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Japanese property groups pivoting from offices to hotels

Mori Trust sees surging tourist demand as answer to looming office glut

Mori Trust President Miwako Date, center, announces a deal with Hilton to open hotels in Okinawa.

TOKYO -- A hotel development deal between Mori Trust and the Hilton group highlights a shift toward the hospitality sector among Japanese real estate groups as concerns over an excess of office space mount.

Tokyo-based Mori Trust will build a pair of luxury accommodations in Okinawa with Hilton and Hilton Grand Vacations. A conventional hotel will open in 2020, while a timeshare resort with ownership sold on a weekly basis will begin operation in 2021.

The hotels seek to attract long-stay visitors to the subtropical Japanese islands. Annual tourist traffic in Okinawa Prefecture is on par with Hawaii's, but tourism revenue is no more than a third, Mori Trust President Miwako Date told reporters Monday. 

Mori Trust first decided to invest more in hotels back in June 2016, initially planning to develop a total of seven locations in both city centers and outlying areas. The number of proposed projects has since grown to 17.

Rival group Nomura Real Estate Development is entering the branded-hotel business next year. A central-Tokyo redevelopment project of the company will likely house a luxury hotel. Mitsui Fudosan, another big Japanese developer, aims to nearly double the hotel rooms it operates to 10,000 by fiscal 2020.

Office depot

They are turning to hotels because office buildings risk hitting a profitability ceiling. Market conditions are not bad at the moment. Average office vacancy rates in five central-Tokyo districts fell 0.62 percentage point on the year in October, according to Tokyo-based industry consultancy Miki Shoji. The average lease rose 598 yen ($5.27) per 3.3 sq. meter.

But in 2018, Tokyo's 23 wards will see 1.39 million sq. meters of new floor space come onto the market in large office buildings of at least 10,000 sq. meters, Mori Trust says. This will mark an 80% jump in new supply from 2017. And 1.77 million sq. meters of additional floor space is seen coming in 2020.

Nor is oversupply the sole concern. Office demand itself could take a hit from telecommuting and other efforts to work more efficiently.

On the other hand, rising inbound tourism means that hotels can generate returns rivaling those of office buildings even if they occupy the same location, according to Nomura Real Estate Development. Occupancy rates of Tokyo business hotels came to 83% in 2016, data from the Japan Tourism Agency shows. In Osaka, resort hotel occupancy rates reached 89%.

Regular hotels are said to enjoy rates topping 80%, amounting to virtually full capacity. And the Japanese government has set a goal of reaching 60 million visitors to Japan in 2030 -- 2.5 times the 2016 figure.

Expectations in the industry are running high. But the Mizuho Research Institute, using data from property services group CBRE, found that hotel space in eight Japanese prefectures will outpace demand by 110,000 rooms in 2020.

These estimates do not include private residential space rented out to travelers. Should such Airbnb-type services take hold in Japan, it would only add to the risk of a hospitality supply glut.

Geopolitical factors can also sway visitor counts. South Korea has lost many Chinese tourists over the deployment of the U.S. military's Terminal High Altitude Area Defense missile shield. Developers betting on hotels in Japan may want to keep an eye out for the next big thing.

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