With investors comparing the merits of Japan and China in terms of hospitality investment, HA Advisors managing director Hiro Abe and several industry experts discussed the matter in detail at the recently concluded South East Asia Hotel Investors’ Summit (SEAHIS) in Bangkok.

Abe’s panel consisted of Pacifica Capital KK president and chief executive Seth Sulkin; SC Capital Partners founder and chair Suchad Chiaranussati; Pan Pacific Hotels Group (PPHG) chief executive Choe Peng Sum; and Takenaka Corporation’s executive managing officer Aki Tachibana.

Throughout the discussion which looked into risks and opportunities regarding hospitality and investment, it was apparent that Japan is still the most compelling near-term hotel investment market within the Asia Pacific.

There is, however, a caveat: would-be investors need to look beyond Tokyo, Kyoto, and Osaka if they are to thrive in Japanese hospitality’s increasingly competitive environment.

Repositioning matters

With regard to PPHG, Choe remarked that the Group is still bullish on Japan in the face of greater competition from leading domestic players.

He said: “One reason I think we can grow rapidly is through repositioning. By bringing in international travellers, the revenue grows, the yield grows. It justifies our presence.”

Pointing to the group’s partnership strategy with local owners, Choe also highlighted the success of branded properties in Tokyo and Kyoto whose performance has been significantly buoyed up by international demand.

He added: “We all hear about overtourism because a lot of people go to Tokyo, Osaka and Kyoto. But actually Japan has so much to offer. I’m a true believer that we can grow a lot in Fukuoka and Sapporo, where demand can extend throughout the year.”

The labour issue remains

But while demand remains high and with it investor optimism, a number of economic factors are still challenging investors.

Tachibana explained that construction costs have almost doubled compared to those last seen before COVID closed Japanese borders in 2020; however, escalation began to moderate over the past several months.

As he put it: “If we set the index at 100 in 2020, by the end of 2025 the index was 175 to 200. Still, three to five percent inflation is very much a risk factor for developments over the next three to five years.”

Nevertheless, Tachibana opined that the sharpest increases are now behind the industry, though structural labour shortages could still exert pressure on costs.

He said: “The significant inflation is already done. The next phase is mainly due to structural labour shortage.”

Investors still love Japan

For his part, Chiaranussati is of the opinion that Japan’s continuing appeal extends far beyond tourism growth.

His SC Capital Partners acquired over 100 hotels in Japan over the past 14 years and remains actively invested in the market, citing three key reasons for being bullish about the market with the first being improvements to operational efficiency.

Chiaranussati opined:“Japan can be extremely inefficient due to its demand for offering the best service it can. Sometimes there are three or four people serving you when there only needs to be one. We have done some assets where we purchased properties yielding one or two percent. Once we restructured operational efficiency, we could bring somewhere between 400 and 800 basis points of yield improvement.”

Second, Japan’s hotel leasing market is at a level of sophistication that has yet to be seen anywhere else in the region.

As he put it: “Japan is the only country in Asia-Pacific today that has a very sophisticated hotel leasing system. From an investor perspective, you can decide to buy the type of hotel with the lease profile that suits your risk appetite.”

Finally, Chiaranussati pointed out the country’s access to highly developed capital markets.

He said: “The capital market instruments are extremely complete for you to manage risk. This flexibility really opens up a lot of value.”

A time of evolving strategies

For his part, Sulkin is of the opinion that rising construction costs have pushed many investors toward conversions and repositioning rather than traditional greenfield developments.

As he explained it: “Prices for existing hotels are going up a lot because everybody is trying to avoid new construction.”

That said, Pacifica is actively pursuing office-to-hotel conversions, which offer lower risk and shorter construction timelines; but, even in this area, labour shortages are adversely impacting project delivery.

Sulkin elaborated further by saying: “The problem is not just with general contractors. It’s also with subcontractors, particularly electrical. In many smaller markets, you simply can’t find contractors. Even if you’re willing to pay the higher cost, you may be told to wait one, two, three or four years.”

He did, however, dismiss expectations that construction costs will retreat significantly.

Sulkin said: “I see no reason construction costs are going to fall. The labour force is shrinking by about one percent a year.”