Low valuations are providing a good opportunity to invest in an industry that can thrive even in downturns, says Garry Frenklah, who represents Alchemy Japan.
People get intimate in good times and bad, so taking exposure to the leisure hotel industry while values are at all-time lows could be a wise counter-cyclical investment, argues Alchemy Japan, an asset management and advisory firm that operates the country's 10th largest chain of love hotels.
Asset prices are dependent on the availability of leverage - and since banks and finance companies have been reluctant to lend during the financial crisis, property prices have dropped and capitalisation rates (net operating income divided by property price) are at record highs, says Garry Frenklah, Alchemy's Asia ex-Japan representative.
Japanese lenders' innate conservatism means that fewer still are prepared to lend against love hotels, he adds.
As a result, he notes that deals are closing in the 25-30% cap-rate range. The sale of the Japan Leisure Hotels (JLH) portfolio, the first significant transaction executed since the financial crisis, traded in June last year at 35%, a historic high. By comparison, the typical cap rate for hotel deals in the US is 6-8% at present, notes Frenklah.
The buyer of the JLH assets was able to re-trade two of the hotels within two months of purchase and has recently disposed of a third at rumoured cap rates of 23-25%, says Frenklah, suggesting that cap rates may be coming off their peaks and prices are starting to recover.
However, the deal also demonstrates the perils of getting in at the wrong level. JLH had to sell the portfolio following the exit of its largest shareholder, DKR Oasis, due to the hedge fund's liquidation.
Still, firms such as Orix and Tokyo Star Bank - the sector's biggest lenders - have tentatively started to re-enter the market, adds Frenklah, meaning cap rates are likely to continue to fall.
Source: asianinvestor.net; To continue reading 'Click Here'.