Today many of the hotels look somewhat shabby compared with their heyday in the
bubble economy of the 1980s, but hold out the promise of sweet returns for
investment funds that renovate and securitize them for the debt market.
Following the example of offshore private equity firm MHS Capital Partners,
whose love hotel fund raised $10 million from foreign institutional investors a
few years ago, local fund managers are targeting individual investors.
Tokyo-based investment group Global Financial Support Co. (GFS) is launching
the 11th and the last of its fund series this month with investments starting
at 500,000 yen ($4,134).
GFS's previous 10 love hotel funds have raised a total of 11.6 billion yen
since 2004, offering average payouts of 8.4 percent annual interest with a
five-year maturity.
That compares with less than 1 percent on most Japanese savings accounts.
GFS said it would offer a similar payout with the 11th fund, giving investors
more bang for their hard-earned yen.
"That's exceptionally attractive given that it would be almost impossible for
most retail investors to earn such high returns from other products," salesman
Daisuke Ishibashi told a news conference on Thursday.
GFS's funds have all sold out as they attract investors left cold by other real
estate funds' soaring prices and low returns.
Japan's bullish real estate market has also seen investment banks such as
Goldman Sachs and Morgan Stanley swallow golf courses and city hotels.
But love hotels, which range from the tacky to the luxurious, are exceptionally
profitable.
Rooms rented by the hour earn fatter margins and more free cash flow than
ordinary hotels rooms since they can be used three or four times per day.
GFS's renewed property Hotel Asia P-Door is located in one of the love hotel
districts in central Tokyo, and offers guests a selection of 23 rooms featuring
palm trees and exotic water fountains for as little as 2,980 yen for a two-hour
stay.
It is said there are about 27,000 love hotel properties across Japan, creating
a massive industry estimated to rake in close to 3 trillion yen in annual
sales.
But high returns come with high risks.
GFS warns investors their investment in the love hotel funds is not fully
guaranteed, which means they can lose their bets if the hotels go out of
business, burn down in a fire, or get entangled in crime.
One of the reasons why this lucrative business has failed to lured more
institutional investors is that it is often associated with organized crime and
red-light districts.
"In Japan, there is a strong bias that these love hotels are a part of the
underground world, but we've learned ourselves that most of them are family-run
businesses and these funds are very sound investments," said GFS Chief
Executive Shuzo Shinano.
Reuters
