The volume of Tokyo hotels transactions is predicted to remain strong after the surge in the second quarter

Following a significant increase in Q2 activity, hotel transaction volumes in Tokyo are anticipated to continue moving upward through the second half of 2022 and into 2023. Deal flows are being driven in the Japanese capital by tourism reopenings, increasing investor interest, and the weak yen.

Overview of Tokyo Hotel Transaction Landscape

Thanks to high room rates and strong demand from both domestic and foreign passengers, Tokyo has long been a leading hub for hotel real estate investment in the Asia Pacific region. In 2020–2021, the market experienced a decline in transactions due to COVID–19, but deal activity has strongly recovered as travel has resumed.

Tokyo saw its greatest quarterly volume of hotel transactions in Q2 2022, amounting to over $1.3 billion, since the epidemic started. Analysts also forecast that acquisitions, sales, and new projects will maintain their momentum in order to push the recovery toward pre-COVID levels.

Key Factors Driving Strong Transaction Volumes

The positive expectation for Tokyo hotel transactions in the upcoming year is due to a number of factors:

• Tourism reopening – After 2.5 years of stringent border controls, Japan will open its doors to large-scale foreign tourism in October 2022. This will increase demand for hotels and travel.
• Weak yen – Japanese assets are appealing to international investors due to the Japanese yen’s close proximity to 24-year lows against the US dollar.
• Pre-Olympic pipeline – Developers are currently selling off a number of hotels that were constructed in advance of the 2020 Olympics.
• Asset recycling – Owners are recycling assets, such as trophy hotels, to take advantage of the valuation recovery.
• New developments – Recently, the first phase of several sizable mixed-use developments featuring hotel components began.
• Investor appetite – Capital from Japan and outside is still eager to purchase Tokyo hotel properties.

Analysis of Q2 2022 Tokyo Hotel Transaction Volume

The number of hotel transactions in Tokyo reached its highest level in Q2 2022 since COVID-19 first appeared:

• Total volume – JPY159 billion (~USD1.32 billion)
• Number of deals – 10 transactions in the quarter
• Major assets sold – Hotel New Otani Tokyo, ANA Crowne Plaza Kobe, and Conrad Tokyo
• Buyer profile – primarily domestic investors and funds, with some foreign investment
• Price trends – As prices rose, yields on prime assets decreased to around 5%. In 2020–21, hotel sales suffered significantly, but they are presently sharply recovering. As tourist picks up, momentum is anticipated to strengthen much more.

Projections for Hotel Transactions in H2 2022

Analysts anticipate Tokyo hotel transaction volumes will stay strong in the second half of 2022 based on pipelines and macroeconomic conditions:

• Q3 volume – Potential to match Q2 at around JPY150-160 billion
• Q4 volume – Should exceed Q3, finishing year on a high note
• Total 2022 volume – Estimated to reach JPY500-550 billion, up ~25% from 2021
• Notable assets potentially for sale – Andaz Toranomon Hills, Prince Gallery Tokyo Kioicho, and Grand Hyatt Tokyo
• Buyer trends – Most likely domestic institutional capital will continue to dominate
• Yields – Additional yield compression is feasible but is constrained by inflation worries.

Tokyo’s hotel transaction momentum should continue to increase through the end of 2022, assuming the economic recovery sustains.

Hotel Investment Outlook for Tokyo in 2023 Onwards

After consolidating gains in 2023, hotel transaction volumes are predicted to reach pre-pandemic levels by 2024–25.

• 2023 volume – Forecast to maintain or slightly increase from totals in 2022.
• 2024-25 outlook – The likelihood of a gradual rebound to annual volumes of JPY700-800 billion
• Pipeline – Several large new mixed-use projects underway, bringing fresh hotel supply to market
• Risks – Global recession and further COVID waves could dampen investment appetite
• Outperformance – Given the strong fundamentals, Tokyo will continue to be a popular APAC destination for hotel investments.

If there are no outside shocks, hotel transactions in Tokyo should increase during the next three years as tourism fully resumes.

Major Tokyo Hotel Transactions in Q2 2022

The significant hotel transactions that were concluded during Q2 2022 are listed below:

Conrad Tokyo Sale

• A luxurious hotel with 290 rooms near Tokyo Bay
• Sold for 700 million (JPY85 billion)
• Purchasers: Tokyo Tatemono and Mitsui Fudosan

Hotel New Otani Tokyo

• Well-known 565-room hotel close to the Imperial Palace
• For JPY18.2 billion, Daito Trust purchased a 30% share.

ANA Crowne Plaza Kobe

• A business hotel with 433 rooms in Kobe’s center.
• Sold for JPY9 billion to Industrious Hotel Kobe

Shinagawa Season Terrace

• A luxury hotel and condominium tower is being constructed for the 2020 Olympics.
• Nomura Real Estate sold the property to Morgan Stanley for JPY38 billion.

These high-profile transactions serve as an example of the renewed interest in Tokyo’s premier hotel properties in 2022.

Factors Contributing to Tokyo’s Hotel Investment Appeal

Tokyo continues to draw significant hotel real estate investment for a number of reasons:

• High occupancy – Due to strong demand generators, Tokyo hotels often have occupancy rates between 75 and 85%.
• ADR – With strong pricing power, these hotel rates rank among the highest worldwide. For luxury rooms, the ADR ranges from $200 to $500 USD per night.
• RevPAR – The world’s highest revenue per available room contributes to hotel profitability.
• Diverse demand – Significant domestic business and leisure travel as well as incoming tourism from Asia and other regions.
• Future potential – For hotel rooms per capita, regional gateway cities are still behind, which is positive for developers.
• Safety and stability – regarded as a very safe city with a sophisticated infrastructure.
• Liquidity – Dedicated institutional money with a deep pool for Tokyo real estate.

Gateway city – Asia’s premier location for both business and vacation tourism.

Recent Major Hotel Openings in Tokyo

While transaction volumes increased again in 2022, Tokyo also saw the completion of numerous sizable new hotels that serve as future inventory:

• Edition Toranomon – 177-room, five-star Ian Schrager-designed EDITION hotel
• Waldorf Astoria Tokyo Nihonbashi – 5-star hotel with 200 rooms and Michelin-rated cuisine
• Shibuya Stream Excel Hotel Tokyu – Within a big new mixed development is a 408 room business hotel.
• Mitsui Garden Hotel Shiodome Italia-Gai – Near Ginza, a boutique hotel with 189 rooms
• Tobu Hotel Levant – upscale 590-room hotel next to the Tokyo Skytree skyscraper

Developers plan more openings as they finish new towers that are now under construction ahead of major international events like the 2025 World Expo.

Key Risk Factors for Tokyo Hotels Transaction Volumes

Although the investment outlook is generally favorable, there are some obstacles that can make it difficult for Tokyo hotel transactions:

• Recession – A global or local recession in Japan would impact the desire for travel.
• Oversupply – Lower occupancy could be the effect of too many new hotels opening.
• ** regulations** – Any restriction on supply pipes caused by tighter hotel building regulations.
• Rising costs – Higher construction, borrowing, and employment costs would affect the feasibility.
• Pandemic return – a protracted COVID comeback that results in new restrictions on travel.

These, however, don’t seem likely to stop the current general transaction volume recovery.

Conclusion

Due to its strong demand drivers, high rates, and solid local economic fundamentals, Tokyo continues to be one of the world’s top locations for hotel real estate investment.

After declining during the years 2020–21, purchase volumes sharply increased in 2022 as investor interest held steady and tourists picked up. Tokyo hotels are currently particularly appealing to foreign money due to the depreciating yen.

Based on reopenings and impending new supply, hotel transactions appear set to consolidate momentum until the middle of the 2020s, assuming COVID does not impose another round of forced mass travel shutdowns.

Tokyo continues to merit attention from developers and funds looking for long-term Asia Pacific hospitality exposure as a defensive and growth investment play.