KKR, Pacifica, Star Asia, Axe Share Insights Into Japan’s Hotel Gold Rush: MTD TV

Some of the most prominent players in Japan’s sizzling hospitality market discussed the country’s tourism boom and the importance of international-branded hotels in attracting foreign guests as part of Tuesday’s Mingtiandi Tokyo Forum. Watch the full recording>>

Four experts from KKR, Pacifica Capital, Star Asia Group and Axe Management joined Bloomberg’s Lisa Du at the Yardi-sponsored event for a wide-ranging talk on the outlook for Japan, where this year’s foreign tourist spending has already topped 2023’s record annual level.

With the market’s first-half hotel investment volume leaping 50 percent year-on-year to JPY 465 billion ($3 billion), per MSCI data, Japan hospitality assets remain a “must have” in any fund manager’s opportunistic or value-add strategy, said David Cheong, managing director and co-head of acquisitions for Asia real estate at KKR. The Manhattan-based firm notched a major milestone last year when it teamed with Hong Kong’s Gaw Capital on the $409 million buy of the Hyatt Regency Tokyo in a deal backed by South Korea’s MDM Asset Management.

“If you look at the current occupancy rate profile, I think we’re still hovering just above 78, 79 percent nationwide,” Cheong told the audience of more than 200 at the Mandarin Oriental Tokyo. “Whereas pre-COVID level, we’re actually at 87, 88 percent, historically speaking. So there’s more room to go despite the performance being really good, and part of that is supply constraint, labour constraint.”

International Love

Pacifica president and CEO Seth Sulkin’s hotel developments have included the Fairfield by Marriott Osaka Namba, Holiday Inn & Suites Shin Osaka, Moxy Kyoto Nijo and Courtyard by Marriott Hiroshima. He observed that inbound room nights are still a minority of the Japan market, which remains underrepresented by international hotel brands — meaning an uphill battle to boost average daily rates if properties rely on domestic guests.

“In order to raise ADR, you need an international brand targeting visitors,” Sulkin said. “And so we see a huge opportunity and given the fragmentation of the market and the poor management of a lot of properties, there’s tremendous potential to buy existing hotels below replacement cost to change the brand to something international and raise ADR.”

With new supply down, particularly at the low end of the sector, few new business hotels or upper-midscale properties are entering the market because construction and land costs are too high, particularly for domestic brands, according to Sulkin.

“We’ve had to go more upscale and luxury in order to make the numbers work,” he said.

Star Asia also sees “huge demand” for more luxury properties in Japan, a market with an insufficient supply of five-star hotels, said Malcolm MacLean, co-founder and managing partner of the group, which has acquired or developed more than JPY 1.4 trillion in real estate and related assets.

“Our view is taking it even a step further and making it a high-end, ultra-luxury, quintessentially Japanese hotel, because that’s what a lot of people come here for,” MacLean said.

Fundamental Strength

With offices in Hong Kong and Japan, Axe Management recently acquired three hotels in Osaka from CapitaLand Ascott Trust for JPY 10.7 billion and partnered with IHG to rebrand the trio as Garner hotels.

Axe CEO and managing partner Gary Kwok told the Mingtiandi forum that Japan would continue to be a key destination for capital deployment by institutional and private investors.

“Demand for the products is very high and supply is low,” Kwok said. “People love coming to Japan. The yen is still weak at this moment. Tourists love to come here. And the interest rate elsewhere globally remains very high.”

A Panel in Pictures