Between 9-11 September 2024, senior representatives from across the hospitality industry will head to Hong Kong for the inaugural International Hospitality Investment Forum (IHIF) Asia 2024.
This year’s speakers include senior representatives from: Gaw Capital, Ares Management, Hilton, Radisson Hotel Group, and many more.
Not only will you hear from leading hotel investment executives, but the multiple networking opportunities mean you’ll be able to capitalise on the return to dealmaking we are seeing this year.
You can book your ticket here.
Over the last couple of years investors — both international and local — have piled into Japanese real estate as the country's economy undergoes a significant transformation. To get a sense of what is driving this trend we recently caught up with Kusumine Enami, managing partner and Japan representative at AB Capital.
Enami will be speaking on a panel entitled ‘Capitalizing on Challenges: What is Attracting International Investment into Japan? ’ (Tuesday, September 10, 2024 13:30-14:30)
Hospitality Investor: Could you tell me a little bit about AB Capital’s investment strategy?
Kusumine Enami: AB Capital (ABC) focuses exclusively on the Japanese hospitality market. Our investment strategy is multifaceted and driven by key factors unique to this market.
Firstly, ABC strategically targets the mid-market segment, characterized by minimal competition and numerous off-market opportunities. This segment is highly fragmented, which allows us to capitalize on attractive off-market transactions. Our typical deal size ranges from JPY 2.0 billion to JPY 10.0 billion.
We construct a diversified, risk-adjusted portfolio through various lease and operation agreements, including fixed rent leases, variable rent structures, franchise operations, and management contracts. Our core strategies include a Fixed Stable Income Strategy for stable returns, a Growth Seeker Strategy to capture growth opportunities, and a Repositioning Strategy that enhances value through renovations and rebranding. These approaches enable us to effectively manage risk while maximizing returns, ensuring a robust and sustainable investment approach in Japan's dynamic hospitality sector.
Hospitality Investor: Your focus is primarily on Japan, what drew you to that market?
Kusumine Enami: Japan is the only developed market in Asia with a positive property-debt yield spread (positive carry), creating significant leverage opportunities. The country’s established legal system and market transparency further enhance its appeal.
The Japanese yen has depreciated significantly against the US dollar since early 2021. As of July 26, 2024, the USD/JPY exchange rate is approximately 154, about 48 per cent higher than in January 2021, making the yen the cheapest it has been since 1990. This devaluation supports the growth of Japan's tourism industry, which in turn benefits our hospitality investments.
We believe Japan is undergoing a transformative phase of robust economic growth and steady inflation, signalling the end of its "Lost 30 Years" of economic stagnation. The hospitality sector is experiencing strong growth, bolstered by the government's strategic commitment to making Japan an international tourist destination. The Japanese government aims to attract 60 million inbound tourists annually by 2030 and is providing substantial support to the industry.
Japan's hotel supply and demand fundamentals are very tight. For example, in Tokyo, the compound annual growth rate (CAGR) of hotel room supply over the next three years is estimated at 1.2 per cent, while the national average is estimated at 0.65 per cent. This limited supply, combined with the expected increase in inbound visitors, suggests that the Japan hospitality market will remain tight, driving Revenue Per Available Room (RevPAR) upward.
Hospitality Investor: Which locations and segments of the market are of most interest to you?
Kusumine Enami: ABC strategically invests in the mid-market hospitality sector, characterized by minimal competition and abundant off-market deals.
We consider various hotel types, with a particular focus on economy, mid-scale, and lifestyle hotels, which align well with our growth seeker and repositioning strategies. Additionally, small luxury and apartment hotels are emerging themes that we are proactively exploring.
In terms of location, ABC concentrates on the top seven prefectures with the most liquidity: Tokyo, Osaka, Kyoto, Hokkaido, Okinawa, Aichi, and Fukuoka. These regions accounted for over 70 per cent of hotel transactions in Japan since 2017 and nearly 45 per cent of total guest nights in 2019. Within each prefecture, our focus is on the capital cities. Furthermore, ABC is also proactively looking at major ski, onsen, beach, and retreat resort areas.
Hospitality Investor: There are factors affecting the momentum towards investment into Japan - the end of negative interest rate policy, skyrocketing construction costs, and serious labour shortage. How do you think about these challenges?
Kusumine Enami: The negative short-term interest rate has been quite unusual, limiting the Bank of Japan's (BOJ) ability to implement further monetary stimulus when needed. AB Capital (ABC) views the cessation of this policy as a positive development for Japan's overall economy, as it provides the BOJ with more flexibility in monetary policy with minimal impact on bank lending. While rising interest rates could theoretically negatively affect property prices, ABC anticipates the impact will be minimal due to the limited range and gradual pace of increases. This gradual approach should give the market enough time to absorb any temporary cap rate widening, maintaining current levels without significant compression or widening.
Regarding increasing development costs, these actually make existing hospitality assets more attractive compared to replacement costs. Consequently, ABC focuses on investing in existing hospitality assets.
The labour shortage, exacerbated by COVID-19, remains a significant challenge. Many former hospitality workers left the industry, and the increasing number of hotels has tightened labour supply and demand. Full-service and large luxury hotels require a higher number of workers compared to economy, mid-scale, and limited-service lifestyle hotels. To address this, ABC emphasizes operational efficiency by partnering with efficient operators and hotels. We thoroughly analyse operators' capabilities and cost structures, which is why our main targets are economy, mid-scale, and limited-service lifestyle hotels, including apartment hotels, rather than full-service or large luxury hotels. Additionally, we carefully assess occupancy rates and conservatively underwrite occupancy KPIs. Due to the labour shortage, managing occupancy below its maximum level through strategic adjustments in ADR is now an effective revenue management strategy.
Hospitality Investor: What key criteria do you consider when evaluating potential hotel investments in Japan?
Kusumine Enami: When evaluating potential hotel investments in Japan, AB Capital (ABC) considers several key criteria to ensure a comfortable risk-adjusted return. Based on which criterion is the main driver of return, the investment will be categorized into one of our three main strategies: stable income, growth seeker, or repositioning.
- Entry NOI Yield on Purchase Price / Price Discount: We assess the initial net operating income yield relative to the purchase price and any potential price discounts.
- Lease / Management Contract Negotiation: We negotiate lease or management contract terms to secure more favourable conditions.
- Organic Hospitality Market Growth: We evaluate the growth potential of the hospitality market in the region.
- Value-Add Initiatives: We consider opportunities for renovation, repositioning, and other value-add asset management initiatives.
- Spread Between Stabilized NOI Yield and Expected Exit Cap Rate: We analyze the spread between the stabilized net operating income yield on the purchase price and the expected exit market capitalization rate.
- Finance Terms: We evaluate the terms of financing to ensure they are favorable and contribute to the overall return.
Hospitality Investor: What are your primary sources of funding for hotel investments in Japan?
Kusumine Enami: ABC is a Hong Kong licensed asset manager that utilizes a private fund structure to invest in Japan's hospitality market. Our fund's limited partners primarily include APAC family offices, corporations, and some institutional investors, though specific names cannot be disclosed due to confidentiality obligations. For each investment, we use the committed capital from our fund’s investors as equity and complement it with non-recourse loans borrowed from onshore financial institutions in Japan to finalize the deal.
Hospitality Investor: The theme of this year's event is "Charting New Horizons". What do you think are the biggest opportunities in hotel investment in the region?
Kusumine Enami: We believe that converting local economy and midscale hotels to international brand midscale hotels presents the most significant opportunities in Japan's hospitality market. This potential is driven by several factors:
- Market Gap: There is a substantial gap between fragmented local mom-and-pop brands and the growing demand from international visitors in the economy and midscale segments.
- Abundant Opportunities: The market is filled with numerous fragmented local hotels, offering ample opportunities for deal sourcing, price negotiation, and lease or operation agreement improvements.
- Recent International Brand Entry: Recently we see a handful of international operators start looking to tap into the opportunity of converting local economy hotels to international midscale brands in the Japanese market. A lot of these midscale brands began their entry to Japan in 2023, and we anticipate seeing some rebranded properties open by late 2024. To achieve scalability in conversions, these midscale international brands have relatively relaxed design standards, particularly for room size, which can be smaller than the usual global standards.
These factors collectively highlight a promising horizon for hotel investment in Japan, particularly through international brand conversions.