Japan's love hotels flirt with retail investors

By Aiko Wakao

TOKYO (Reuters) - An industry known for its privacy is flirting with the public, as Japanese love hotel funds look to entice retail investors with attractive returns.

For decades, young Japanese couples and secret lovers have rented love hotel rooms by the hour, the experience enhanced by novelties such as rotating beds, ceiling mirrors and karaoke machines.

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.