Japan - September 2020 SPOTLIGHT Savills Research Japan Hospitality Retail sales in Beijing were up 4.4% year-on-year to RMB539.8 billion in 1H 2018 Japan Hospitality Japan’s landmark year disrupted but not lost INTRODUCTION June. Indeed, Japan is eff ectively as closed off Summary 2020 was a year of high hopes for the Japanese as it was during the isolationist Edo Period, hospitality market. Emboldened by the Tokyo creating an unprecedented challenge for • After eight consecutive years of Olympics and the rapid growth of tourism hoteliers. growth, the number of overseas since 2013, the national government had Moreover, with record room supply entering tourists is fi nally set to see a originally aimed for 40 million overseas the market in 2019 and 2020, the COVID-19 contraction in 2020, with only visitors for the year. These hopes have crisis has arguably come at the worst possible four million visitors entering the undoubtedly been dashed by the COVID-19 time (Graph 2). Soaring inbound tourism and country in the fi rst half of the pandemic, with just four million visitors the upcoming Tokyo Olympics prompted a year. entering the country in the fi rst half of the spate of new developments from 2017 to 2020, year – a 76.3% decline over the fi rst half of 2019. mostly in the budget and limited-service • Prompted by the Olympic As would be expected, the vast majority of hotel subsectors. Fortunately, supply looks tailwind, record supply is these visitors entered the country in January set to cool signifi cantly in 2021 and beyond. expected for 2020. Fortunately, and February, prior to any signifi cant border Operators capable of weathering the storm new supply will cool signifi cantly closures, with only 2,600 recorded entries in until then may fi nd themselves in a more in 2021 and beyond. • Domestic travellers accounted GRAPH 1: International Arrivals And Annual Growth Rates, 2007 to 1H/2020 for 84% of overnight stays in 2019 and their spending has trended upward. Other Nations China South Korea 60 Global 2011 Tohoku • Unemployment in Japan remains Financial Earthquake 50 among the lowest in the world, Crisis and Tsunami meaning local residents still have 40 some spending power to travel domestically. 9% 2% 30 19% 22% • J-REIT price performance 47% 20 indicates divided sentiment 29% MILLIONS OF PEOPLE OF MILLIONS 24% within the hotel sector, with 14% 0% 27% 10 -19% -28% 34% more upmarket hotel REITs -88% outperforming those with a 0 heavier reliance on limited- service hotels. • Occupancy has fallen to the 20-30% range, while ADRs have Source Japan Tourism Agency (JTA), Japan National Tourism Organisation (JNTO), Savills Research & Consultancy compressed to less than half of what they were pre-COVID. Rural and suburban hotels are GRAPH 2: Hotel Guest Room Supply, 1982 to 2023* performing markedly better than their urban counterparts. Annual Room Supply (LHS) Historic Average Room Supply YoY Change in Total Stock (RHS) • Hotel investment volumes 70,000 14% for 1H/2020 fell 19% YoY to around 214 billion yen. While 60,000 12% this is a relatively modest drop 50,000 10% considering 2019’s record- high investment into the 40,000 8% sector, volumes appear to have 30,000 6% been supported by existing commitments entered into prior GUEST ROOMS 20,000 4% to the pandemic. 10,000 2% 0 0% 1982 1992 1988 2012 1986 1998 1996 2018 1984 2016 2019 1994 2014 1990 2010 2002 2008 2006 2004 2000 Est. 2021Est. Est. 2022Est. Est. 2023Est. Est. 2020Est. Source Hoteres, the Ministry of Health, Labour and Welfare (MHLW), Savills Research & Consultancy *As completion data provided by Hoteres is as of 1 May, total supply in 2020 includes hotels expected to be completed thereafter. savills.co.jp/research 2 Japan Hospitality advantageous position when the dust settles. Indeed, despite these grim statistics, there are bright spots for the market, even in the short term. Domestic tourists accounted for With national borders largely closed 84% of overnight stays in 2019 and spending amongst this group actually grew at a higher worldwide, inbound tourism to Japan rate than overseas tourists during the year. The country emerged from lockdown in has plummeted. Although overseas mid-May and domestic travel has seen some visitors are a key driver of growth recovery, providing a buff er for operators. This should be further bolstered by the in the hospitality sector, domestic government’s “Go To” travel campaign implemented on 22 July, which is subsidising tourism still accounts for most nationwide travel. In the end, hoteliers are in for a long slog to demand. A short-term rebalancing of get through the crisis and there have already assets could help mitigate some of been some casualties within the budget hotel subsector, with weakly-capitalised, newer the damage to the sector, whilst long- operators such as WBF and First Cabin fi ling for bankruptcy. Larger, more-established term inbound tourism trends could players appear to be faring better and some lead to opportunities for those with have even doubled down on the current market. APA Group, for instance, has enough capital to weather the storm. indicated that it would aim to more than double their hotel market share. We can therefore expect to see further consolidation in the hospitality market, which should of inbound demand is more impactful on a Although Japan’s economy has taken a present lower-risk opportunities to investors per capita basis. signifi cant hit through the fi rst half of the once the market recovers. Meanwhile, the number of outbound year, the national unemployment rate is still travellers has been increasing since 2015, very low compared to regional peers – even DOMESTIC DEMAND OFFERS A reaching a historic high of 20 million in 2019 edging downward from 2.9% to 2.8% from LIFELINE (Graph 4). More than 70% of these travellers May to June (Graph 5). The country’s sound Although inbound tourism has been an reportedly did so for leisure purposes. job security should give residents some important catalyst for the growth of Japan’s Given that global travel restrictions will fi nancial leeway to travel domestically, in hospitality sector, domestic travellers still likely remain in place for the time being, addition to supporting the relatively nascent claim the lion’s share of demand, accounting a signifi cant portion of this demand – “workcation” trend. That said, the recent for 84% of total nights stayed in 2019. potentially equivalent to the total spending uptick in new coronavirus cases may be Domestic tourist spending grew by 3.6 of inbound tourists – should be redirected causing some to reconsider travel plans for trillion yen from 2014 to 2019, with year-on- towards domestic travel. Indeed, according the time being. year (YoY) growth actually outpacing that of to a survey conducted by Travelzoo Japan in Regardless, the government’s “Go To” the inbound segment in 2019 (Graph 3). That May 2020, 65% of respondents indicated that travel campaign should serve to drum said, inbound tourists tend to stay longer they would travel domestically during the up some demand. The program provides and spend more money. As such, the absence three months after Japan’s soft lockdown. subsidies of up to 50% of the costs for domestic transportation, hotels, restaurants, tourist attractions and shopping for GRAPH 3: Domestic And Inbound Tourist Spending, 2012 to 2019 trips made after 22 July, with the amount capped at 20,000 yen per person per night. Domestic Overnight Spending (LHS) Inbound Tourist Spending (LHS) However, with a sudden increase of new Domestic YoY (RHS) Inbound YoY (RHS) coronavirus cases in the capital, it was 25 80% announced that travel to and from Tokyo 70% Prefecture would be ineligible for the program just days before its implementation. 20 60% Despite the exclusion of Japan’s largest 50% market, the government has announced that 15 40% two million travellers have taken advantage YOY of the program during its fi rst month. The 30% campaign is scheduled to end in January 10 20% 2021, or earlier if the 1.7 trillion yen allocated JPY TRILLION JPY for the program is fully utilised before 10% then. In the meantime, the government is 5 0% discussing whether to add Tokyo to the list -10% of eligible locations as early as September. This now appears likely given that new 0 -20% COVID-19 cases have begun declining in the 2012 2013 2014 2015 2016 2017 2018 2019 capital. Tokyo’s addition should signifi cantly Source JTA, Savills Research & Consultancy boost the impact of the campaign. savills.co.jp/research 3 Japan Hospitality GRAPH 4: Inbound And Outbound Travel, 1964 to 2020 HOTEL MARKET PERFORMANCE Savills tracks the performance of over 100 1 Japanese Overseas Travelers Visitor Arrivals to Japan hotels owned by fi ve J-REITs to analyse 35 market trends. Our analysis focuses on limited-service hotels; full-service and resort 30 properties are excluded due to limited data. Given that most of the existing hotel stock is 25 in the limited-service category, this should provide a good proxy for the overall market 20 trend in Japan2. On a trailing-twelve-month basis, our 15 average daily rate (ADR) and revenue per available room (RevPAR) indices fell by 10 MILLION TRAVELLERS 19.8 and 33.1 points YoY, respectively, as of 1H/2020. Over the same period, occupancy 5 posted a decline of 16.7ppts. Of course, these performance metrics have been even 0 more bleak in recent months. In May 2020, 1972 1978 1982 1976 1992 1988 2012 1974 1968 1986 1998 1966 1996 2018 1984 1970 2016 1964 1994 2014 1980 1990 2010 2002 2020 2008 2006 2004 our ADR and RevPAR indices fell to a low of 2000 Source JNTO, Savills Research & Consultancy 50 points and 19 points, respectively, while occupancy bottomed out at 23% in April (Graph 6).