Review Of Tokyo Hotel Market
Tokyo is the capital city of Japan and with a land area of 2,186.8 square kilometres, it occupies 0.6% of the total area of Japan, thus making it the third smallest of the prefectures. The city has the largest population as compared to the other prefectures in Japan. As of October 1999, the population of Tokyo was 11.944 million, or 9.4% of Japan's total population, according to statistics provided by the Tokyo Metropolitan Government.
RECOVERY OF THE JAPANESE ECONOMY IS UNDERWAY ALBEIT UNDERPOWERED IN 2000-01Japan experienced 0.5% year-on-year growth in real Gross Domestic Product (GDP) to reach Yen 481 trillion in 1999. Whilst the macroeconomic policies and structural reforms implemented over the past two years in Japan have been instrumental in bringing about economic recovery, the International Monetary Fund (IMF) predicts the recent pickup remains fragile and subject to downside risks as although business investment has turned around, household demand remains lacklustre and uncertainties related to the process of corporate restructuring will continue to pose risks to the economic outlook over the medium term.
INTERNATIONAL VISITOR ARRIVALS TO TOKYO IMPROVETokyo, the financial and administrative capital of Japan, ranked highest amongst the major Japanese cities in terms of international visitor arrivals. International visitation to Tokyo recorded 2.7 million foreign visitors in 1999, which commanded a share of 56% of total foreign arrivals to Japan. As compared to 1998, visitor arrivals to Tokyo recorded a rise of 7.1% in 1999. Foreign visitor arrivals reached 1.4 million for the calendar period ending June 2000, which was an improvement of 7.0% from its corresponding period in 1999.
The US constituted the largest source market for Tokyo, with 19.7% of visitor arrivals in 1999. This was followed by South Korea with 17.0% and Taiwan 14.3%. The highest growth was recorded in the Oceania region at 44.4% in 1999 (primarily from Australia), followed by the Asian region at 7.9%. Countrywide statistics suggest leisure travellers constitute a higher proportion of visitors, followed by business travellers.
HOTEL SUPPLY IN TOKYO SHOW UPWARD TRENDTokyo Prefecture had 701 hotel establishments comprising 80,603 rooms in 1999, according to figures provided by the Tokyo Metropolitan Government. Hotel room supply in Tokyo recorded compound average annual growth (CAAG) of 2.7% pa between 1990 and 1999. In addition, Japan has another form of accommodation for tourists termed ryokans or Japanese inns, and these totaled 1,578 inns comprising 31,957 rooms in 1999. Room supply is likely to reach 82,873 rooms in 2000.
High-end hotel supply in Tokyo comprising four to five star hotels registered positive growth from 1990, although no new hotels were opened in 1997. During 1998, three hotels were opened - namely the 375 room Hotel Century Southern Tower, the 884 room Le Meridien Grand Pacific and the 309 room Takanawa Prince Hotel Sakura. Similarly, growth of 0.9% or 327 rooms were added in 1999 with the opening of the Toshi Center Hotel in Hirakawacho.
The trend continued with positive growth in room supply during the first three quarters of 2000. During the period, the 1,006 room Tokyo Dome Hotel opened in Koishigawa whilst the 504 room Disney Ambassador Hotel began operations. Other hotels which opened include the 427 room Tokyu Excel Hotel in Shibuya and the 333 room Dai Ichi Hotel Ryogoku.
Current supply in the five star segment totals 26 establishments comprising 16,093 rooms, after experiencing growth in rooms of 3.2% in the first three quarters of 2000. Similarly, room supply in the four star segment grew by 8.4% to reach 47 establishments comprising 22,676 rooms in the same period during 2000.
GROWTH IN HOTEL SUPPLY CONCENTRATED WITHIN FOUR TO FIVE STAR SEGMENTSThe following hotel development projects in Tokyo have been identified. The status of the projects is indicated as Under Construction (UC), Proposed (P) or Stalled (S). These projects are expected for completion between 2001 and 2005.
2001:
Hotel Mira Costa - 500 rooms (UC)
Tokyu Cerulean Hotel in Shibuya - 420 rooms (UC)
2003:
Grand Hyatt in Roppongi - 400 rooms (UC)
ANA Hotel in Shinagawa - 300 rooms (UC)
Lotte Hotels (2) - 900 rooms (UC)
2003/4:
Shiba Park Hotel in Shiodome - 300 rooms (P)
Other hotels (2) in Shiodome - 900 rooms (P)
2004:
Okura Hotel at Tokyo Station - 300 rooms (P)
Hotel Grand Markey Iidabashi - 500 rooms (P)
2005:
Unnamed hotel in Nihonbashi - 200 rooms (P)
In view of the potential developments detailed above, the projected room supply in the four to five star segment is likely to rise according to:
2000 - 38,769 rooms
2001 - 39,689 rooms (+2.4%)
2002 - 39,689 rooms (0.0%)
2003 - 41,289 rooms (+4.0%)
2004 - 43,289 rooms (+4.8%)
2005 - 43,489 rooms (+0.5%)
According to Jones Lang LaSalle Hotels' third edition of the Asia Hotel & Tourism Property Digest, an analysis of the Revenue per Available Room (Revpar) across the major gateway cities within Asia showed Tokyo achieved the highest revpar of US$123 in 1998 and US$136 in 1999, as compared to the next highest revpar attained of US$105 in Seoul during 1999.
In comparison to Asia Average, which is computed based on a total of 14 Asian gateway cities, the revpar in Tokyo was nearly double the Asia Average of US$69 in 1999.
Five star hotels in Tokyo continued to achieve a substantial premium in revpar over the four star segment, with a margin of US$50 during 1999.
FIVE STAR HOTELS SUSTAIN ROOM YIELDS IN 2000Until the 1990s, the Tokyo five-star or deluxe hotel market was dominated by hotels operated by local chains such as the Imperial, Okura, New Otani, Dai-Ichi and ANA, which were built mainly in the 1960s, 1970s and 1980s.
A new wave of international standard hotels entered the market in the 1990s, many of which were managed by international hotel chains including Westin, Hyatt, Sheraton and Four Seasons. The newer hotels are situated mainly outside the primary central business district (CBD) core of Tokyo and away from the subway stations. However, these newer properties are competing aggressively based on facilities and international chain affiliations. As a result, the newer hotels have achieved high occupancies and average daily rates (ADRs). For instance, the Park Hyatt is known to have set a benchmark ADR of 43,000 yen or approximately US$377 in 1999 and average occupancy in the high 80s percentage, compared with the market average for five star hotels included in this study at 25,828 yen (US$227) and 72.6%. RND recorded CAAG of 0.6% per annum between 1996 and 1999, whilst revpar registered a 12.5% improvement year-on-year to reach US$165 in 1999.
During the calendar period ending October 2000, the five star hotels showed a strengthening of occupancy rates to achieve an average of 75.7% whilst ADR reached 23,463 yen (US$213). This resulted in a slight decline in revpar to US$161.
COMPETITION INTENSIFIES BETWEEN JAPANESE AND FOREIGN OPERATED HOTELSAlthough top hotels managed by Japanese chains such as the Imperial, Okura and New Otani had dominated in terms of trading performance, their competitive edge has been eroded by operating weaknesses such as:
- heavy reliance on Food & Beverage (F&B) with huge banquet facilities
- high labor costs with the life-time employment framework
- significant reliance on travel agencies to sell rooms
In contrast, even though newer hotels affiliated to major international chains such as the Park Hyatt, Westin and Four Seasons began operating only in the 1990s, these hotels rely less on F&B and enjoy relatively low labor costs due to the young age of the properties. Additionally, the hotels benefit from strong sales and Central Reservations System (CRS) network for direct sales that enable yield management. As a result, the newer hotels generally achieve stronger trading performance.
FOREIGN INVESTORS CONTINUE TO VIEW TOKYO FAVORABLYHistorically, the high entry costs and foreign investment restrictions have tended to limit direct participation by overseas investors. Consequently, the investment market has been development focused, driven by local investors/developers partnering with overseas operators. The high tax environment is also considered a deterrent to many investors.
However, with more banks willing to write down non performing loans, the market is considered ripe for acquisitions.
Many hotel investors currently perceive the Asian market nearing the bottom of the economic cycle and timely for opportunistic acquisitions. Low interest rates have provided an added incentive for investors to re-assess opportunities.
According to the Hotel Investor Sentiment Survey (HISS September 2000) conducted globally by Jones Lang LaSalle Hotels, many Asian markets are beginning to roar again as investors indicate tremendous positive sentiment for trading performance. On average, investor sentiment indicates the Asia Pacific markets are on the early upturn of the market cycle and strong buy sentiment exists in many Asian markets with Tokyo and Bali as stand-out cities. The survey drew responses from nearly 200 of the world's largest investors/owners of hotel properties.
HISS Reveals Investment Insights On Tokyo:
- Investors show most interest in high-end hotels.
- Initial yield expectations were lowest in tightly-held or actively sought Asian markets such as Tokyo, Singapore, Hong Kong and Seoul.
- Near 90% of investors surveyed indicate intention to buy hotel properties in Tokyo whilst the remaining minority had intention to sell.
Further investment is expected in the latter part of 2000 and during 2001 as major international operators and opportunistic funds continue to show strong investor interest in Tokyo.
Currently, there are few cases of hotels in operation being offered for acquisition. However, sale of the hotel portfolio held by the Daiei group, which also owns a major retail chain in Japan, is pending. A consortium led by major US-based funds and an investment bank is considering acquiring the Daiei properties, which are situated in Kobe, Osaka, Fukuoka and the Chiba Prefecture.
Additionally, a 500-room airport hotel is likely to be offered for acquisition whilst Ripplewood is rumoured to be interested in an equity stake in Suginoya Ryokan, which is one of the major Japanese inns in Kyushu.
OUTLOOK FOR TRADING PERFORMANCE AND INVESTMENT IS EXPECTED TO TREND UPWARDTrading performance is likely to be boosted despite positive growth in room supply
- International travel to Japan, particularly in the corporate segment, is expected to increase as Japan gradually opens its domestic markets to international trade and as economic conditions in Japan and other markets in Asia improve.
- The FIFA World Cup 2002 Korea/Japan joint tourism promotion is expected to boost foreign visitor arrivals to the country.
- Narita airport is to open a new, 2,180-meter interim runway in May 2002. It currently has one runway, which is 4,000 meters in length. The opening of the new runway is expected to increase flight and air passenger capacity. The number of travelers passing through Narita airport during the first half of 2000 hit a record 11.68 million, up some 660,000 from the corresponding period last year. The Narita Airport Authority has forecast number of travellers will rise to 41 million annually by 2010 and 46 million per annum by 2015.
- Traditional hotels built in the 1960s and 1970s are likely to come under more pressure to upgrade. More refurbishment or redevelopment projects are therefore expected in the medium term, which will enable older hotels to compete more aggressively with the new hotels.
However, city hotels have to place greater emphasis on generating a higher proportion of total revenues from Rooms instead of F&B. In view of the above, the outsourcing of F&B outlets in these hotels will likely become more popular.
Investment activity is set to pick up
- Consistently strong trading performance despite the Asian economic crisis, together with anticipation of strengthening operating results, will attract investment interest.
- The wave of bankruptcies and liquidity problems following the bursting of Japan's bubble economy presents investment opportunities in a tightly-held market.
