In 2023, international capital returned to the Japanese hospitality market in a huge way. With overseas buyers representing around 60% of total deal volumes, according to Savills data, the likes of Blackstone, Goldman Sachs and KKR piled in, contributing to the highest cross-border hospitality flows since 2008. “Investors returned thanks to an incredibly diverse set of drivers,” says Tetsuya Kaneko, managing director, head of research & consultancy at Savills Japan, “perhaps not replicated anywhere else.”
While borders to Asian countries stayed closed much longer than other regions in the wake of the pandemic, significant pent-up demand was building around Japan. The World Economic Forum reported in 2021 that it was the most desirable destination in the world, beating out the likes of Spain and France to top travellers’ wish-lists. When Japan reopened, ADRs and RevPAR figures soared to record levels, while travellers returned to find a rich and diverse market in a dynamic state of evolution. Adds Kaneko: “The luxury retail sector has been a major beneficiary of Japan’s elevation as a global tourism hub. Japan is also now globally recognised as a ski destination. Meanwhile, the development of an integrated resort in Osaka heralds the birth of Japan’s casino industry.” Like Singapore before it, Japan is exploring the potential of gambling tourism, which doubled Singapore’s tourism revenues and inbound visitor numbers after the establishment of Marina Bay Sands and Resorts World Sentosa in 2010. The ambitious Osaka resort, set to include hotels, a casino, shopping mall and conference centre, is slated to open in 2030 on Yumeshima, a reclaimed island in Osaka Bay due to host the World Expo in 2025.
There are other, promising factors at play, too, Kaneko adds, such as the growing international appeal of Japan’s ryokan, traditional homesteads serving hearty cuisine and offering a slower pace of life. Other segments are significantly underdeveloped, including its luxury hotel offering, largely because Japan’s tourism industry traditionally targeted domestic guests. Also, “Japan’s medical and healthcare expertise and infrastructure are second-to-none, but attract few international visitors, which leaves room for significant growth,” he adds.
Macroeconomic factors
On top of these demand drivers, macroeconomic factors have boosted the appeal of Japanese real estate over the past few years. The relatively weak Yen and the Bank of Japan’s divergent monetary policies leaving interest rates at global lows have proved an assist to global capital, especially those funds able to access local financing.
Goldman Sachs, an investor which has been betting on Japanese hotels for some time, has played an active part in the recent round of deals. July 2023 saw the firm join with experienced local player, Singapore’s SC Capital Partners, and the Abu Dhabi Investment Authority (ADIA) to acquire a portfolio of 27 resort hotels from Japan’s Daiwa House Industry for $900 million. Suchad Chiaranussati, chairman and Founder of SC Capital Partners said at the time: “This is a rare opportunity to acquire one of the largest and most prominent hotel portfolios in Japan. We are also delighted to expand and deepen our relationship with ADIA, following the launch of a data centre investment programme last year, and commence on a promising venture with Goldman Sachs, one of the leading financial institutions globally.”
Around seven years before, Goldman acquired a portfolio of Japanese hotels alongside investment manager Pacifica Hotels KK, plus a slate of Moxy hotels which were converted to hospitality assets from office properties. In December 2023, Goldman sold the 158-key Moxy Kyoto Nijo to Blackstone for a reported JPY 8 billion, prompting the world’s largest alternative asset manager to also declare a renewed investment strategy targeting Japan.
Blackstone’s deals
Blackstone has proven to be another prescient international hospitality investor in the region, striking mid-pandemic in 2021 to purchase a portfolio of eight hotels in top Japanese tourist destinations from Kintetsu Group Holdings, one of Japan’s largest railway companies. The year 2023, meanwhile, was marked by slate of successful divestments across a range of asset classes as Blackstone exploited international appetite for the country’s property, whilst also identifying select acquisitions. “Our pipeline has increased since the spring,” Blackstone’s head of Japan real estate Daisuke Kitta told The Japan Times in August 2023. "Our acquisitions team is finally getting back to business.”
Other key international deals contributing to 2023’s record deal volumes included investment management giant BentallGreenOak buying the Rihga Royal Hotel Osaka for JPY 50 billion, and KKR teaming up with Hong Kong’s Gaw Capital Partners to secure the Hyatt Regency Tokyo for JPY 57.1 billion. In July, AB Capital Investment, another growing Hong Kong player in the hospitality space, picked up its fourth Japanese hotel in three years.
Labour issues
Yet for a country with such promise, investors are also advised to “look under the hood” before buying. Kaneko notes that segments such as high-end tourism, which have proved such success stories elsewhere in the current macroeconomic climate, might not develop in the same direction here. “In terms of development pipelines, the vast majority of projects in the works are budget hotels,” he says. “It is very difficult to establish luxury properties – you need a sizeable land bank and you need more people with suitable skills. Labour shortages are really making their mark on the sector, so even if the potential clientele is out there, it’s a difficult area to scale.” While groups such as Bulgari have successfully opened five-star properties in the country, with the Italian fashion house launching in Tokyo in April of last year, reports suggest that international brands are often resorting to importing staff from elsewhere to make up numbers. “Labour shortages are often self-limiting hotel occupancies to 80%,” Kaneko adds. “Skyrocketing construction costs and land prices have also created supply-side bottlenecks.”
Additionally, some investors are in wait-and-see mode as they see uncertainty surrounding interest rates, he notes. “Given the modest CPI rates in Japan, many smaller businesses are already pretty vulnerable. That said, in general, potential modest monetary policy fluctuations have already been priced into the market, and international capital continues to show considerable interest in Japan.”