With more than 40 million travellers expected to visit the country in 2020, Japan’s tourism sector is living an incredible surge. On the back of such extraordinary numbers, Japan Hotel REIT Advisors Co., Ltd., the largest hotel specialized J-REIT, is offering a path for foreign entities to invest in this booming real estate segment. In this interview for the Worldfolio, Mr. Hisashi Furukawa, President of Japan Hotel REIT Advisors, discusses the current state of the market and the opportunities it has created.
Hisashi Furukawa is President and Representative Director of Japan Hotel REIT Advisors Co., Ltd. (JHRA). JHRA manages Japan Hotel REIT Investment Corporation (JHR), the largest hotel specialist REIT in Japan. JHR is a publicly traded J-REIT (Tokyo Stock Exchange code: 8985).
What attracts foreign investors to Japan’s real estate market?
Foreign investors accounted for 26% and 21% of the total real estate transaction volume in 2017 and 2018 respectively, according to JLL reports. Technically speaking, these numbers do not show any large changes and experts foresee that this trend is to remain stable.
The reason behind foreign investors’ appetite for the Japanese real estate market is its stable yet attractive yield spread, which reflects the Bank of Japan’s policy to maintain low interest rates. Historically, the Japanese Yen is known to be a low interest currency. Given the current outlook of the global economic and financial environment, we can expect interest rates to increase in various countries over the upcoming years. Unlike nations such as the U.S.A., Japan’s interest rate hike will most likely lag behind. As a result, we foresee that the Japanese real estate market will continue to attract international attention.
In 2018, more than 31 million tourists visited Japan. What are the reasons behind this great touristic boom?
The number of inbound visitors is growing consistently and vigorously. In 2003, Japan’s former Prime Minister, Mr. Junichiro Koizumi, introduced the VISIT JAPAN campaign to turn tourism into a vector for economic growth. That year, we received around 5 million visitors and it took a decade for that number to double. The 10 million mark was surpassed in 2013 and suddenly, a massive touristic boom occurred, effectively tripling that number within 5 years. In 2018, more than 31 million people came to visit the wanders of Japan.
This great touristic boom was influenced by a variety of factors. Firstly, the middle classes of developing Asian countries witnessed an expansion of their purchasing power, effectively triggering an increased appetite for travelling. Secondly, the Japanese Government has grown progressively friendly to foreign visitors. Under the policies of Abenomics, the development of the tourism sector was identified as an economic priority. Shortly after 2012, visa requirements were amended, airports’ capacities were extended and ameliorated, and flights by international low cost carriers were facilitated. Finally, technological advances have encouraged touristic activities. The use of smartphones devices has made circulation easier and has reduced the impact of the language barrier. Furthermore, social media sharing has allowed visitors to promote Japan internationally; something we are traditionally not good at!
What will be the impact of the 2019 Rugby World Cup and of the 2020 Olympic Games on Japan and on your sector?
For the Rugby World Cup, the demand for hotel rooms has already spiked. Regarding the Olympic Games, what is most important is to attract the attention of individuals who have never visited Japan and turn them into repeated guests. The Government has articulated a plan to get to 40 million visitors by 2020, and 60 million by 2040. If the current annual increase remains similar, at least the 2020 target will be met.
After 2020, Osaka will host the World Expo 2025 and there are on-going discussions to build large-scale integrated resorts, including casinos, at multiple locations in Japan. Thanks to these events, the next decade will be an exceptionally busy period for the tourism industry. Consequently, we can explain to investors that our market and business is supported by strong fundamentals and positive structural changes on a long-term basis.
All year round, hotels in Tokyo boast an 80% occupancy rate. When Japan will reach the 40 million visitors bar, will the market be ready to host such numerous travelers?
With the new development projects occurring in Tokyo and other major destinations, we can confidently affirm that supply has caught up with demand and both are growing adjacently. In Osaka and Kyoto, however, one could argue that supply is higher than demand. Demand and supply cycles differ in each market, and it is true that weakness driven by new supply affects some markets today. Nonetheless, we believe that supply will eventually balance-out on a nationwide basis by virtue of the market’s strong fundamentals. As a matter of fact, one could have considered Tokyo to be weak until the middle of last year as the development of new supply soared. With the growth in visitors however, the Tokyo market has reached equilibrium and room rates are now expected to increase.
You have recently announced that you purchased Hilton Tokyo Odaiba, a 4-star facility located in Odaiba, Tokyo.
The transaction was completed in April 2019. It is a large-scale full service hotel located in Odaiba, one of the most popular tourist destinations in Tokyo. The hotel is situated on the front-line of the shore with a magnificent view of the city skyline over Tokyo Bay. The Odaiba area, having an adequate access to Haneda Airport and to major tourist spots, is set to live significant changes that will increase its attractiveness. As there will be several facilities hosting the Tokyo 2020 Olympics and Paralympics around the hotel, such as Tokyo Big Sight’s International Broadcast Center and Main Press Center, the tourism infrastructure of the area will be ameliorated and the demand for land will increase. Over the next 2 years, Odaiba will capture the attention of worldwide investors and travelers.
Ownership of a prominent high-grade hotel in Tokyo rarely changes hands. Accordingly, we are excited about this opportunity.
In comparison to other main cities, Tokyo has a lack of high standard hotels. How will this affect new supply?
The majority of facilities currently under development are limited-service hotels. In comparison to full-service hotels, limited-service facilities are simple, of a smaller scale, efficient in terms of profit creation and easier to manage. Looking at the future, one could argue that there is a risk of over-supply for such type of hotels, which are typically lower-price segment assets. Simply put, Japan lacks high quality full-service hotels. As a result, our new Hilton Tokyo Odaiba can be considered a truly attractive facility given its scarcity as a full-service 4 star hotel in Tokyo.
With 28 high-grade hotels (4-star and 5-star hotels), Tokyo lags far behind other main metropolitan areas, such as New York with its 115 high-grade hotels, or Paris, with 82. Consequently, we believe that the potential performance, revenue and value of such facilities are expected to increase more powerfully than lower-priced limited-service segments.
You recently purchased Hotel Oriental Express Osaka Shinsaibashi in Osaka. Why did you choose to acquire this property?
Hotel Oriental Express Osaka Shinsaibashi is a typical, small-scale and limited service hotel. We have specific reasons for acquiring this asset. We already have 2 larger hotels in the neighborhood and therefore we have in-depth knowledge and insight on this sub-market. From an operating standpoint, we will create synergetic effects between our already established facilities, effectively bringing operational costs down and maximizing revenue thanks to our stronghold in the area. With this advantage, we assisted the developer in the planning and development of this facility, and were able to have a priority seat at the negotiation of this off-market transaction. We were able to generate an attractive investment by capitalizing on our existing properties and expertise.
With assets in Tokyo and in the other main metropolitan areas, your J-REIT is present throughout Japan. Can you tell us more about the advantages of your regional diversification strategy?
With our 43 assets scattered around Japan’s most attractive hotel markets, namely, Okinawa, Fukuoka, Osaka and Kyoto area, Tokyo and Tokyo Bay area, and Hokkaido, our portfolio is well diversified. We have under our umbrella an array of mid-price and above-grade hotels. This high-quality and diversified portfolio is unique to JHR.
A benefit of our regional diversification is to mitigate the risks linked to earthquakes and natural disasters. Thanks to Japan’s unique geographical position and climatic characteristics, we have the immense luck of having natural Onsens (hot baths), four distinctive seasons, breathtaking landscapes and so much more. In a way, I believe that natural disasters are the price to pay for having such extraordinary features; it is the other side of the coin.
By virtue of our diversified portfolio and regional implementation, the economic burdens caused by natural disasters are largely mitigated. In case of an earthquake, the hotels in the targeted area will be damaged but our remaining properties will not. For example, the 2011 Great Eastern Japan Earthquake rocked the Tohoku region, and a number of assets in our portfolio were affected operationally. However, overall financial impact on our portfolio as a whole was not destructive.
What regional locations show the highest growth potential?
We favour large hotel markets at popular tourist destinations, which we believe will provide steady and secular growth. The regions we have determined as strategic investment areas are Tokyo and Bay Area, Hokkaido, Osaka, Kyoto, Fukuoka and Okinawa.
On top of these large markets, there are attractive opportunities in smaller cities such as Hiroshima and Kanazawa given their popularity as a tourist destination. Additionally, in light of the increase in inbound travelers, for the last few years we have begun seeing an ever-growing amount of repeated visitors. Repeaters tend to go “off the beaten tracks” and are interested in discovering more areas of Japan, effectively bringing opportunities into new regions. There seem to be interesting investment opportunities in even smaller markets.
Can you go over the evolution of your company since the merger in 2012?
As operational assets, hotels are difficult properties to manage. Out of over 60 publicly-traded J-REITs today, only 5 to 6 are hotel specialists. As the largest hotel specialist J-REIT, we are proud to boast the longest track record and most diversified high-quality portfolio.
Our J-REIT, JHR was created in 2012 by the merger of Nippon Hotel Fund Investment Corporation (“NHF”), which was originally formed by a consortium of Japanese firms, and Japan Hotel and Resort, Inc. (“the former JHR”), which was originally formed by a subsidiary of Goldman Sachs Group. In 2012, NHF and the former JHR were the only two hotel specialists. After the merger, JHR was the only one. Consequently, we were in a dominant position to acquire hotel assets and grew adjacently to Japan’s touristic boom.
Were there any benefits by the merger besides the size expansion and market positioning?
To our advantage, our two former entities had distinctive yet complementary strategies. On the one hand, NHF was engaged in fixed rent lease-based assets. On the other hand, the former JHR was an expert in variable rent lease. By combining both strategies, we successfully achieved a truly balanced portfolio and performance scheme. Today, 55% of JHR’s revenues are fixed rent and 45% are variable rent. Maintaining the balance of potential for upside through variable rents and stability through fixed rents is our key strategy for the future.
With the growth of tourism, and by extension, hostelry, new hotel REITs penetrated the market. Despite the appearance of competitors, we have remained the largest and most reliable hotel specialist J-REIT. Furthermore, we are proud to boast a successful track record of a consistent growth unmatched in our industry. Throughout the years, we managed to build a high-quality diversified portfolio composed of 43 assets with more than 11,700 hotel rooms. The majority of our assets are located in the strategic investment regions we previously discussed, and international brand hotels, such as Hilton, Sheraton, Marriott, Mercure, Ibis and Holiday Inn, represent 55% of our portfolio, an appealing point to inbound visitors.
What are your next objectives?
The 43 hotel assets owned by JHR are worth about 500 billion JPY according to recent property appraisal. Currently, JHR’s market capitalization stands at about 400 billion JPY. We would like to expand the portfolio size and correspondingly market capitalization to the level at which JHR may be included in the MSCI (Morgan Stanley Capital International) Global Index and we will have an even wider range of investors. While we do not have specific target timing, we want to ‘grow smart’ and achieve our objectives within a couple of years as we continue to observe attractive investment opportunities.
Can you comment on your most recent numbers and your forecast for 2019?
If one observes Key Performance Indicators of the 5 HMJ hotels in JHR portfolio (over 10 year statistics are available for these 5 hotels on a same store basis), namely, ADR (average daily rate), OCC (occupancy) and RevPAR (revenue per available room), one will witness that our forecast for 2019 will reach records. We expect an OCC to hit 91.9% and an ADR to stand at 20,269 JPY, which translates into a RevPAR of 18,620 JPY.
In 2009, KPIs significantly decreased due to the global financial crisis, dropping to a RevPAR of 12,696 JPY. After a slight recovery in 2010, the 2011 earthquake occurred and it had a negative effect on KPI performance for that year. However, since 2013 onwards, all indicators of the 5 HMJ hotels have consistently increased. As stated earlier, the inbound trend started in 2014. One will notice that an OCC has significantly soared over time and expected to reach 91.9% in 2019. As a result of this lofty occupancy ratio, the room rates could increase sharply in the year to come.
Along with JHR’s diversified portfolio and your extensive track-record, what are the other advantages of JHRA?
One of our strongest competitive advantages is our independence. Many J-REITs are created by conglomerates or developers as a part of their overall businesses, and are designed to rely on their sponsor for growth strategy, deal sourcing, property management, and so on. In our case, our main sponsor is a Singaporean investment management company and we do not rely on our sponsor to grow our business. Accordingly, we have developed market-leading sourcing and acquisition capabilities. Our strength is to create attractive off-market private transactions, and we focus on complex situations with narrow buyer windows. For example, when a seller of a large full service hotel wants to sell his operation as a package, including the working-staff, the practicality of the deal becomes extremely complex. By virtues of our reputation as a reliable and successful long term holder, we are consistently invited to such negotiations.
How are you planning to attract more foreign investment into your J-REIT?
40% of JHR’s investor-base is composed of foreign entities. It is a high number in comparison to the 25% of the market average. For both foreign and domestic investors, we make consistent efforts to conduct effective Investor Relations. We focus on sending an articulate message as to our strategy and story, and clearly display our compelling track-record, including a history of dividend increase, and showcase our strengths.
As a J-REIT with 40% of foreign investors, what is the recipe to attract overseas attention?
Even when compared to American REITs, our level of transparency and information disclosure is extremely high. We disclose an extensive amount of information, maybe too much! Furthermore, we prepare English and Japanese disclosure documents at the same level. Our success was linked to Japan’s touristic boom. In 2013 and 2014, foreign investors became increasingly interested in the Japanese inbound story; even more so than Japanese people. Since then, we have raised capital through global offering a couple of times. Normally about half of newly-issued shares were allocated to international investors, logically leading our foreign investor ratio to increase.
Looking at the future do you plan to acquire overseas assets?
While we have been investigating the possibility, oversea investments have hurdles to overcome, namely, tax leakage, additional administrative cost and foreign exchange risk hedge. To overcome these hurdles, we need a certain level of expected return.
Furthermore, some J-REIT investors prefer simple stories and pure plays. For example, our J-REIT is pure and to the point: Hotels and Japan. When we decide to expand internationally, we will have to clearly explain to our investors the reason for our play. Nevertheless, we will continue our research and investigations.
In terms of location, we would prioritize markets that have a connection to Japan. To that end, Pan-Pacific destinations, such as Hawaii, are our most likely targets.
How did J-REITS contribute to the boom of Japan’s real estate market?
The J-REIT market was born in 2001. Despite its relatively short history, J-REITs have acquired an enormous amount of property assets. With more than 3,900 properties under management for an approximate value of 17.9 trillion JPY as of December 2018, J-REITs have consistently been a major player and acquirer in the real estate market. Due to its simplicity and transparency, J-REITs have successfully attracted a variety of domestic, foreign, large and small-scale investors.
What is your long-term vision for the future of JHRA?
I would like to further improve the quality of our service. Essentially, our business is to make the right investment and asset management decision. As the largest and the leader of our specific market, I want our company to boast the best capability of making right decision and the highest level of investment and asset management services. I believe it to be the key for the long-term sustainability of our business and I want to institute a culture where every employee is devoted to providing the best quality service to our clients.