Spotlight Japan hospitality - August 2018 Savills World Research Japan

Spotlight Japan hospitality - August 2018 Savills World Research Japan
Savills World Research

Japan hospitality    August 2018

Spotlight | Japan hospitality                                                                                                                                                                                                       August 2018

                                                                                                                                                                                                                                               Savills World Research

                                                                                                                                                                                                                         Japan hospitality      August 2018

Japan hospitality                                                                                                                                                                                                                          

“Demand for hotels has kept pace with robust
supply, as inbound tourist numbers grow                                                                                                                                      SUMMARY
strongly and steadily. Hotel performance is likely
                                                                                                                                                                             The number of overseas visitors to Japan has
to improve due to stricter minpaku1 regulation.                                                                                                                              risen 15.6% YoY over 1H/2018, to 15.9 million.
Hotel players with different strategies are
                                                                                                                                                                             Inbound tourist spending in 1H/2018 was 2.2
increasingly entering the industry, leading to                                                                                                                               trillion yen, up 9% YoY.
a more mature, competitive landscape with
reduced risk premiums.”                                                                                                                                                      Marketing initiatives to increase tourism from
                                                                                                                                                                             outside Asia should have a positive impact on
                                                                                                                                                                             hotels for both diversification and profitability.
Introduction                                                               With a series of events such as the
In 1H/2018, the number of overseas                                         2019 Rugby World Cup, the 2020                                                                    Strong occupancy levels and reduced
tourists to Japan reached 15.9                                             Tokyo Olympics, and possibly the                                                                  minpaku supply raise expectations of long-awaited
million, an increase of 15.6% year-                                        World Expo 2025 in Osaka in store,                                                                improvements in hotel performance.
on-year (YoY), and their spending                                          the country is not short of ammunition.
over the same period rose 9% YoY                                           Integrated resorts are also expected to                                                           New players are entering the hospitality
to 2.2 trillion yen. The 2020 goal                                         be built at three locations and should                                                            industry, and many operators are adopting different
of 40 million annual visitors looked                                       induce further arrivals.                                                                          roles and taking different risks, making the industry
ambitious when first announced                                                                                                                                               more mature and reducing risk premiums.
years ago, but now appears                                                 Additionally, Japan is aiming to attract
achievable. Even the goal of 60                                            more tourists from diverse regions                                                                Investment interest in the hotel sector remained
million visitors by 2030 seems more                                        and reduce its heavy reliance on Asian                                                            strong in 1H/2018. New supply is likely to help
realistic. Given the size of Japan’s                                       visitors, who currently account for
                                                                                                                                                                             increase future volumes.
population and economy, and its                                            85% of overseas tourists. Potential
extensive and reliable transportation                                      increases in non-Asian tourists
system, there appears to be capacity                                       should have a positive impact on
for further growth.1                                                       hotels since they tend to spend
                                                                           more on accommodation per trip
1   Minpaku is the Japanese term for peer-to-peer                          than their Asian counterparts (Graph
accommodation, such as those provided by Airbnb.

GRAPH 1                                                                                                                                          GRAPH 2
Overseas visitors to Japan, 2003 – 1H/2018                                                                                                       International tourist arrivals and % of
                                                                                                                                                 international tourists vs population, 2016
                                                                                   Of which China    Total    Estimate                                                                         Intl. arrivals   Intl. arrivals vs population
                          70                                                                                                                                                90                                                                 140%

                          60                                                                                                                                                                                                                   120%
                                                                                                                                                                                                                                                                       Intl. arrivals vs population

                          50                                                                                                                                                                                                                   100%
                                                                                                                                                 Intl. arrivals (million)
 Million intl. arrivals

                                                                                                                                                                            50                                                                 80%
                                                                                                                                   2030 target

                                                                                                                                                                            40                                                                 60%
                                                                                                                 2020 target

                          10                                                                                                                                                10

                                                                                                                                                                             0                                                                 0%

                               2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2030

Source: Japan Tourism Agency (JTA), Japan National Tourism Organisation (JNTO), Savills Research &
Consultancy                                                                                                                                      Source: World Bank, Savills Research & Consultancy

Spotlight | Japan hospitality                                                                                                                                                                                                                                                                                                          August 2018

GRAPH 3                                                                                                                                                                                                                                                                                  4). According to the World Tourism
International tourism revenue and international                                                                                                                                                                                                                                          Organization, the number of European
                                                                                                                                                                                                                                                                                         tourists who visited the Asia Pacific
tourism revenue vs GDP, 2016                                                                                                                                                                                                                                                             region amounted to 32 million in 2016,
                                                                                                             Intl. tourism revenue                                           Intl. tourism revenue vs GDP                                                                                while the number of visitors from
                                      300                                                                                                                                                                                                     2.5%
                                                                                                                                                                                                                                                                                         Europe to Japan in the same year was
                                                                                                                                                                                                                                                                                         only a fraction of this at 1.4 million. The
Intl. tourism revenue (US$ billion)

                                                                                                                                                                                                                                              2.0%                                       government has earmarked a large

                                                                                                                                                                                                                                                          Intl. tourism revenue vs GDP
                                                                                                                                                                                                                                                                                         budget for marketing, which should
                                      200                                                                                                                                                                                                                                                further support the effort to attract
                                                                                                                                                                                                                                                                                         European visitors. Moreover, a new
                                      150                                                                                                                                                                                                                                                exit tax of 1,000 yen per person is
                                                                                                                                                                                                                                              1.0%                                       projected to generate over 50 billion
                                      100                                                                                                                                                                                                                                                yen of revenue annually and will
                                                                                                                                                                                                                                                                                         be used, for instance, on multiple
                                                                                                                                                                                                                                              0.5%                                       language services and increasing the
                                                                                                                                                                                                                                                                                         number of Wi-Fi hotspots, in addition
                                           0                                                                                                                                                                                                  0.0%
                                                                                                                                                                                                                                                                                         to marketing.

                                                                                                                                                                                                                                                                                         Geopolitical ructions in 2018
                                                                                                                                                                                                                                                                                         highlight the benefits of diversifying
Source: World Bank, Savills Research & Consultancy
                                                                                                                                                                                                                                                                                         Japan’s sources of tourism. China,
                                                                                                                                                                                                                                                                                         which makes up one of the largest
                                                                                                                                                                                                                                                                                         proportions of international arrivals,
Average accommodation spending per trip by                                                                                                                                                                                                                                               saw its current account surplus flip to
nationality, Q2/2018                                                                                                                                                                                                                                                                     a deficit in Q1/2018 for the first time
                                                                                                                                                                                                                                                                                         in almost two decades (Graph 5). On
                                                                                                                                                   Accommodation spending                                               Region average
                                      120,000                                                                                                                                                                                                                                            top of decreased exports, increased
                                                                                                                                                                                                                                                                                         international travel by Chinese nationals
                                      100,000                                                                                                                                                                                                                                            has widened the services deficit since
                                                                                                                                                                                                                                                                                         2010. In addition, an escalating trade
                                                                                                                                                                                                                                                                                         war with the United States continues to

                                       60,000                                                                                                                                                                                                                                            soften the outlook for China’s balance
                                                                                                                                                                                                                                                                                         of payments. Continued trade war
                                       40,000                                                                                                                                                                                                                                            rhetoric or an increasing services deficit
                                                                                                                                                                                                                                                                                         could further weaken the renminbi,
                                                                                                                                                                                                                                                                                         which has depreciated against the yen
                                               0                                                                                                                                                                                                                                         by more than 5% year to date, and





                                                                          Hong Kong




                                                   South Korea



                                                                                                                                                                                                                                                                                         possibly impact outbound tourism to

                                                                 Asia (Major)                                                Asia (Other)                                                                     Ex-Asia                                                                    Also, the risks posed by uncontrollable
                                                                                                                                                                                                                                                                                         external events became apparent
Source: JTA, Savills Research & Consultancy
                                                                                                                                                                                                                                                                                         in 1H/2018: heavy rains in areas of
                                                                                                                                                                                                                                                                                         western Japan are estimated to have
                                                                                                                                                                                                                                                                                         impacted tourist spending by 8.6
Chinese current account, Mar 2008 – Mar 2018                                                                                                                                                                                                                                             billion yen, and a measles outbreak
                                                                                                                                                                                                                                                                                         between March and June drove an
                                                                                                                              Current Account                                   Goods                     Services                           Travel
                                                                                                                                                                                                                                                                                         estimated 3,500 tourists to cancel
                                      200                                                                                                                                                                                                                                                trips to Okinawa. The Japan market
                                                                                                                                                                                                                                                                                         is large enough to accommodate a
                                      150                                                                                                                                                                                                                                                diversification strategy that could
                                                                                                                                                                                                                                                                                         mitigate such risks. Nevertheless,
                                                                                                                                                                                                                                                                                         these risks and volatility events are
                                                                                                                                                                                                                                                                                         embedded in the hospitality industry.
       US$ billion

                                                                                                                                                                                                                                                                                         The main concern of hoteliers
                                                                                                                                                                                                                                                                                         continues to be a high level of
                                                                                                                                                                                                                                                                                         upcoming supply. As illustrated in
                                                                                                                                                                                                                                                                                         Graph 6, total sq m of new lodging
                                      -50                                                                                                                                                                                                                                                construction starts in Tokyo and Osaka
                                                                                                                                                                                                                                                                                         rapidly increased between FY2015
                     -100                                                                                                                                                                                                                                                                and FY2017. Based on the volume of
                         Mar 08                        Mar 09                     Mar 10      Mar 11                    Mar 12                   Mar 13                  Mar 14           Mar 15          Mar 16              Mar 17            Mar 18
                                                                                                                                                                                                                                                                                         press releases, hotel developments are
Source: State Administration of Foreign Exchange, Savills Research & Consultancy                                                                                                                                                                                                         still being proposed, though forecasts
                                                                                                                                                                                                                                                                                         tabulated by industry publication

Spotlight | Japan hospitality                                                                                                                                                                   August 2018

Hoteres show that total planned new           in nights stayed by overseas tourists                    GRAPH 6
rooms only grew by 2.6% between               markedly diverged from the YoY                           New construction starts of
December 2017 and June 2018, well             change in international arrivals.
below the average of 24.6% over
                                                                                                       accommodation buildings, FY2011 –
the last four semi-annual periods.            As of 13 July, the government registry                   FY2017
In addition, stable hotel occupancy           showed approximately 4,400 approved                                               Tokyo (# of hotels)     Osaka (# of hotels)           Tokyo (sq m)         Osaka (sq m)
indicates that supply appears to have         minpaku providers and just under                                         250                                                                                    600,000
grown somewhat in line with demand            1,500 pending approval, far fewer
so far.                                       than the 50,000 to over 60,000 listings                                                                                                                         500,000
                                              available on Airbnb’s website before                                     200

New regulation in the minpaku industry        June. Stricter legislation appears to
appears to have partially alleviated          have cooled enthusiasm for the sector,

                                                                                                       # of lodgings
supply concerns among hoteliers. The          evidenced by a return to growth in

                                                                                                                                                                                                                        sq m
new regulation significantly reduced          nights stayed in Q2/2018, which should
the number of Airbnb listings and             benefit budget hotels in particular.                                     100
appears to have opened up some                                                                                                                                                                                200,000

breathing room for budget hotel               Facing stiff resistance from local
operators. This could even lead to a          residents, minpaku listing portals                                                                                                                              100,000
hotel supply shortage in the future           are looking for new approaches.
and trigger long-awaited increases in         Airbnb, the largest minpaku listings                                          0                                                                                 0
hotel room rates.                             provider in Japan with about 27,000                                                 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017

                                              listings on its website as of late June,                 Source: Ministry of Land, Infrastructure, Transport, and Tourism, Savills Research
                                                                                                       & Consultancy
With the hospitality market growing,          has announced a US$30 million
various investors are adopting                advertising budget for its Japanese
                                                                                                       GRAPH 7
different strategies. While J-REITs           operation. Motivated by bookings of
are shuffling their assets, there is still    any sort rather than being dependent                     Annual growth in international arrivals*
strong acquisition appetite, especially       specifically upon minpaku, Airbnb                        versus growth in nights stayed, Jul
from new players. Some companies              is also soliciting hotels to list rooms
                                              on its website at a fraction of the
                                                                                                       2017 – Jun 2018
now focus on operating hotels
without purchasing the underlying             cost typically charged by online                                                                                       Intl. arrivals            Nights stayed
real estate. As various investment            travel agents, which may contribute
options become available, the hotel           to an improvement in the operator                                            25%
market is becoming more liquid and            cash flow. Rakuten Lifull Stay, which
mature, reducing risk premiums and            expects 1,600 rooms to be available                                          20%

                                              on its platform once all pending
                                                                                                            YoY % change

thereby lessening downside risk from
potential market adjustment.                  applications are approved, has entered
                                              into partnerships with Tujia and                                             10%
Minpaku regulation                            HomeAway, both of which have long-
On 15 June, registration under the            term interests in Japan themselves. In                                        5%

Private Lodging Business Act became           addition, stricter minpaku regulation
mandatory for operators falling under         has changed major minpaku providers
its jurisdiction. The registration process    from individuals to corporates and                                           -5%
is lengthy, and calls for significant setup   made the competitive landscape fairer                                                  Jul   Aug   Sep     Oct   Nov    Dec    Jan       Feb   Mar     Apr    May   Jun

costs such as installing expensive fire       for budget hotel operators.                                                                             2017                                     2018

safety systems. Operating days are                                                                     Source: JTA, JNTO, Savills Research & Consultancy
restricted to 180 per year and violators      Japan hotel market                                       * International arrivals numbers for May and June are preliminary estimates by the
                                              Savills tracks the performance of over                   JNTO.
face a fine up to one million yen if
caught, though local governments              100 hotels owned by five J-REITs2 to
are permitted to enforce their own            analyse market trends. Our analysis                      room (RevPAR) increased slightly as
restrictions which have generally been        focuses on limited-service hotels;                       occupancy rose by 0.7 percentage
stricter. Kyoto, for example, in principle    full-service and resort properties are                   points (ppts) YoY to an impressive
only permits operation during the             excluded due to limited data. Given                      87.5% (Graph 8). Minpaku supply
low season and for a maximum of 60            that a majority of the existing hotel                    may have had some influence here:
days a year in residential areas. These       stock is in the limited-service category,                analysis by Smith Travel Research
additional burdens discourage both            this should provide a good proxy for                     (STR) demonstrates that, globally,
existing and new operators.                   the overall market trend in Japan3.                      ADRs tend to suffer from a reduced
                                                                                                       number of compression nights4 as a
Japan is no exception, as Airbnb has          Though average daily rates (ADR)                         result of the presence of minpaku. With
been met with regulation in many              were marginally lower YoY across                         the apparent contraction of minpaku
                                              our sample, revenue per available                        supply, ADRs should have upward
markets, ranging from restrictions
                                              2     The five J-REITs consist of Japan Hotel REIT,      momentum in the future.
on the number of operating days               Invincible Investment, Hoshino Resorts REIT, Ichigo
to fines for unlicensed operators.            Hotel REIT, and Mori Trust Hotel REIT. Since new
                                              samples are added when J-REITs acquire hotels, the       According to JTA data, which covers
Strict regulation has a marked effect         sample size and composition may change marginally        a wider universe than our sample,
on appetite to operate minpaku.               between survey periods.
                                              3     As of this report, Tokyo accounts for over 30%     4    Compression nights occur when occupancy
Fluctuations in minpaku usage can be          of the sample hotels while other Kanto prefectures and   exceeds a certain level, typically 95%. Hotels are able to
seen in Graph 7, as the YoY change            Kansai account for about 15% each.                       temporarily raise ADRs in these circumstances.

Spotlight | Japan hospitality                                                                                                                                                                  August 2018

occupancy in Tokyo averaged 85%                             Port in Osaka and Rihga Royal Ogura        GRAPH 8
through 1H/20185, with Shibuya                              in Kyushu, though multi-property           Trailing-twelve-month limited-service
occupancy particularly strong at 90%                        portfolio acquisitions also made up
thanks to its popularity as a tourist                       a reasonable portion of transaction
                                                                                                       hotel performance, 2014 – 1H/2018
destination and limited supply. Similarly,                  volume as investors snapped up
                                                                                                                                                 Occupancy (RHS)         ADR Index        RevPAR Index
Osaka and Kyoto recorded occupancy                          opportunities to diversify in one fell                               115                                                                      100%
of 86% and 79%, respectively, as                            swoop. According to the Japan Real
tourists continued to visit in droves.                      Estate Institute (JREI), estimated cap
                                                            rates on budget hotels in April were                                                                                                          90%
The nationwide labour shortage is                           4.5%, 0.2ppts lower YoY, showing

                                                                                                           Index (1H/2014=100)
acutely apparent in the physically                                                                                                                                                                        85%
                                                            the compressing trend.                                               105

demanding hospitality industry.
According to the Bank of Japan’s June
                                                            Multiple major property developers
Tankan survey, the short-term outlook                                                                                            100
                                                            have announced or expanded on
for hospitality labour supply conditions
                                                            intentions to enter the hotel business                                                                                                        70%
was the tightest out of all industries.
                                                            this year. NTT Urban Development                                     95
Hourly wages for lodging staff are                                                                                                                                                                        65%
                                                            plans to launch a hotel business
up 4.2% YoY6 according to Recruit
Jobs (Graph 9), continuing a trend                          targeting foreign tourists in Kyoto                                  90                                                                       60%
                                                            and Osaka. Mitsubishi Estate intends                                       1H      2H       1H   2H     1H       2H      1H       2H   1H
established back in 2013. Prolonged                                                                                                     2014             2015            2016           2017       2018
tightening of the labour market has                         to open multiple Royal Park Hotels
prompted the government to draft a law                      in Tokyo, Kyoto, and Osaka. Mitsui         Source: J-REIT disclosures, Savills Research & Consultancy
to welcome 500,000 new workers from                         Fudosan has signed an agreement
overseas to help alleviate the situation.                   to open Japan’s first Bvlgari
                                                            Hotel in Tokyo. Tokyu Fudosan              GRAPH 9

One way to counter rising costs is                          bought the Kyukaruizawa Kikyo in           Lodging staff hourly wages*
through productivity improvements.                          Nagano and plans to open more
A 2017 study by the Research                                luxury hotels elsewhere in Japan.                               1,200
Institute of Economy, Trade and                             Foreign companies are also making
Industry showed that an increased                           firm commitments. For example,                                  1,150

proportion of overseas guests, who                          Hilton is expanding its presence in
tend to use hotels at different times to                    Okinawa, having recently opened the
domestic guests, led to more efficient                      DoubleTree by Hilton Okinawa Chatan                             1,050
utilisation of hotel rooms and improved                     Resort (cover photo).
labour productivity by as much as

7%. As more foreign tourists visit                          As the hospitality industry matures,
Japan, this effect should somewhat                          various players are taking different                                 950

counterbalance increasing costs.                            strategies and risks. Some are                                       900
                                                            interested in making new investments
Investments                                                 and divesting old properties, while                                  850
According to Real Capital Analytics                         others are keen to focus on
(RCA) data, hotel transactions                              management or operation without                                      800
                                                                                                                                            June 2015        June 2016            June 2017        June 2018
amounting to 140 billion yen took place                     repositioning their balance sheets.
across Japan in 1H/2018, up 51%                             Minpaku operators can now enlist the       Source: Recruit Jobs, Savills Research & Consultancy
YoY. The lion’s share was transacted                        services of corporate management           * Average wage for lodging staff in the three major metropolitan areas in Japan:
in Tokyo and Yokohama, though                                                                          Tokyo, Tokai and Kansai
                                                            agencies and specialise in niche
Sapporo, Osaka and Fukuoka also                             markets where they can add the
captured investor interest. Significant
                                                            most value. As the industry further
transactions included Hotel Universal
                                                            matures, risk premiums should
5     With regard to occupancy levels, 1H/2018 refers to
the period from January to May 2018.                        decline and the industry should
6     June 2017 to June 2018                                become more resilient. 

Selected investment transactions, announced in 1H/2018

                                            Approx. price             Price per room             Cap rate
 Property name                                                                                                                                          Location                               Buyer
                                              (JPY bil)                  (JPY mil)                 (%)

 Hotel Universal Port                             34.0                      57                       4.3                                            Konohana, Osaka                        Orix J-REIT

 Rihga Royal Ogura                                16.6                      56                       5.5                                        Kita Kyushu, Fukuoka                 United Urban J-REIT

 Hotel MyStays
                                                   5.3                      32                       4.5                                            Naka, Yokohama                     Invincible J-REIT

Source: J-REIT disclosures, Savills Research & Consultancy

Spotlight | Japan hospitality                                                                                                                                                 August 2018

  The prospects for the market
  Overseas tourist numbers                             competition. Labour related costs                         Buyers would like to take advantage
  continue to rise and are expected                    continue to rise, slimming margins,                       of acquisition opportunities,
  to fill rooms in popular city                        but there are avenues for improving                       while aggressive sellers refuse to
  destinations. Hotel operators are                    productivity to compensate.                               compromise on price and operating
  enjoying an improved outlook                                                                                   assumptions. Developers continue to
  compared to six months ago:                          Sporting events such as the Rugby                         introduce fresh stock to the market,
  the rate of increase in future                       World Cup and the Olympics are                            which should support volumes going
  supply appears to have slowed                        likely to serve as catalysts for the                      forward. Unpredictable events in
  and minpaku supply has greatly                       hotel market in coming years, topping                     1H/2018 serve as a reminder of the
  decreased, which should                              up already strong demand, as are                          risks inherent in the hotel business.
  allow for better pricing power,                      integrated resorts once they come                         Additionally, if economic uncertainty -
  especially for budget hotel                          online. Marketing initiatives to                          especially in the Asia Pacific region -
  operators. Minpaku operators,                        increase tourism from outside Asia                        deepens, it could deal a blow to this
  now mainly corporates,                               should have a positive impact on                          promising sector, at least temporarily.
  must also be compliant with                          hotels in terms of both diversification
  regulations, resulting in fairer                     and profitability.

  Please contact us for further information
  Savills Japan                                               Savills Research

  Christian Mancini                                           Tetsuya Kaneko                           Simon Smith
  CEO, Asia Pacific                                           Director, Head of Research               Senior Director
  (excl. Greater China)                                       & Consultancy, Japan                     Asia Pacific
  +81 3 6777 5150                                             +81 3 6777 5192                          +852 2842 4573                                      

                                                              Savills Hotels

                                                              Raymond Clement                          Tomotsugu Ichikawa
                                                              Managing Director                        Director
                                                              Asia Pacific                             Japan
                                                              +65 6415 7570                            +81 3 6777 5184

  Savills plc
  Savills is a leading global real estate service provider listed on the London Stock Exchange. The company established in 1855, has a rich heritage with unrivalled growth. It is a company
  that leads rather than follows, and now has over 600 offices and associates throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.

  This report is for general informative purposes only. It may not be published, reproduced or quoted in part or in whole, nor may it be used as a basis for any contract, prospectus,
  agreement or other document without prior consent. Whilst every effort has been made to ensure its accuracy, Savills accepts no liability whatsoever for any direct or consequential loss
  arising from its use. The content is strictly copyright and reproduction of the whole or part of it in any form is prohibited without written permission from Savills Research.

You can also read
NEXT SLIDES ... Cancel