Japan - February 2022

S P OT L I G H TSavills Research

Japan Hospitality

Retail sales in Beijing were up 4.4% year-on-year to RMB539.8 billion in 1H 2018

Japan Hospitality

Opportunities amidst the uncertaintySummary• Japan’s borders remain closed
to tourists, and the Omicron
variant has further disrupted therecovery of inbound tourism.
• Hotel bankruptcies arecomparatively high, signallingthat many players are ﬁnanciallydistressed.
• The luxury hotel sector has
garnered the attention of manybrands that are looking toexpand their footprint into themarket.

INTRODUCTION
Almost two full years have passed since
the onset of the pandemic in early 2020,
with Japan’s borders remaining closed inprinciple throughout 2021. While the Japanese
government initially planned to experimentletting some tourists back in December 2021,
the emergence of the Omicron variant threw aspanner in the works, and strict border measures
were extended likely until the end of February.
Nonetheless, there are some positives forthe hospitality industry as a whole. Firstly,at the start of 2022, the percentage of fully
vaccinated residents in Japan was around80%. The distribution of the booster shot

GRAPH 1: Occupancy rates by hotel type in Japan, 2019 to November 2021

• Hotels saw some recovery inoccupancy in the second half of2021 even without the aid of the“Go To” Travel program.

RyokanResort hotel

Business hotel

City hotel

90807060%• Investment volumes in the hotel
sector were on par with theprevious year and are expected
to increase in 2022.

has already started and is being accelerated.
Furthermore, restrictions pertaining todomestic travel have generally been relaxed.
This is a big relief especially to the hospitality
industry in Japan, where domestic travellers
comprised more than 80% of total demand
before the pandemic.
In fact, looking at Graph 1, some recovery
has been observed in occupancy rates. The
increase in COVID-19 cases and suspensionof the “Go To” Travel campaign at the end of2020 caused a plunge in occupancy rates at thestart of 2021. However, since then, occupancy
rates have slowly trended upward even during
periods when there were spikes in COVID-1950403020• Opportunities in the Japanesehotel market are likely to further
emerge in the near future.

10JanFebMar
AprMayJunJulAug
Sep
Oct
Nov
Dec
JanFebMar
AprMayJunJulAug
Sep
Oct
Nov
Dec
JanFebMar
AprMayJunJulAug
Sep
Oct
Nov

02019

2020

2021

Source Japan Tourism Agency (JTA), Savills Research & Consultancy

GRAPH 2: Total room nights sold to domestic and inbound guests, 2007 to October
2021
Domestic

Inbound

ROOM NIGHTS SOLD (MILLION)

600

500

400300200

10002007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 YTD
Oct
2021
Source JTA, Savills Research & Consultancy

savills.co.jp/insight-and-opinion/2

Japan Hospitality

cases, and without the boost from the “GoTo” Travel campaign. As of November 2021,
occupancy rates were around the same as
the highest levels observed in 2020, showingthat the hospitality industry in 2021 was oncourse to be in better shape than 2020, albeit
gradually.
There are admittedly uncertainties andhurdles ahead for hotel operations. For
instance, the Omicron variant and potential
new variants pose an imminent threat.
Even if demand recovers, there may bechallenges in acquiring new talent, as many
workers were forced to leave the industry
during the pandemic. Finding and training
new employees will incur additional costs,
straining the already thin operating margins
that the hospitality industry runs on. This
may surprise unprepared investors when theylook at actual cash ﬂows a few years later.
However, in the longer-term, thehospitality industry is expected to get backon the growth track that it was on prior to
the pandemic. Provided that there is plentyof pent-up demand domestically and globally,
opportunities are also abound in the industry.
The following two sections will explore thecircumstances surrounding bankruptcies, aswell as the luxury hotel sector.
LODGING BANKRUPTCIES IN JAPANWith the pandemic drastically decreasing
revenue from not only accommodation,
but from other key revenue streams suchas corporate events and banqueting 1, thehospitality industry has undoubtedly been
struggling over the past two years. 2020 saw arapid increase in the number of bankruptcies,
exceeding 120 cases, more than half ofwhich were a result of the pandemic. While
1 MICE facilities were broadly promoted before thepandemic. However, those plans appear to either have fadedaway or put on hold from future.

While domestic tourism has seensome recovery, times are tough forthe hotel industry, with increasing
bankruptcies and delayed recovery
due to new variants. However,opportunistic investors still see thisas a chance to enter or expand into
the Japanese hotel market.

the number of bankruptcies in 2021 has
fallen, more than two thirds were due to thepandemic, showing its lingering eﬀects.
Furthermore, the number of bankruptcies
in the hospitality industry over the past
two years appears more subdued than it
actually should be. According to Tokyo Shoko
Research, 2021 had the lowest number ofbankruptcies in 57 years. In contrast, thenumber of bankruptcies in the hotel industry
has stayed on par with an average year. One
reason for this was the ﬁnancial support
provided by the Japanese government in theform of no-interest loans backed by publiccredit guarantees. Moreover, banks initiallygranted moratoriums, giving the industry evenmore breathing room and time to adapt tothe challenging environment. That said, thismoratorium period is likely to end sooner thanlater, which may lead to further bankruptcies
or more transactions. Indeed, Japanese banks

remain selective and cautious towards hotelacquisitions, although they have steadily
become more accommodative to deals.
While there has been some recovery intravel over the past few months, many hotels
are nonetheless still deep in the red. In fact,in December 2021, Seibu Holdings announced
that they would be separating the ownershipand operations of the hotels, ski resorts,
and golf courses that were previously bothconducted by its subsidiary Prince Hotel, andfocus on operations via a newly establishedsubsidiary. It has recently entered talks with
GIC to sell about 30 of its properties forapproximately JPY150 billion.
Most hotel owners traditionally preferﬁ xed-rent leases, and some accept a ﬁ xedrent plus revenue sharing payment structure.
However, the pandemic has led to an increased
number of hotels without operators, especiallythose newly built by real estate companies.
This has consequently contributed to thegrowing acceptance of management contractsby hotel owners. This trend may furtheraccelerate if a large developer starts accepting
this practice, and consequently create a wider
operator and investor base.

GRAPH 3: Hotel Bankruptcies in Japan, 2013 to 2021

Bankruptcies due to COVID-19 (LHS)

140

160,000

120

140,000
120,000

100

100,000
80
80,00060
60,00040

MILLION YEN

NO. OF BANKRUPCIES

Number of bankruptcies (LHS)
Amount of debt (RHS)

40,0002020,000

00
2013

2014

2015

2016

2017

2018

2019

2020

2021

Source Teikoku Databank, Savills Research & Consultancy

3LUXURY HOTELS IN JAPANCompared with other countries, Japan has
a relatively limited number of luxury hotels.
According to Five Star Alliance, Japan has
slightly over 50 hotels listed. In contrast,
many Western countries completely dwarf
this number, and even neighbours in the Asia
Paciﬁc like Hong Kong and Singapore have acomparable number of luxury hotels despite thevast diﬀerence in the sizes of their economies.
This trend is no diﬀerent when analysing at
a city level – cities like New York and London
have more than three times the number ofluxury hotels than Tokyo does. Hence, investor
interest in higher grade hotels with larger
guestrooms remains underserved. The supply
in this category has been limited, and thedemand appears stable with upside potential.

Japan Hospitality

GRAPH 4: Number of luxury hotels by country/region, 2021
500
NUMBER OF LUXURY HOTELS

450
400
350
300
250
200
150
100500Source Five Star Alliance, Savills Research & Consultancy

GRAPH 5: Number of luxury hotels by city, 2021

NUMBER OF LUXURY HOTELS

140120100806040200Source Five Star Alliance, Savills Research & Consultancy

GRAPH 6: Lodging developments, 2012 to November 2021

# OF LODGING DEVELOPMENTS

2,500

There are plausible reasons as to why Japan
has a signiﬁcantly smaller number of luxury
hotels. For instance, Japan is home to a large
number of high-end ryokans, traditionalinns, which are luxurious in their own right,
but are not technically classiﬁed as luxury
hotels. They tend to be located far from city
centres, and especially in the case of ryokans,
sometimes lack some luxury amenities.
The Japanese hospitality market has
traditionally been dominated by strong,large local players. Nevertheless, the relativelack of luxury hotels in Japan has caught theattention of international players, and somehave seen the pandemic as a chance to enteror expand in the Japanese market. While
many luxury hotels have not recovered to
pre-pandemic occupancy levels, some players
anticipate high levels of pent-up demand fortravel, and expect tourism revenue in Japan
to continue growing.
Many well-known international brands
have already started opening luxury hotels inJapan. For instance, in late 2020, The TokyoEDITION, Toranomon, was opened, and theMarriott will keep expanding its footprint
with The Tokyo EDITION, Ginza in 2022.
These hotels are also part of Mori Trust’s
Luxury Destination Network vision. Indeed,the Marriott has been active in Japan, and alsoplans to see the ﬁrst Marriott Hotel openedin Nagasaki with Kyushu Railway in 2023. Inaddition, Japan’s ﬁrst Bvlgari Hotel is scheduled
to open in 2023, occupying the top seven ﬂoorsof Tokyo Midtown Yaesu. Furthermore, Hilton
has also capitalised on this momentum with theopening of Roku Kyoto, LXR Hotels & Resorts inlate 2021, and has announced the ﬁrst Waldorf
Astoria hotel in Osaka.
Some domestic players in the resort hotelindustry have also been expanding theirfootprints. For instance, Hoshino Resorts
has been rapidly developing its Kai brandby acquiring two resorts in 2021, and has
plans to open two more in 2022. Elsewhere,
Hiramatsu Hotels opened a new branch in
Nagano in 2021, following a new opening in
Kyoto in 2020. Indeed, these franchises seemconﬁdent in their branding, and appear tohave stronger balance sheets than many otherhotels despite the pandemic.
HOTEL MARKET PERFORMANCE
Savills tracks the performance of over 100
hotels owned by ﬁve J-REITs2 to analysemarket trends. Our analysis focuses onlimited-service hotels; full-service and resort
properties are excluded due to limited data.
Given that most of the existing hotel stock isin the limited-service category, this should
provide a good proxy for the overall market
trend in Japan3 .

2,000

1,500

1,000

500

0
2012

2013

2014

2015

2016

2017

2018

2019

2020

YTD
Nov
2020

YTD
Nov
2021

Source Ministry of Land, Infrastructure, Transport and Tourism, Savills Research & Consultancy

savills.co.jp/insight-and-opinion/

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2 The ﬁve J-REITs consist of Japan Hotel REIT, Invincible
Investment, Hoshino Resorts REIT, Ichigo Hotel REIT, andMori Trust Hotel REIT. Since new samples are added when
J-REITs acquire hotels, the sample size and composition may
change marginally between survey periods.
3 In this report, Tokyo accounts for over 30% of the sample
hotels while other Kanto prefectures and Kansai account for
about 15% each.

Japan Hospitality

GRAPH 7 : Limited-service hotel performance, 2014 to 2H/2021

Occupancy (RHS)

ADR Index (LHS)

RevPAR Index (LHS)

140

100%
90%

12070%
OCCUPANCYINDEX (1H/2014=100)80%10060%

8050%
60

40%
30%

4020%
2010%0%2014201520162017201820192020

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

2H

1H

02021

Source J-REIT disclosures, Savills Research & Consultancy
Note: Occupancy is calculated based on the total number of rooms each month.

GRAPH 8: Hospitality sector investment volumes by investor type, 2007 to 2021

Cross-Border
100%Institutional

Listed/REITs

PrivateUnknown

User/Other0.880%

0.770%

0.660%
0.550%
0.440%
0.330%

JPY TRILLIONSPROPORTION OF INVESTMENT

90%Total
0.9

Hotel performance remained weak for themost of 2021. However, one sliver of hope canbe found in the slightly recovering occupancy
rates from the previous half-year, which
are almost at the levels seen in 2H/2020
even without the help of the “Go To” Travel
campaign. Moreover, hotel revenues have also
improved slightly. In 2H/2021, the average
daily rates (ADR) index increased by 0.8
points half-year-on-half-year (HoH), and therevenue per available room (RevPAR) index
increased accordingly, by 3.8 points HoH.
Budget hotels in particular have been
hit harder by the pandemic due to the large
supply in the market. The small room sizesof such hotels appear to be an issue for bothcustomers and operators, especially after thepandemic. Looking at Graph 6, the numberof lodging developments increased rapidly
from 2016 to 2019, showing the pace at which
competition increased. Most of the supply
have been budget hotels. Moreover, it shouldbe noted that even before the pandemic
started, many of these hotels were notdoing well. These hotels are likely to needto keep resorting to price wars to attract
more customers and weather the storm.
Furthermore, more troubled budget hotels
are expected to appear on the disposition
market. Therefore, the competition on room
prices to attract budget travellers is unlikely
to cool down anytime soon.

0.2

20%
10%

0.1

0%

0.0

Source RCA, Savills Research & Consultancy

TABLE 1: Selected investment transactions announced in 2H/2021

PROPERTY NAMEAPPROX.
PRICE(JPY BIL)

PRICE PER
ROOM(JPY MIL)CAP RATE

LOCATION

BUYER

Ibis Tokyo Shinjuku

11.3

55

4.1%

Tokyo

Undisclosed

Kai Kirishima &Kai Beppu

11.2

94

5.3% and 5.0%

Kagoshimaand Oita

Hoshino REIT

The B Osaka
Midosuji

10.7

35

Undisclosed

Osaka,Osaka

BPEA

Source J-REIT disclosures, RCA, Savills Research & Consultancy

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INVESTMENT
The hotel industry has been one of the mostbadly hit by the pandemic. That said, investor
appetite remains robust, and the gap betweensellers and buyers appears to have narrowed.
Overall, looking at Graph 8, transaction
volumes in 2021 were around the same as what
was seen between 2017 and 2020, barring 2019
which saw an exceptionally large volume oftransactions. The largest proportion in 2021
came from institutional investors, who havebeen notably active in the market.
Some domestic players have been activein the market. For instance, hotel chain
operator Apa Group purchased two hotels
in Tokyo and Nagoya from Nishi-Nippon
Railroad, and acquired another hotel inOsaka in the second half of 2021. Apa
Group is expanding its number of hotels,and appears to be using the pandemic
as a chance to acquire underperforming
assets at a discount. Indeed, as a large andexperienced hotel owner and operator,
Apa Group should have the resources andexpertise to withstand tough times, and islikely expanding with a long-term visionin mind. Samty Asset Management alsoestablished a REIT specialising in hotels inNovember 2021 and plans to go public withit. Nippon Telegraph and Telephone West
Corporation will be developing the site of its
headquarters, located next to Osaka Castle,
in a redevelopment project that features ahotel with approximately 220 rooms.Japan Hospitality

Overseas investors have also been looking at
the Japanese hospitality industry. For instance,
Baring Private Equity Asia acquired The B OsakaMidosuji, a large hotel in Chuo ward, Osaka, in atransaction estimated at over JPY10 billion. Thehotel will reportedly be the ﬁrst of the “HolidayInn Express” brand of IHG Hotels & Resorts inJapan.
Overall, while 2021 has seen large transactionsin the hotel sector, transaction volumes have been
relatively low considering the pandemic. To besure, although interest in the sector has gathered,many sellers have not been ﬂexible on pricing.
However, with more uncertainty about the timingof recovery surrounding the market and as thegap between buyers and sellers narrows, moretransactions should be observed in 2022.
OUTLOOK
The hospitality sector still faces many challenges.
Although occupancy rates have been slowly
recovering and the second half of 2021 has seensome improvement from the ﬁ rst half, the twoyears of drastically reduced revenue has weakened

many hotels, and even prompting some to exit themarket. Moreover, the emergence and spreadingof new COVID-19 variants continue to pose athreat to the industry, as hotels are unable toforecast the return of hotel demand in the near
future. Even if demand were to rapidly increase,some hotels are likely to face hurdles acquiring
labour, especially because many workers in theindustry were laid oﬀ during the pandemic.
However, even with the uncertainty present in
the market, some investors and players are seeing
this as a chance to enter the market or expand
their footprint. As the state of the pandemic dragson, distressed hotels without adequate ﬁ nancial
backing may resort to disposing assets, leading toopportunities in the market. The number of hotels
that went bankrupt in 2021 has not deviated fromprevious years despite the record low number ofbankruptcies across all industries. Some famous
domestic hotel brands with stronger balance
sheets like Hoshino have been acquiring assets
during the pandemic in anticipation of a recovery.
We expect more deals this year due to theending of moratorium periods and the prolonged

subdued demand by the lingering pandemic.
Another area with potential opportunities isthe luxury hotel sector. Compared with someneighbouring countries and many large cities in
the world, Japan has a relatively small numberof luxury hotels. Large international players
like Marriott have been steadily expanding into
the Japanese market. Indeed, there is a large
amount of pent-up demand for travel, especiallyin the luxury sector. There are also many large
mixed-use development plans across prime areasin Tokyo. Given the subdued oﬃce demand dueto the pandemic, some planned oﬃce portions
should be replaced by luxury hotel and residences.
During this decade, more luxury hotels andresidences in prime areas in Tokyo, such as
Marunouchi, are therefore expected.
While risks are abound, performance is likely
to vary widely from hotel to hotel by location,category, and business mix, implying that there
are opportunities present in the market. The gap
between some buyers and sellers has begun tonarrow, which should bring more deals forward.

For more information about this report, please contact us

Savills Japan

Savills Research

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

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

Savills Hotels
Yoshihiro Kanno
Manager, Research &Consultancy, Japan+81 3 6777 5275
ykanno@savills.co.jp

Simon Smith
Regional Head of Research& Consultancy, Asia Paciﬁc+852 2842 4573
ssmith@savills.com.hk

Hirofumi Matsunaga
Director, Head of Japan
Hotel Advisory, Japan+81 3 6777 5284
hmatsunaga@savills.co.jp

Savills plc: Savills plc is a global real estate services provider listed on the London Stock Exchange. We have an international network of more than 600 offi ces and associates throughout the Americas, the UK,continental Europe, Asia Paciﬁc, Africa and the Middle East, offering a broad range of specialist advisory, management and transactional services to clients all over the world. This report is for general informative
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is prohibited without written permission from Savills Research.

savills.co.jp/insight-and-opinion/

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