Your time starts now
September 3, 2005 Sydney Morning Herald
Love hotels - check in, strip off, clock out - are hot property in a market that has Australian investors snapping up Japan's bargains, writes Deborah Cameron.
THE things to look for in a love hotel are the bed, the bath and the fantasy. Typically, there are mirrors on the ceiling, a deep tub with seething spa jets, a rotating bed and enough jungle pattern wallpaper to drive Tarzan into a frenzy.
Not a permanent frenzy, mind you, but one that lasts two or three hours. Time enough to park the car, check into a themed room, undress, take a bath and leap into bed. There might be time left over for a movie or some karaoke and another bath. No need to pack your bag; no one brings them. Because it's Japan, the exact moment you leave the room is clocked by an electronic sensor in the door frame, instantly creating a bill at the front desk. Pay in cash, no questions asked and straight back to the office.
As more foreign investors plunge into Japanese real estate, love hotels are more than an exotic flirtation. They are a way to make money, according to a group of buyers that includes an Australian.
About "half of all the sex in Japan occurs in love hotels", calculates Professor Mark West, an American lawyer, in research that gave a rare and detailed account of the economics of the industry. Small homes, a lack of privacy, serial love affairs and prostitution have helped create the niche.
While they giggle and blush about them, Japanese also see love hotels as a necessity, West says.
Miro Mijatovic, a Sydney lawyer and Tokyo sports agent and events promoter, is part of a consortium that has invested $4 million in a new love hotel less than an hour from Tokyo Station.
Mijatovic and his partners, Hamish Ross, a New Zealand-born former stockbroker, and Scott Delany, an American banker, say that their venture is aimed at a new and growing market. "It's more five-star," they say.
For the uninitiated this means fewer mirrors and less plastic, better food, fine wine, thicker towels, wireless internet and a widescreen TV. They have even talked to Austrade, the Federal Government's trade arm, about getting Australian shampoo and dainty soaps in the bathrooms.
"We're now out-Japanesing the Japanese," says Mijatovic. "We've taken a unique hotel concept and turned it into something much more respectable and much better."
They are part of a trend. Other Australians are also having an effect in Japan with investments in ski fields, office buildings, real estate and golf courses. But there are questions about the risks and, on the political front, a main candidate in the September 11 election says he is opposed to the stampede of foreign investors.
"Thirty per cent of our golf courses are in the hands of foreign-based companies," said an alarmed leader of the People's New Party, Shizuka Kamei, on Wednesday.
Kamei said it was a sign that foreigners, particularly from the United States, would soon "completely attain control of our life and our economy".
Foreign direct investment in Japan soared 90 per cent last year, according to the Japan Economic Foundation, making it the first year that investment by foreign interests in Japan had eclipsed Japanese direct investment abroad.
The scale of foreign investment in real estate here is the reverse of the 1990s when it was Japan that was buying up tracts of the Gold Coast and tilting at the Empire State Building in New York. Such was the mood back then that in Brisbane The Courier Mail consistently called it a Japanese invasion. In New York, magazines ran cover stories with the rising sun flag pegged to what seemed like every second skyscraper in Manhattan.
That history, which ended in disaster for the Japanese investors, should be a cautionary tale, according to Dr Christopher Pokarier, an associate professor of international business at Tokyo's Waseda University.
"There is a great danger of repeating the mistakes that the Japanese made," says Pokarier, an Australian, and an expert on Japan's plunge into the Australian real estate market.
Though the lion's share of foreign money being spent in Japan is from the US, Australia was the source of about $828 million of direct investment between 2002 and last year, according to Japan's Ministry of Finance.
The Babcock & Brown Japan Property Trust last week announced a $4 million profit from an investment in 12 office and retail properties valued at 47.3 billion yen ($56.5 million). In February, Babcock & Brown announced that it had raised $300 million from investors and since March has been listed on the Australian Stock Exchange.
The trust's managing director, Eric Lucas, an Australian who has spent 15 of the past 20 years in Tokyo, says Japan's "dire" economic run appears to be ending. He said that signs of recovery in the Tokyo property market were due to the presence of so many foreign investors and, more recently, the interest of domestic investment funds.
But Pokarier thinks that so much foreign money might be creating a mini real estate bubble.
"The risk is that investors get taken to the cleaners by savvy locals, and the problem with listed property trusts in particular is that they raise the money up front and then they have to spend it. They buy at the wrong time or don't do deals the way that they should."
In Hokkaido, described by a major Australian investor as "the Tasmania or New Zealand of Japan", the provincial Government has set up a special team to deal with foreign investors.
With its volcanic soil and springs, Hokkaido is an alpine wilderness and, on its lower slopes, a rural idyll. Sparse population, abundant space and harsh winters combine to make its real estate the cheapest in Japan. But its Government has bigger ideas and investors get red carpet treatment, especially when they've got a vision to create an international destination.
"They've effectively set aside a group of people to deal with us and to get it done," says the Melbourne-based chairman of Harmony Resorts Niseko, Roger Donazzan. "It's fantastic."
Last year Donazzan's company bought a ski field in Hokkaido that has quickly become a destination for Australian skiers. He says the company is planning the first $70 million phase of a seven-stage redevelopment. Building will start by 2007.
"The sentiment is there, the Government is supporting foreign investment, the assets are cheap and the economy is picking up, which is great for local demand," he says.
According to the Japan External Trade Organisation, other Australian ventures are also targeting Hokkaido, among them travel agents and condominium developers.
Roger Griffin, the Tokyo vice-president of real estate investment banking firm, Sonnenblick-Goldman Company advised on Donazzon's ski resort purchase and says it is part of a wider picture. "There is a dramatic transfer of investment from the corporate sector to the financial and savings sector," he says.
Put simply, Japan's biggest companies have changed. They are over the real estate kleptomania that gripped them during the years of the bubble economy and, under pressure from banks to straighten out their finances, are selling the irrelevant and non-performing parts of their empires.
Many of the golf courses, hotels and spa resorts sold in the past seven years have come from companies that, in the good old days, maintained them as decorative baubles or for company use. Such was the extent of this indulgence that much remains to be sold.
Another attraction for foreign investors has been a halving of real estate prices in Tokyo since 1995. Low interest rates have further sweetened the pudding. Investors are in the almost unique position of having an immediate positive gap between the return on their properties and the cost of interest, Griffin says.
Lucas, of Babcock & Brown, also pointed to the healthy returns during the midweek release of results for the Japan Fund. The fund was paying an interest rate of 1.23 per cent or less on its borrowings but making yields of 5.6 per cent.
"The name of the game is to make sure that we can maintain and grow the top line very slightly to enjoy that really fantastic spread between the cost of debt funding and the income of the properties," he says.
Investment banks and asset managers including the global giants Morgan Stanley and Goldman Sachs predict a healthy future for Japanese real estate investment. Goldman Sachs has recently launched a fund to buy dog-eared hot spring resorts and redevelop them, and it has bought 80 golf courses. Morgan Stanley, which has acquired $US15 billion ($20billion) worth of real estate in Japan since 1998, dramatically underlined the new order when earlier this year it bought the Tokyo headquarters of Mitsubishi. Another industry tyro, Hudson Lone Star, though a Texas-based fund, also has major holdings in Japan.
Mijatovic and Ross, with their love hotel, are small by comparison. And yet they can't stop talking about the potential. Ross describes a recent visit to the love hotel of his dreams. It was not the decor that got him excited but the amount of time he had to wait in a linen cupboard, discreetly out of sight, while dozens of paying guests queued through the lobby.
"And this was at 2.30 in the afternoon," he says, still amazed. "The hotel had 700 per cent occupancy."
Imagine it: every day, around the clock, couples paying 5000 yen ($60) to use a room for two or three hours. Cleaning staff, in teams of six, did their job with such speed and precision they had it down to five minutes.
"It's just like the formula one pit-stop crews," he says, dreaming of the day when his company has a chain of 50 or more love hotels.
This means that the most expensive locations in Tokyo had in fact already bottomed around three years ago! This coincides with the first round of investment funds into Japan and the start of the J-REIT’s dominance in prime property purchases.