Japan is set to be the first Olympics to experience the impact of Airbnb as an accommodation partner. The International Olympic Committee and Airbnb have signed a deal to collaborate around nine Olympic events, in a bid to solve the challenge of peak demand for bed space in host cities.
The inevitable spike in demand from the 2020 Olympics is expected to help Japan reach a target of 20m visitors in a year, after having successfully grown inbound traffic in recent years. As a result, hotels across the country are performing strongly. Savills, which monitors a portfolio of more than 100 hotels across the country, owned by five local REITs, says first half 2019 saw revpar up 2.8% as occupancy improved to 88%, with room rate up 2.3%.
The country’s hotel market continues to be dominated by local brands, with Tokyo Inn and Route-Inn having close to 300 properties each. In contrast, Marriott has just 47 hotels across Japan, while Choice counts 50.
And investment activity is strong, too. Real Capital Analytics said the first half of the year saw the highest volume recorded since 2009, with JNY195bn of hotel transactions, up 10% year on year. But the consultant’s David Morgan-Green warned it is a difficult market to enter, with some opacity and with domestic operators dominating. He notes the commercial property sector “has occasionally defied conventional wisdom around market fundamentals and has frequently been one of the most difficult markets to determine sentiment and the direction of travel.”
Such issues are currently being tackled by Blackstone, which is bidding to take over Unizo Holdings, a group with 24 hotels across Japan and a further eight in development; as well as a portfolio of office buildings in Japan and east coast USA. Unizo moved into play when Japanese travel company HIS made a bid earlier this year. The group’s management then encouraged a white knight bid from Fortress Investment Group – which they rebuffed. Blackstone followed with a USD1.6bn offer, and talks continue.
Standard Life Investments, warned in a 2018 market report of falling hotel yields. “We believe the asset class is expensive at a time of significant new supply and potential medium-term increases in Japanese interest rates. The public markets have picked up on supply and competition concerns, with hotel-focused Japanese Real Estate Investment Trusts (JREITs) performing poorly relative to the broader listed real estate market.” It suggested opportunities lay in value-add situations, perhaps rebranding or upgrading older properties, while acquisitions might be best sought from conglomerate investors, who had interests other than purely hotels.
In its most recent market report, CBRE also warns of the strong pipeline, with 80,000 rooms due to open in the next two years, across the nine largest cities in Japan. Of these, 87% will be limited service properties. The market set for the biggest influx is Kyoto, where new supply represents 24% of existing stock.
Yoshitaka Igarashi, Associate Director of CBRE Research commented: “In cities that have seen a large number of new hotels, the principle of fair competition has already begun separating the winners from the losers. However, in future, success will be determined by hotels’ ability to differentiate themselves. This can be done by developing a finely tuned location strategy and tailoring market positioning to specific customer segments.”
For the brands, growth can be down to finding an able local partner. Marriott expects to have 15 Fairfield brand hotels open across the country, by the end of next year, alongside partner Sekisui House. The new builds will use modular construction and are to be located at roadside rest stops, designed for travellers visiting the Japanese countryside.
Japanese authorities have kept a close eye on the development of Airbnb and peer to peer accommodation across the country. New laws introduced in 2018 improved regulation of such accommodation, and in response Airbnb listings fell from over 60,000 to less than 15,000 as unregistered operators were delisted. As of February 2019, the platform’s numbers were up to more than 40,000.
HA Perspective [by Andrew Sangster]: It is frightening just how often normally sensible people fall for the fallacy of investing for a big, one-off event. Few events are bigger – or more one-off – than the Olympics. As Nancy Reagan suggested: “Just Say No”.
But credit committees seem unable to heed this advice. And projects which would normally never get past the feasibility report stage, somehow are waved through thanks to some ill-informed views, usually held by the spouse of the most senior credit committee member.
But Japan is an enormous market which is enjoying an upsurge in visitor demand. There are good grounds to believe that Tokyo, like London before it, can easily absorb any extra supply.
There have been wobbles. The biggest have been around natural disasters – last year had a number of smaller events although nothing compared to the trauma of the Fukushima Daiichi nuclear disaster in 2011 which was the worst in recent memory.
But Japan is resilient. I was there during the typhoon that postponed three Rugby World Cup matches. And although typhoon Hagibis, the worst in decades to hit the country, killed around 100 people and caused US9bn of damage, the trains were nearly all up and running by midday the next day.
Supply, however, does look to be an issue. Between 2018 and 2020, supply in Tokyo is expected to grow by 25%. Osaka, the second-biggest metropolitan area after Tokyo, is anticipated to see supply up by nearly as much (23%) and the holiday destination Okinawa by almost 20% (source: Savills, Hoteres and MHLW).
With the exception of Okinawa (where new supply is focused on full-service resorts), the incoming stock is mostly economy or limited-service hotels. This could well help shift the perception of Japan as a high-cost country to visit. Provided the Japanese currency remains subdued, any short-term blip in terms of rates and occupancy may prove a catalyst to a bigger and stronger hotel industry in the medium to long-term.