Hotel investors look to Japan’s regions as Tokyo offers limited opportunity

An imbalance in the supply of luxury hotels across Japan is pushing investors to look beyond the capital.

December 26, 2019

More and more of Japan’s hotel investor are looking to limited-service hotels in the regions of Kyoto, Osaka, and Kanazawa as opportunities for luxury hotels become scarce.

While demand for luxury hotel assets in Tokyo remains strong, “the challenge is that there are virtually no hotels to invest in because most developers are long-term asset holders,” says Tom Sawayanagi Head of Japan Hotels & Hospitality Group at JLL.

Existing stakeholders would rather hold on to their assets than sell because many regard Tokyo as a safe investment haven due to its relatively stable political environment and its reputation as a popular tourist destination. In addition, many Japanese corporates inherit the sites for centuries and that means it is challenging for the current management to make a decision to dispose such without significant reasons.

Japan, which will host the 2020 Tokyo Olympics, has seen a surge in tourist arrivals. In 2018, a record number of 31.2 million people visited Japan. The government’s goal is to attract 40 million overseas visitors by 2020. Following the Olympics, plans are underway to attract 60 million foreign visitors a year by 2030.

The rapid rise in the number of tourist arrivals and the government’s plans to leverage tourism to boost economic growth have attracted big names in the hotel industry.

Several luxury hotels are slated to open over the next few years, including the Four Seasons Otemachi and the Tokyo EDITION Toranomon in 2020, the Tokyo Edition Ginza in 2021, and the Bulgari Hotel Tokyo in 2022. The Okura Tokyo also reopened its doors in September 2019. According to the Nikkei Real Estate Market Report’s November 2019 issue, as of the end of September 2019, at least ten hotel projects are underway. Of these, five are scheduled to be completed and opened before the Tokyo Olympics in July 2020.

Room supply growth slows after 2020

Room supply of upscale to luxury hotel in the Tokyo Metropolis Area will show a 9.7 percent growth in 2020 as many operators would look to meet the demand for the Tokyo Olympics.

However, the pace of growth is expected to fall. The supply rate is projected to drop to less than 1 percent by 2025, according to data from JLL. The slower pace of growth is in part due to a market cycle of large-scale of redevelopment projects in which a luxury hotel tends to be included as well as ambiguity over the slated opening times of some projects in the city.

With few rooms added in the recent years, revenue per available room (RevPAR) is expected to continue to rise. In Tokyo’s luxury hotel sector, RevPAR climbed 8 to 9 percent year-on-year as of October 2019.

Expectations for further gains in RevPAR as well as limited investment opportunities for full-service hotels have led some investors to look into acquiring limited-service or budget-friendly hotels.

In the third quarter, the majority of the transacted hotels were categorised as limited-service hotels. There were no transactions of five-star hotels in Tokyo, says Sawayanagi.

Osaka market is soft

With a lack of opportunities in prime locations, investment money has turned to Japan’s other Tier 1 areas.

Kyoto and Osaka have seen an oversupply of rooms in limited-service hotel sector with RevPAR falling 5 to 10 percent, according to JLL data. “This is due to too much supply, rather than an expected decrease in inbound visitor arrivals,” says Sawayanagi. Distressed assets in the limited-service hotel sector of Kyoto, Osaka, and Kanazawa may emerge between 2020-2021, he adds.

One factor that has contributed to supply is the availability of Minpaku, or private residences rented out by their owners as short-term lodgings without hotel business license.

Japan introduced a Minpaku law in June 2018, restricting the number of days that Minpaku lodgings nationwide can be rented out per year at 180 days per annum. This cap doesn’t attract institutional money for new developments, explains Sawayanagi. However, the so-called “Special District Minpaku,” currently allowed in Ota Ward of Tokyo and Osaka City, doesn’t have the 180 days cap. “This is a much more viable option for the operators and investors,” says Sawayanagi.

“Osaka is seeing some new supply of the Special District Minpaku apartments which eat up some of the demand from limited-service hotels. Together with the oversupply of limited-service hotels, the Osaka market is now soft,” explains Sawayanagi.

“If so, opportunistic funds should have some room to play,” he says, adding that the buyers for these assets may be Real Estate Investment Trusts (REITs), private investment funds backed by pension money, or offshore family offices.

If RevPAR growth slows after 2020, some investors may start considering selling their hotel assets, he says.