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January 18, 2017

In 2016, total hotel transaction volume in Japan exceeded the US$3 billion mark. This was the highest in almost a decade, yet still around US$1.5 billion short of the 2007 record when Morgan Stanley acquired 13 hotels in one of the largest portfolio deals to date. That particular transaction was at the height of the pre-GFC property investment boom. Regardless, 2016 was still a strong year for Japanese hotel sales activity.

In 2017, I expect Japan may witness another year of positive capital inflows. But unlike 2007, a larger component of investment is likely to be coming from Japan’s regional neighbours rather than North America. Specifically, out of China. However, there is one caveat. It has been reported recently that China’s central government has pledged to tighten scrutiny on outbound investment by state-owned enterprises and this may limit the flow of capital into big property plays.

China’s Anbang Insurance Group was reported to be in talks to buy as much as US$2.3 billion in Japanese residential property assets from Blackstone in what would be Japan’s biggest property deal since the Morgan Stanley ANA hotels acquisition. I still believe this is the shape of things to come long term. With positive hotel trading performance and astonishing tourism growth supported by the Yen’s depreciation, Chinese investors have placed Japanese hotels firmly on the radar.

It seems plausible that Japan’s total investment last year into hotels of US$3 billion could be achieved again in 2017. Disregarding the Chinese, there is a high level of Japanese domestic capital particularly from corporates and J-REITs. Japan enjoys an already-strong domestic composition of local buyers.

JLL will soon begin marketing a mix of portfolio and single-asset hotels close to one billion U.S. dollars in Japan. The country is in the unique position of having hotel stock for investors unlike other highly sought-after regional cities like Hong Kong, Singapore and Sydney where demand outweighs supply.

For regional hotel buyers in 2017, two of the most sought-after countries will again be Japan and Australia, followed by Thailand, Vietnam, Hong Kong, Singapore and the Maldives. In Japan, Thailand and the Maldives, there will be buying opportunities, while stock options remain limited in Australia, Hong Kong and Singapore.

Japan should witness a continuation of limited-service hotel portfolios, single and trophy assets bought to the market. Japanese hotel trading performance remains positive. Further compression of cap rates will result in any would-be sellers taking a ‘wait-and-see’ approach coming back into the market.

The investment horizon looks positive in the land of the rising sun.

Asia Pacific hotel transaction volumes

Japan hotels 2016

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Frank Sorgiovanni

Head of Research, Asia Pacific, JLL Hotels & Hospitality

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