Japan - February 2021

S P OT L I G H TSavills Research

Japan Hospitality Emerging Trends

Japan Hospitality - Emerging Trends

Distressed markets andcredit markets emerging
Summary• The testing market environment
could result in distressed
opportunities that will makegreat entry points into themarket.
• Many investors are on thelookout for such distressed
assets, and therefore
opportunities could provescarce.
• The trend of shifting toward
management contracts appears
inevitable and will accelerate as
hotel owners run out of options.
• Banks may become tougherwhen dealing with existingloans to hotels, possibly leading
to more distressed assets.
• In the long run, Japan’s hotel
market remains promising, andits famously high standardsof public health will be an
attractive factor as a new era of
tourism is ushered in.
• Multiple upcoming positives
for the hospitality industry
include the roll-out of vaccines,
a large "Go To" travel stimulus,
signiﬁcantly lower supply andpent-up demand for travel.

INTRODUCTION
The second half of 2020 brought only a little
more hope to the hospitality sector than theﬁrst, and international borders have remained
eﬀectively closed to tourists. Prospects arecertainly not expected to change signiﬁcantly
as long as the number of COVID-19 cases
worldwide does not see a steep decrease.
Therefore, the prevailing circumstances
could lead to the emergence of distressed
opportunities, which will make great entry
points into the market. Many international
hotel operators and investors have maintained
an interest in the promising Japanese hotel
market and will likely see the downturn as anopportunity to buy up distressed assets.
The shift towards management contracts
may also create opportunities for investors
willing to take more operational risk. Althoughmost owners currently prefer a ﬁ xed-rent lease,few operators presently have the ﬁnancial
capacity to undertake ﬁ xed-rent lease contracts.
Investors who wish to take more operationalrisk may ﬁnd struggling owners who are
comfortable only with ﬁ xed leases but cannot
ﬁnd suitable operators.
That said, risk is mounting in the credit
market. According to the Small and Medium
Enterprise Agency, a majority of the pandemicloans to small and medium-sized companies
have already matured or will mature between
spring and summer 2021. If the current
challenging operating environment persists,banks may reconsider forbearance. Even if
reﬁnancing is possible, favourable ﬁnancing
terms may not be applicable any more given the
more uncertain market prospects. Although thedistressed market has been quiet thus far, theemergence of a more active distressed market
may be in the oﬃng.
A DISTRESSED MARKET
Having been particularly negatively impacted by
the pandemic, the hospitality industry will likely
see increased bankruptcy rates, leading to a more
active distressed market. Many international
hotel operators and investors have maintainedinterest in the rapidly growing local hotel
market and will likely see the downturn as anopportunity to snatch up properties that would
not have been up for sale in a healthy market.
Presently, even several famous Japanese
hotels have been closed or disposed of. However,their established brands and networks, aswell as advantageous physical attributes
will not disappear and will remain valuable
to international investors with the ﬁnancial
wherewithal to survive the COVID-19 storm.
Furthermore, multiple domestic players areactive. One example is Prince Hotel, a hotel
subsidiary of Seibu Holdings1, that plans to1 Seibu Holdings requested Mizuho Bank and theDevelopment Bank of Japan to provide ﬁ nancial support for its
main subsidiaries, Seibu Railway and Prince Hotel. The twobanks provided 80 billion yen in preferred equity in total. Seibu
Holdings announced a 63 billion yen net loss in the ﬁscal term
ending March 2021.

savills.co.jp/research

2expand its new brand, Prince Smart Inn, to
100 properties by 2030. Hence, given theongoing activity in the market and this sector’s
continuing popularity, it would probably bebetter not to wait too long in anticipation of
deeply discounted opportunities.
Other good targets could come from regions
beyond major cities. Some owners in theseregional areas are only thinly capitalised
but possess lodgings with good value-add
potential. While budget hotels generate
forecastable proﬁts and therefore become
easy acquisition targets, the performance ofJapanese traditional inns depends heavily on
the operator at hand. As such, skilful operators
could ﬁnd underperforming properties
and signiﬁcantly improve their operatingindicators. Moreover, regional markets havebeen more resilient to the negative impactsof COVID-19, thus making the wait-and-see
strategy more eﬀective than in urban markets.
Elsewhere, some hotels developed bycondominium developers are likely toexperience more diﬃcult times as they tend
to have a small number of rooms and aregenerally located in less favourable locations.
As such, the prices of these hotels could besigniﬁcantly adjusted to an economically
viable level for potential buyers who wish toconvert them into other uses such as serviced
apartments, satellite oﬃces for teleworking,or possibly subscription use. For this categoryof hotels, investors may want to wait longenough to see necessary adjustments
materialise before acting.
Lastly, two and three-star hotels may resort
to consolidation for survival. Many investors
would like to acquire operating platforms inJapan, and because sizable franchises andchains provide more value, players who areable to bring consolidation to the table should
enjoy portfolio premiums.
A SHIFT TOWARD OPERATINGCONTRACTS
There is an increasing number of hotels
without operators, typically those newly built
by real estate companies. Although there were
prospective operators during the planningstages of these hotels a few years ago, manyof them have exited due to the pandemic.
Currently, most owners prefer a ﬁ xed-rentlease, and occasionally accept a ﬁ xed-rent plus
revenue sharing payment structure. However,few operators presently have the ﬁnancial
capacity to undertake ﬁ xed-rent lease contracts.
As a result, some hotel owners in desperateneed of operators have started accepting
management contracts. While hotel owners
with other thriving businesses are still
able to maintain a wait-and-see attitude
regarding their empty hotels, the trend ofJapan Hospitality - Emerging Trends

shifting toward management contracts
seems inevitable and should accelerate if
the pandemic persists and hotel owners run
out of options. Some costs, such as FF&E
will more likely be incurred by hotel ownersrather than operators going forward, adding
greater ﬁ nancial stress on the former.
This shift in the operating structure
could create opportunities for experienced
hotel investors who are willing to take more
operational risk and feel comfortable withmanagement contracts. These investors
may also be able to ﬁnd risk-averse owners
and take their properties oﬀ their handswith some discount. Smaller owners with
only a few hotels may be more willing to exit
rather than opting for management contracts
because they cannot mitigate increased
operational risk by diversiﬁcation.

The current difficult circumstances
serve as a strong catalyst for theemergence of new trends anddistressed opportunities. There arenumerous keen investors on thelookout for such distressed assets,
and therefore opportunities areunlikely to be as abundant as one
might hope.

GRAPH 1: Forbearance Period by Public and Private Banks at the end of December,
2020
Public Banks' Forbearance Period> 3 years,4%

2 - 3 years,
12%< 6 months,
33%
1 - 2 years,
18%

6 months - 1 year,
33%

Private Banks' Forbearance Period> 3 years,8%

2 - 3 years,27%

1 - 2 years,
9%< 6 months,
42%

6 months - 1 year,
14%

Source The Small and Medium Enterprise Agency, Savills Research & Consultancy

3AN UNCERTAIN CREDIT MARKET
Thus far, banks have been generous and haveshown some ﬂexibility pertaining to existingloans due to the following reasons. Firstly,
the allowance for doubtful accounts has still
been within expectations. Secondly, given
the rising US interest rates, the prospectsof the yield curve look more favourable forbanks. Thirdly, the government, the centralbank, and ﬁ nancial supervisory agencies are
all supportive in preventing the hospitality
industry from collapsing.
However, lenders will be increasingly
careful when extending loans given the
more uncertain market prospects. Even if
reﬁ nancing is possible, similar ﬁ nancing
terms may not be applicable, and therefore
require noticeably higher interest rates.
Also, banks are likely to pay closer attention
to operating cash-ﬂows, rather than tothe credit of operators/tenants. Althoughtenants who have managed to keep paying
rents despite the pandemic are likely toreceive better credit scores, banks will only
become increasingly stringent. Budget
hotels without key selling points will be ina more diﬃcult position as new supply up
to the pandemic was predominantly in thissegment.
For investors, securing bank loans forinvestments will not come easily as lenders
are taking a cautious approach and are being
very selective regarding hotel deals. Hence,
investors may need to ready a larger amountof cash or be prepared to accept higher
interest rates than before. Next to the ﬁerce
competition for hotel acquisitions, this willbe the second hurdle even for investors
fortunate to have identiﬁed a potential
candidate.

Japan Hospitality - Emerging Trends

OUTLOOK
While the future of the industry remains in thedark, there are positives worth highlighting.
The ﬁ rst is the progress made in rolling out a
COVID-19 vaccine. Japan has started vaccinations
and will likely expedite the entire process if theprospects of early adopters look promising. The
second is the boost in domestic demand aided by
the expansion of the “Go To” Travel campaign
budget, which should help keep aﬂoat operators
savvy enough to adapt and seize opportunities.
The third is the substantially lower supply inthe pipeline along with hotel closures caused
by increasing bankruptcies, which should provefavourable for hoteliers who manage to weather
the storm. The last is the pent-up demand fortravel in concurrence with the high levels of extra
savings from self-quarantine. When the situation
improves, this demand should help the industry’s
recovery, especially in the resort segment.

In the long run, Japan remains a promisinghotel market, and its famously high standards ofpublic health will be an attractive factor as a newera of tourism is ushered in. Furthermore, theglobal pandemic could be seen as an opportunity
to reset the tourism industry and strike a balance
between burgeoning inbound tourism, local
sensitivities, and sustainability. These factors
will bear increasing importance going forward, assome Japanese cities have already suﬀered fromthe side-eﬀects of growing tourism that worldfamous tourist destinations in Europe have.
COVID-19 could serve as an impetus for the Japan
market to develop into the next phase: a moresustainable and diversiﬁed tourism destination.
That said, with so much uncertainty remaining,
it is possible that severe conditions will continue
for the hotel industry. For instance, while thepandemic may abate to a degree, epidemics
may break out in certain regions due to newvariants of the virus. Under this scenario, therecovery of mass markets will be slower and may
consequently lead to wider consolidation andmore distressed opportunities. Well prepared
investors can certainly take advantage of thisdownturn and try to expand their portfolios.
Nevertheless, competition for such distressed
assets is ﬁerce, and therefore opportunities
appear likely to be less abundant than hoped.

For more information about this report, please contact usSavills Japan

Savills Research

Christian Mancini
CEO, Asia Paciﬁc(Ex. Greater China)+81 3 6777 5150
cmancini@savills.co.jp

Tetsuya Kaneko
Director, Head of Research& Consultancy, Japan+81 3 6777 5192
tkaneko@savills.co.jp

Simon Smith
Senior Director
Asia Paciﬁc+852 2842 4573
ssmith@savills.com.hk

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