Daniel Vovil, Co-Founder and President of Odyssey Group talks us through Ryokans, tourism, and heritage redevelopment in Japan.
Welcome to The Yield Daniel, can you please introduce yourself to the readers?
I am the co-founder of Odyssey Capital Group. We are an Asia based alternative asset manager focusing on private equity real estate. Our real estate investment strategies are mainly value add and opportunistic. And we take a thematic view of macro opportunities for real estate as well as a value add, bottom up approach.
Our key strategy is our Japan boutique hospitality fund.
Could you tell us about the fund?
The Japan Boutique Hospitality Fund was set up 2 years ago and is focused on the structural opportunities fund in the hospitality market in Japan with the key focus being the following sub-segments.
Firstly, there is the Ryokan market. These are hot spring resorts which are traditionally family run bed and breakfasts. These are all round japan. Secondly, we look at heritage building redevelopment, and thirdly we look at luxury boutique hotels.
We like these niche focused areas because we are seeing a lot of structural demand in unique experiences and destinations. Japan is well set, with government support, for multi-year demand. However the tourism and hospitality market infrastructure is one of the least developed sectors in the world. Although japan is safe, clean and well developed, it hasn’t evolved its hotel real estate segment of the economy for many decades. This is the opportunity. There is strong demand with limited supply.
Why has this segment been neglected?
Japan has had 20 years of declining asset prices. Given the cyclical market, construction companies prefer resi and office. Hospitality is often the second and third thought. The market was caught off guard by how strong tourism would be post Prime Minister Abe’s relaxation of visas and his efforts in supporting regional governments. There is a big wave of demand but without the required supply. There was a bit of skepticism from the native Japanese investors who were not looking to build supply as they thought the hospitality boom was shot term when in reality it is structural.
Let’s look at these segments…why Ryokans?
They are very interesting because they are the most under optimised, undervalued, under the radar and have been for many decades. The reason being they are run by husband and wife teams who do not really understand international tourism well. They do not know how to deal with international investors. They are traditionally run and are traditionally multi-generational.
Many are looking to retire and to hand over their asset to firms that will look after them appropriately. We are now seeing a general shift in ownership with many assets coming to market with a low valuation. They are under optimised because they are not efficiently run. We can come in and improve the cash flows simply by doing basic renovations and repairs. We can optimise the look and feel from a capital perspective. It is a cottage industry; it is an old-fashioned industry usually based in regional towns. Often, large institutional investors do not look at these assets as much as they look at large office opportunities in Tokyo, for example. We have the advantage in being niche and agile, able to optimise these assets.
These are luxury experiences: food and beverages, hot-springs, wellness… all very Japanese. That’s why I like Ryokans.
Do you find it difficult to engage at a local level with Ryokan owners?
It is very difficult as most of them are not officially for sale. The only way to find assets normally is to keep eyes and ears on the grounds and to build a trusting relationship with vendors. That is why institutional finds it hard despite there being potential high returns.
We are lucky as we have strong teams on the ground, around 20 people with over 20 years of experience each. They are all Japanese. They work with us to source, negotiate and execute business plans.
What about Heritage redevelopment?
This really demonstrates our strength in deal flow and our access to negotiations with government owners, banks and heritage groups. We reposition and re-purpose buildings to luxury boutique destinations. Here are two examples we can share:
Firstly, an art-deco property which used to the headquarters for large Japanese rail group, built in 1937. We acquired the long-term lease and repurposed it into a 99-room hotel. We have developed a unique destination which speaks to the art-deco world of a bygone era. This is more than a typical 5-star hotel.
A more interesting example is buying a whole street in Kyoto filled with Machiya, basically tea houses. We bought a whole street which was built 100-150 years ago and converted them into 24 luxury villas as part of an urban resort. Again, a unique experience of culture and history. This is where hospitality is going and why we invest in this niche market in Japan.
We are currently in a pandemic which is not being friendly to tourism; how is this impacting you?
It’s true that we have been impacted more than other sectors, and Japan has obviously been severely impacted… borders are closed, and the local population is not travelling (usually a huge tourism driver). We see it as a short-term issue, eventually a cure for the virus will be developed and people will travel again. We think people will now seek out more unique experiences; a quality over quantity mindset.
People will seek out wellness opportunities and seek it in countryside destinations instead of in a 5-star hotel located in a CBD.
In the short term we are also seeing an advantage as there are several vendors looking to sell assets. The silver lining in the very dark cloud is acquisition…prices are very attractive. We are lucky to have ability to understand the market and to buy assets at very attractive rates, repositioning in the quiet time so we can be be much stronger when the market picks up. This is a structural demand story against the short term of COVID-19.
What about the future, and what about a second raising?
We closed the first fund in March, and we are now looking to launch our second fund. It is a larger sized fund, maybe more opportunistic in scope, but still focused on boutique luxury. We are looking to potentially partner with a large hospitality group and are also looking for co-investors in single asset projects. We are aiming for mid-June.
We are looking for a pathway to a long-sited fund. The opportunity is there, assets are large and liquid. There is a lot of opportunity to develop this market. The yields and returns are very attractive. Moving to a REIT or an IPO is long term plan.