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Positive vibes for Japan's love hotels if Goldman's in bed

By William Sparrow
March 7, 2005

Japan's booming love-hotel industry is rumored to have attracted the attention of Goldman Sachs, the US-based heavyweight investment bank, brokerage and fnancial-management house. Word on the street, according to CBS MarketWatch, is that Goldman may be seeking to purchase the Japanese company UFJ Holdings' CMA commercial lending unit.

UFJ's diverse holdings via CMA's commercial lending unit center on real estate and include golf courses, gaming parlors and "love hotels" or "short stay" styled lodging that have become a mainstay in Japanese culture, valued at US$429 million. Goldman representatives refused to comment on the rumored acquisition.
Many people in Japan frequent the conveinient, anonymous and often lush facilities of Japan's bustling love hotels. Sometimes it may be a romantic anniversary celebrated at one of Tokyo's posh love hotels in the trendy Maruyama-cho district in Shibuya, or other times it may be a secret and shadowy rendezvous of a couple seeking privacy that cannot be afforded elsewhere.

Love hotels, which rent out rooms to amorous couples by the hour, rake in at least 4 trillion yen ($37 billion) a year, slightly more than the gross domestic product of Cuba, Asian Sex Gazette reported on January 20. Taboo or not, such staggering figures as these have not escaped international investors.

However, the industry does not come without "negative fundamental" issues, least of which may be the lack of a wholesome family image. Some cite that the industry's purported connections to Japan's Yakuza, a renowned international organized crime syndicate, may deter investor confidence.

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"I would say this would be a major step toward legitimizing to the capital markets that these are great acquisitions," said Scott Delany, managing director at Hong Kong-based private-equity firm MHS Capital Partners. "These are money makers. The yields on these are 20-30%, usually," he told MarketWatch.

MHS, a major investment competitor for a share of the love-hotel industry, started a $10 million pilot fund last April to invest in leisure hotel properties, targeting net returns of at least 20%. A dozen European, US and Asian investors put up cash, including two unnamed institutions.

Last November, MHS announced that it had acquired its first property in the Greater Tokyo area. It aims to invest in up to four love-hotel properties worth up to $4 million each, and eventually hopes to tap international capital markets for debt funding.

While the Goldman investment might help to legitimize an otherwise shadowy industry, there may be other more important goals for the investment bank. Goldman Sachs is one of the larget golf-course operators in Japan and in 2003 launched a subsidiary, Accordia Golf, and UFJ/CMA's holdings are likely appealing in this regard.

Love hotels, then, may just be the icing on the cake for Goldman, which may have more mainstream investment and real-estate aspirations in Japan. Legitamacy, international investment and mainstream recognition, though, could prove to be the watershed for Japanese love hotels by putting them on the menu of international investors.

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