects an investment horizon of around seven years for the strategy and while keeping its options open, Mackie suggested the potential to list the portfolio. ” Given our strong track record in the REIT sector, there is a really interesting opportunity for a potential IPO, said Mackie. “Equally a piecemeal or an en bloc sale of the portfolio would be a possibility.”

UBS-AM, which globally has around $82 billion in real estate assets under management, entered the Japan market back in 2000 with the Mitsubishi Corp joint venture. Since then the Swiss bank has grown its Japanese property exposure to around $12 billion.