Our nation in 2020, we all welcomed the New Year that we were so thrilled to host the Tokyo Olympics and Paralympic Games. However, needless to say, because of the unexpected Covid-19 infectious disease, Japan’s Nikkei index temporary dropped sharply in March 2020, further and further, so many corporations including the Food and beverage service industry (bars and restaurants) have been placed in a predicament. The year’s news was dominated by COVID-19 in Japan as well.
On the other hand, property values in this country continued to rise due to extremely low interest rates and money glut under the influence of bold Quantitative and Qualitative Monetary Easing. Institutional investors including pension funds that had been relying on Japanese Government Bond yields to some extent till then, poured enormous amount of money into real estate market by the reason of alternative investment. Maybe because of that, it has become low-yielding permissible era. About the status, that is to say, it might be the composition of COVID-19 vs. Money glut.
Now we will begin to talk about actual topic of our business. Basically, after 2013, we have been developing Income-Producing Properties in the prime area of central Tokyo, and around the same time, we have been selling them directly to high-net-worth individuals, REITs, and some of the investment funds. The total sales amount had reached over 100 billion yen (JPY) at that time. Although our business was going well under the lower interest rate environment, we also had to reconsider seriously about the necessity of shifting our core business into the field of high-yielding assets, that’s because we had many questions then. Some of our questions were, for example, such as “Would it be possible for us to maintain the value of the assets even five or ten years from now? and also, whether or not, the value of the assets would commensurate with the cost of building depreciation from the perspective of the yield gap between bank interest rate and NOI yield, things like that.” As a consequence, we determined to switch our main business into the development of hotels in 2017. At the beginning, almost all of our development projects were based on over 5.2% NOI yield as a baseline. We accomplished the total sales amount 140 billion yen (JPY) during the period of 2017 through 2019 thanks to the demand from the investors with the perception of remarkable growth in Japan’s inbound tourism market and also thanks to the particularly notable demand of purchasing hotels by private REITs. After that, by and large, the yield has been going down inevitably due to the growing popularity of hotel investments.
Given the circumstances, we embarked on the development for the next-generation of hotels. We could foresee a solution to achieve incomparably high-yielding properties by establishing a solid cooperative relationship with the company who has the strong planning and sales capabilities.
During the pandemic of COVID-19, we might have temporarily seen the stagnation of the overall hotel properties’ sales and deterioration of bank loan environment in a sense. However, vaccination program in Japan is eventually accelerating at this moment in time after one and a half year has already passed ever since the outbreak of COVID-19. Unfortunately, we are still falling behind schedule from the viewpoint of the global standard, though. We are currently expecting we may be able to see some recovery gradually as many people coming and going globally by the time around the end of 2021 through the summer of 2022. We also assume some of the countries might issue the coronavirus vaccine passports. Additionally, as described in “Tourism Vision Realization Program” in Japan, which Tourism-oriented country promotion ministerial meeting announced, it would be sufficiently possible to achieve 60 million foreign visitors to Japan in 2030 by focusing on aggressive promotion of post-pandemic period.
Moreover, with some recent positive news including the news about the acceleration of vaccine inoculation in this country, we now get the impression that the investor sentiment for hotel investments is also remarkably changed in a positive direction. By the way, retrospectively, the following surprising news came in at the end of the March 2021 “Japanese railway company Kintetsu Group Holdings sold eight hotels in Osaka and Kyoto to U.S. investment fund Blackstone group for around 60 billion yen ($550 million), according to Nikkei. Blackstone is one of the largest investment funds in the world and has a track record of investing in real estate.” With this as a turning point, we already got the impression that the investor’s expectations were running high for demand of purchasing hotels at that point in time.
Even throughout the pandemic of COVID-19, we have never, ever heard of 30% discount hotel property transaction in the great location including the prime area of central Tokyo and the central area of Kyoto City. Presumably, sales and purchase hotel transaction market will be getting a whole lot better by the time we will be able to reaffirm the recovery of the operational status of the hotels. Indeed, we would conjecture that the chance to purchase hotels at a comparatively low in price would be short-lived.
Presently, most of the yields for the residences and offices in the prime area of central Tokyo are below 2.8% NOI yield level as a baseline. Thus we do think over 4% NOI yield assets are fairly limited even now in the overall central Tokyo area. Under the current circumstances that both interest income and dividend income are sluggish due to the monetary policy for easing around the globe, we are expecting hotel investment yields will be reevaluated sooner or later. In the meantime, hotel investments are gathering attention from the perspective of highly effective inheritance tax solution amongst high-net-worth individuals.
We always think we have a strong sense of duty to offer high quality assets for addressing the various needs from high-net-worth individuals, investment funds, and REITs. Once again, strategic target has already formulated by government policy as “Tourism Vision to Support the Future of Japan: 60 million by 2030.” In future, we’ll keep making every effort to contribute to the growth with inbound tourism for foreign tourists visiting Japan into an age of the post-COVID-19.
July 2021
Many Thanks and Best Regards,
Takashi Narata
Chief Executive Officer
Daiichi Realtor Co., Ltd.
