by Daniel Vovil, Sam Luck, John Kakita and Yuki Baba
With COVID-19 subsiding and re-opening of borders across the globe, travellers continue to seek high-quality, “authentic” and “unique” travel experiences. Japan has authentic, unique experiences in spades with an abundance of tourist attractions, a rich history, exceptional food culture, distinctive seasons and endless activities — not least of which are the accommodation experiences in their boutique, luxury and traditional Japanese hotels and inns. Head of Operations at Odyssey, Sam Luck shares, “The boutique and luxury sector in Japan offers an entirely different experience from what many travellers may be used to. These boutique Japanese assets are often located in scenic areas, near natural hot springs that guests can bathe in and feature seasonal menus using local produce – providing a truly immersive experience in Japanese culture, nature and cuisine.” While Japanese accommodation has evolved over several centuries from simple lodgings for travellers on foot to pilgrimage accommodation for temple worshipers and now into a mix of modern and traditional hotel types, what continues to differentiate these unique assets is their aim to embody Japan’s culture of hospitality and service known as “Omotenashi”, meaning “to wholeheartedly look after guests.”
Current opportunity in Japanese hospitality real estate
As the Japanese government eases border restrictions for foreign travellers, and the value of the yen continues to trade at a 24-year low to the US dollar, foreign investors with direct market access or partnerships with providers that have a Japanese presence, can capitalise on the favourable exchange rate and acquire pandemic-induced, distressed, Japanese hospitality opportunities.
The yen is forecast to remain low against the major global currencies for the remainder of 2022, and a rise in the yen is only anticipated once the Bank of Japan (BOJ) raises interest rates or changes its current economic policy. Regardless, a rise in rates is likely to be very gradual, and as such, a rise in the yen is not anticipated to be significant over the next three to five years. The Japanese government has expressed its intentions to continue to stimulate the domestic economy, so it will be encouraging the BOJ to keep rates low, which in turn will keep the yen in the lower end of its historical currency range. In addition, in examining the relationship between the yen, global financial market cycles and the hospitality sector from 2011 to 2019, there is a strong correlation: when the yen is weaker relative to the US dollar, a higher number of tourists visit Japan. The combination of hospitality assets trading at attractive post-COVID-19 prices, the current value of the yen, and Japan recently opening its borders to foreign tourists, is a compelling and time-sensitive investment opportunity.
Distressed and discounted opportunities
The COVID-19 pandemic has seen many businesses enter into receivership, including large hotel groups such as Hotel WBF Group, First Cabin and Dai-ichi Hotel Group. Other smaller operators, which make up the bulk of luxury hospitality accommodation, are also facing bankruptcy as COVID-19 exacerbated any existing cost-management inefficiencies, low cash reserves and/or lack of capital to reposition assets for only domestic guests while the country was closed to international tourists. Therefore, increasing numbers of off-market, distressed, undervalued and under optimised assets are ripe for acquisition and enhancement through value-added strategies, including renovation, rebranding and repositioning.
Why luxury boutique accommodation?
Luxury boutique accommodation is seeing increasing interest from both domestic and international investors as these assets can produce significant returns through targeted value-uplift strategies. These assets offer a unique service experience appealing to the middle-to-upper end of the consumer market. “The nature of the asset class is “high-touch,” often leading to operational inefficiencies and high operating costs, however, when managed effectively, higher revenues can be generated as guests are willing to pay a premium for the “experience” the hotel provides, and herein lies the opportunity to access this increasing consumer segment.”
High-demand, unique service and experience offerings create potential for significant returns
Luxury and boutique Japanese assets typically provide a more traditional-style hospitality experience with a price point that targets affluent domestic and international tourists. Unique and in limited supply, the assets tend to differentiate themselves through luxury upscaled pricing and unique design and facilities using high-quality materials, and they may even include heritage features. Ideal assets are attractive to both domestic and international tourists by design, service offering and location, with almost year-round demand that produce stabilised revenues and reduce cyclical demand risk. An example of boutique luxury Japanese accommodation is traditional Japanese inns called ryokans. Ryokans’ unique style of service is distinct from other hospitality sectors both in Japan and throughout the globe. A study conducted by the University of Central Florida concluded that Japanese culture and “Omotenashi” service is an attribute unique to ryokans and is seldom found in other hospitality assets in globally. The customs and traditional service provided at many ryokans are key features that tourists carefully consider when selecting their lodging options in Japan.
Inefficiencies create opportunities for savvy investors
Boutique luxury assets have significant investment potential, as many assets are often poorly managed, underdeveloped and without effective marketing strategies. These issues provide an opportunity for foreign investment to drive asset enhancement, increase asset performance and provide substantial returns to investors. Asset enhancement is multifaceted and often involves investment into structural renovations for rooms, facilities (often involving hot-spring baths) and common areas that enhance the existing appeal of the asset with key industry knowledge required to optimise operating efficiency, streamline processes and minimise operating costs. Partnering with an appropriate operator for the quality level and location of the asset is paramount, and marketing and branding strategies form an integral part of the asset’s performance. Each of these factors directly affects an asset’s ability to price average daily room rates north of US$1,000 per night, stabilise and increase occupancy rates, and more effectively manage costs to generate substantial net operating income improvements and, ultimately, provide significant investor returns.
Case Study: Nazuna Kyoto Tsubaki St
Nazuna Kyoto Tsubaki St is a luxury ryokan renovated from an entire L-shaped alleyway of machiya (traditional Japanese townhouses) spanning 1,400 square metres, built more than a century ago. The reception building on an unassuming street serves as both an entrance to welcome guests, as well as a passage from the outside world into the asset. Once inside, guests are greeted by an otherworldly, nostalgic street view — a world reminiscent of the historical geisha districts of Kyoto known as “Hanamachi.” At dusk, guests can experience the lustre of Tsubaki St as the “Chochin” (Japanese paper lanterns) and “Oki-andon” (Japanese paper lamps) illuminate the stone-cobbled paths. A complete renovation and restoration turned 23 historical residential Machiyas and a private road into a private luxury resort with boutique urban villas, operated by Michelin-star operator Nazuna. Additional machiya were converted into the reception area, Wagyu Ryotei Bungo yakiniku (barbecue) restaurant and “q” (an exclusive six-person chef’s table VIP restaurant). As with other successful luxury boutique assets, the project required funding to purchase the consolidated residential real estate portfolio, project planning for acquisition and renovations, operator selection, structuring, budgeting and forecasting, marketing and construction. The opportunity presented by luxury boutique hospitality assets is clearly demonstrated by the Nazuna case study example. Although located in Kyoto — which historically has been significantly supported by international tourism — the asset is appealing to affluent domestic travellers, well-managed and marketed effectively within Japan. In November 2020, for example, the asset performed well, with higher than market occupancy rates (nearly 100 percent occupancy), and it has surpassed forecasts intermittently during the COVID-19 period. The high occupancy rates have been accompanied by ADRs between US$300 and US$700 per night.
Despite a challenging environment in the global hospitality sector, the boutique luxury Japanese hospitality segment presents a very appealing investment opportunity. “With high demand from high-spending domestic and international travellers, the potential for high returns from these assets can be realised through capital injection for renovations, cost-effective operation, and strategic marketing & branding,” Sam Luck concludes. Foreign investors into Japan will also benefit from the depreciating yen and be able to snap-up discounted and distressed COVID-19 deals, making the Japan hospitality sector one of the few attractive investment sectors at present.
For more information, please feel free to contact the Odyssey Team:
Daniel Vovil is co-founder and head of real estate for the Odyssey Group. Sam Luck is head of operations, John Kakita is managing director (Japan) and Yuki Baba is a senior adviser with the firm. Vovil and Luck are based in Hong Kong, Kakita in Tokyo and Baba in Atami, Japan. Odyssey has offices in Hong Kong, Singapore, Japan and Australia.