Inbound tourism has become one of the few promising industries in Japan, which met 2020’s initial goal of 20 million foreign visitors in 2016. Foreign visitors doubled in 2016 compared with 2013, according to the Japan National Tourism Organization (JNTO).
Also, news of Japan’s approval of the Integrated Resort, or IR, promotion bill – also referred to as the casino bill early December in 2016 opened more potential opportunities for many overseas investors. Japan is now the place to be when it comes to hospitality investment, as spending by foreign visitors has reached a record of ¥3.48 trillion (US$29.6 billion) in 2015, according to data from Japan’s tourism board.
IR will be a mega boost to Japanese tourism and related industries. According to the Daiwa Institute of Research, Japan will see an estimated ¥5.6 trillion (US$47.5 billion) in additional economic impact in development of integrated resorts, and further economic percussion of ¥2.1 trillion (US$17.8 billion) in operations of integrated resorts, assuming a scenario in which Japan has three integrated resorts in Yokohama, Osaka and Okinawa.
Increase in luxury
The increase in inbound tourism and the new IR bill are creating new sectors to Japanese tourism and real estate investment market. For international investors, the most promising sector may be luxury hospitality.
As the interest of the tourism industry in Japanese real estate market continues to be very strong for the past several years and it will be much more, we are seeing there is a significant demand and potential in the luxury hospitality sector. Japanese players don’t have enough experience and knowledge in this sector yet.
Following the passing of the IR promotion bill, movements in the main contending cities and linked resorts for the casinos are already noticeable. The leading contenders, namely Hokkaido, Yokohama, Tokyo, Osaka, Okinawa, etc., are all showing signs of new developments.
Infrastructure and other investments
There are also some plans to upgrade parts of each city that are central but have not been touched for decades, and expand the economic reach, while maintaining the unique cultural vibe each city has to offer. Furthermore, the bill passing and the increase of inbound tourism will strengthen growing demand in Japanese resort destinations.
Looking at the investment market infrastructure, we can also predict a surge in private funds and J-REITs specializing in the hospitality field related to IR. It will also provide a strategic exit for international investors for their investment.
Specific to hotel developments, overseas players including private equity funds entering the Japanese market – the “luxury” end of the hospitality sector – will provide them with the best chance of generating returns. There will be substantial opportunities to invest in the projects for investment and development of luxury hotel branded residences. Overseas players, those who have more experience compared to Japanese local players, are likely to take quick action for these investment opportunities.
While the opportunity for international investors to use their experience and knowledge in the luxury hospitality market will rise, securing prime development sites will remain a Japanese investors’ forte. Japanese investors currently have plenty of equity for hotel development and positive view in this sector, and foreign players need to have the special know-how or brand power, which make special add value in the Japanese market.
New development
There will be two areas for which luxury hospitality will be concentrated. The major gateway cities with integrated resorts and its surroundings, or resort destinations where we find the great potentials of the luxury hotel residence and foreign players have the know-how and upper hand in these investments compared with Japanese developers.
International investors will benefit from co-investments with Japanese players, as there are many unique factors and regulations for operating and developing hotels and also for sales of branded residence in Japan. For example, hotel management contracts (MC) in Japan are not the standard, and lease contracts (LC) that last for roughly 20 to 30 years are preferred by Japanese building owners. As such, foreign hotels that do enter Japan’s more competitive hospitality market have to make compromises to their preferred business model.
Yukihiko Ito is managing director at Asterisk Realty & Placement Agency in Toyko.