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An increase in demand for scarce luxury hotels in Japan presents rich opportunities for the global hotel industry, and developers are seizing it.

Despite being one of the world’s richest countries, Japan has about the same number of five-star hotels as emerging Vietnam, and fewer than the cities of London or Paris. This is certainly not for lack of demand. The Asia-Pacific region had one of the highest occupancy rates in 2018, at 70.6%, second only to Europe, according to market research firm Statista.

Reasons for the deficit stem mostly from Japan’s post-World War II economy. As real estate lawyer Koki Hara explains, Japan came late to mass tourism. Its focus was on industrial growth, which gave rise to a hotel industry comprised mainly of basic accommodations for business travellers. The Japanese real estate market, particularly prime city-centre locations, was dominated by property developers in commercial development. The hotel industry was marked by underperformance.

Not anymore, says Yutaka Kawamura of Mitsui Fudosan, Japan’s biggest property developer. Now hotels in central Tokyo have annual yields of around 3%, according to CBRE. Prices at luxury hotels have risen sharply. Sam Sakamura, Vice-President of Hyatt Hotels in Japan, says some enjoy unimaginably luxuriant margins. Businesses across the tourism industry are finding fertile ground.

As developers flood into the Japanese real estate market, the sites of old office buildings are getting second lives as hotel sites. More franchise agreements are being signed with the biggest foreign brands in the hotel industry. Mitsui Fudosan is expanding its portfolio with Four Seasons, Bulgari and Mandarin Oriental, The Economist reports. Hyatt is opening four new luxury hotels.

The upcoming 2020 Tokyo Games has made the government especially cognizant of the need for more high-end accommodations. It is considering tax breaks and loans to help build them. Robust growth in the country’s tourism industry also highlights the need. Some 31 million people visited Japan last year, a 500% increase since 2011. The country hopes to attract 40 million foreign visitors this year. This aspiration could be dampened by a Chinese travel restriction related to the coronavirus, as Chinese make up a significant portion of arrivals. Nevertheless, inbound tourism is expected to keep rising.

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