Singapore-based private equity firm SC Capital Partners can rightly claim to have been ahead of the curve when it comes to Japan’s booming hospitality market. A specialised investment trust sponsored by the firm, dubbed Japan Hotel REIT, has become a major player in the sector over the past 13 years with a particular appetite for the country’s popular midscale accommodation segment.
Suchad Chiaranussati, the firm’s founder, says: “Our decision to enter the Japan hospitality market stemmed from fundamental analysis conducted around 2010 on the industry’s potential as well as Japan’s need for tourism to counter its demographic headwinds.” While first listed on the J-REIT market of the Tokyo Stock Exchange in 2006, the vehicle took its present form in 2012 after a merger with Japan Hotel and Resort and a name change from Nippon Hotel Fund Investment Corporation to Japan Hotel REIT. Today, the REIT holds around 60 properties across Japan with the majority of hotel assets in the mid-price, limited-service segment. Its city-focused hotels are supplemented by a handful of luxury and resort properties.
Regarding the frothy post-pandemic environment, Chiaranussati adds: “Tourism in Japan is expected to yield high propensity income for the country’s economy, as their tourism infrastructure is already well established.”
Investment goals
The hotel-fuelled REIT is accustomed to both going it alone and investing alongside major joint venture partners. In recent weeks, the vehicle pounced on two full-service properties in Okinawa, as well as two budget hostels in Tokyo’s Shinjuku district for a total of JPY 56.2 billion. According to SC Capital Partners, the assets – amounting collectively to over 1,000 keys – all represent sizeable properties in strong locations where further growth is expected. Bustling Okinawa, highly popular with tourists, is already home to four other hotels owned by the REIT – and is likely to be a target for further acquisitions, according to the trust. The budget hostels in Tokyo, meanwhile, serve a high-footfall station district.
“Following the acquisition, we are planning to pursue improvements in portfolio quality and medium to long-term growth through the active asset management strategy utilising JHR’s experience and knowledge,” said the trust’s manager, Japan Hotel REIT Advisors, which is majority-owned by SC Capital.
Last year, Japan Hotel REIT struck big when SC Capital snapped up a portfolio of 27 resort hotels for some $900 million in joint venture with Goldman Sachs Asset Management and the Abu Dhabi Investment Authority. The deal was the biggest hospitality trade of the year in Japan. The asset management of the hotels was entrusted to Japan Hotel REIT Advisors, giving it “an integral role in capturing the recovery and maximising the further growth of the portfolio”, according to the firm. In deals like this, SC Capital sees the potential to increase revenue through rebranding and refurbishment initiatives, new back end and front-end practises, as well as improved distribution channels. Said Chiaranussati at the time: “The extensive platform and network we have built in Japan over the last 13 years, particularly in the hospitality space, puts us in a unique position to capitalise on the long-term relative value of this highly sought after sector.”
Cross-border interest
The deal also reflects the fact that foreign firms are increasingly scoping out opportunities to be more deeply involved in Japan’s booming hotel industry. The segment is forecast to reach $26.29 billion by 2029, growing at a CAGR of 1.18% during the forecast period (2024-2029), according to data from Mordor Intelligence.
Its listed J-REITs also continue to attract overseas admirers, as Japan’s relatively low interest rate environment and counter-cyclical monetary policy persists. The likes of Prologis and LaSalle both manage logistics J-REITs while private equity player KKR acquired J-REIT manager Mitsubishi Corp-UBS Realty two years ago, picking up two listed J-REITs in the process.
The first quarter of this year saw J-REIT investment volumes in all sectors rise 36 percent year on year, amounting to JPY 502 billion, while J-REITs divested a record quarterly high of JPY 356 billion. Although foreign investments dipped a little, domestic players redoubled their interest, particularly with larger single deal volumes.
SC Capital itself is no stranger to major international partnerships. Established in 2004, the employee-owned, Asia Pacific real estate investment manager is present in eight countries in the region, from its headquarters in Singapore, to offices in Australia, Hong Kong, China, Japan, South Korea, Thailand and Vietnam. Alongside the Japan Hotel REIT, the group also owns the manager of another listed REIT, TPRIME, a commercial REIT in Thailand. The firm furthermore manages the Real Estate Capital Asia Partners (RECAP) series of opportunistic real estate funds, and an open-end core plus fund, SC Core Fund, (SCORE+).
While the firm’s roots lie in its RECAP venture, an opportunistic series traditionally dominated by US capital, the launch of more core funds in 2016 started to attract moderately minded European investors as well. Despite the firm only focusing on Asia Pacific opportunities, Chiaranussati notes that the firm’s Asian investment base has historically been relatively smaller than its cross-border capital partners. “Investors tend to look outside of their home markets,” he says. However, Asia’s reputation as the fastest growing region worldwide is changing all that, while pressures on pension funds in Japan, South Korean and Australia to deploy their abundant capital is also altering their traditionally outward-looking gaze.
He adds: “APAC’s overall demographic profile provides strong support for the region’s economic expansion. While some countries may already have relatively mature demographic profiles, the continual institutionalisation of the region’s real estate market bodes well for the industry.”
Survival and resilience
ESG remains a key factor in SC Capital’s overall approach, given its role both in future-proofing asset performance and avoiding brown discounts. “For assets that we are looking to build/develop, we incorporate the highest ESG standards possible,” Chiaranussati says. “For existing assets, we incorporate during the investment process a plan for improvements and bake that into the deal underwriting.”
SC Capital and the Japan Hotel REIT also learned important lessons during the pandemic about resilience and investment cycles. The firm typically has very low leverage across its hotel investments due to the J-REIT structure and while those holdings were impacted by the pandemic, they largely weathered the storm as the portfolio emerged from Covid. “We didn’t lose any assets to foreclosure,” he adds.
Overall, the pandemic was seen as an opportunity to buy distressed hospitality assets and reposition them in anticipation of the sector’s recovery, something that the REIT is still pursuing.