Tourism in Japan has increased dramatically in recent years, mainly because of a substantial increase in the number of visitors from neighbouring countries. The Japanese government has big plans to boost tourism even further in the future, too. But what does this mean for Japanese hotels? And will they be able to accommodate the demand?
Despite a significant increase in tourism since 2011, Japan is still playing catch-up with its Asian neighbours. In 2016, China had 60 million visitors, Thailand had 33 million and Malaysia had 27 million, but only 28 million people visited Japan (source: Japan National Tourist Organization). This figure is low given Japan’s economic size, quality of infrastructure, and the attractions of its unique and distinct culture.
The Japanese government is now implementing policy measures, such as less stringent visa requirements, to try to attract 40 million visitors by 2020 and 60 million by 2030. Growth is expected to come mainly from Asia’s fast-growing, emerging economies. China currently accounts for 25% of all visitors to Japan given the short travel times and low-cost travel. The government is also looking to establish 10 integrated resorts, similar to those in Macau and Sentosa in Singapore, which should add substantially to tourism over the next decade.
As you would expect, tourist numbers are mainly focused on the major cities, such as Tokyo, Osaka, Fukuoka and Nagoya. Traditional leisure destinations, such as Kyoto, Okinawa, Shizuoka (Mount Fuji) and Chiba (Disneyland) are also big attractions. The top 11 locations account for 55% of the tourism market. Outside these destinations, demand has been more tepid, with the exception of areas of natural beauty, such as hot springs, which have increased resort-style stays in the countryside and on the coast.
Over the last five years, the number of hotel rooms in Japan has increased only marginally despite rising demand.
Hotel room supply
Over the last five years, the number of hotel rooms in Japan has increased only marginally despite rising demand. The increase has focused on budget hotels but the impact on the market has been offset by a sharp drop in other accommodation types, such as traditional Japanese inns. According to CBRE, the supply of hotel rooms in Japan’s major cities is expected to rise by 30% between 2016 and 2020. While this sounds high, it indicates an annual growth rate of just 7% a year. Given the ongoing boom in tourism to Japan and the growth of domestic travel (particularly from wealthy retirees) an oversupply of accommodation is unlikely.
Low threat from alternative accommodation
The growth of minpaku (the Japanese term for private, Airbnb-type accommodation) has not had a significant effect on Japanese hotels either. For the most part, it has met a level of demand that hotels have been unable to provide. In Tokyo and Osaka, minpaku has a market share of around 15%; but for Japan as a whole, estimates suggest it is less than 5%. Unfortunately, most minpaku are currently illegal; but although the Japanese government has introduced new guidelines, local authorities will likely be slow to implement the policies given the current shortage of accommodation in Japan.
Income returns from hotels
Figures from Japan’s Association for Real Estate Securitization (ARES) indicate rental growth from Japanese hotels of 1% per annum over the last nine years. This compares favourably with rental growth of -1.3% from the office sector, for example. Meanwhile, there has also been significant growth in room rates. The rise over the last decade matches the rise in hotel rents, indicating that there is no deterioration in affordability for hotel operators. Over the medium term, the growth in room rates in likely to be around 2-3%.
Opportunities for investors
Visitor numbers from other countries are expected to experience further strong growth over the next decade. While the supply of hotel rooms is rising, and there is a degree of competition from Airbnb-type accommodation, the fundamentals of the Japanese hotel property market remain strong. Most of the growth in room supply has been at the budget end, which is in direct competition with minpaku, and the only part of the market that may be in danger of oversupply in the future. Given the significant growth in tourism from overseas, there is still space in the property market for a variety of hotel operators, which we believe investors can exploit to their benefit. Good-quality hotels are becoming expensive, though, and the best opportunities are likely to be found where value can be added, such as developing ageing hotels to meet more demanding modern standards.
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