TOKYO (Reuters) - Morgan Stanley will buy 13 hotels and two property management units from Japanese airline All Nippon Airways Co. Ltd. for $2.4 billion in the biggest hotel transaction in Asia, the U.S. investment bank said on Friday, making it the largest hotel owner in Japan.
The deal comes amid increasingly fierce competition for commercial property in Japan, where land prices rose in 2006 for the first time in 16 years.
Japan’s hotel market, worth about 1 trillion yen by sales, has lured investors on the back of recovering tourism and active investments in real estate partly driven by low interest rates in Japan.
“The office and residential markets, especially in Tokyo, are quite overheated and investors are shifting their focus to higher-yielding assets,” said Masahiro Yoshioka, a partner at management consultancy KPMG FAS Co. “There aren’t many such large-scale property deals, and this was probably a great investment opportunity.”
Under the deal, ANA will sell its stakes in ANA Property Management Co. Ltd., ANA Hotel Management Co. Ltd. and subsidiary companies of 13 hotels as of June 1 for 281.3 billion yen.
New additions to the portfolio of Morgan Stanley, which has been raising an $8 billion global property fund this year, will include ANA Hotel Tokyo in Minato ward, a prime Tokyo business district, and Okinawa Harborview Hotel on Japan’s southern island of Okinawa known for sandy beaches.
ANA said it would post a special profit from the planned sale in the current business year to March 2008, but the size of the profit has not been finalized. Its hotel segment was valued at 150.3 billion yen as of March 2006.
ANA will remain an operator of the hotels through its unit IHG ANA Hotels Group. Morgan Stanley said its hotel management affiliate, Panorama Hospitality, will work with IHG ANA Hotels to boost value at the properties. Shares of ANA closed up 0.9 percent at 475 yen, compared with a 1.2 percent drop in the TOPIX index
Morgan Stanley has been raising an $8 billion global property fund this year, part of which is expected to be allocated to Japan.
The deal follows the $1.7 billion sale of the office portion of the Pacific Century Place Marunouchi building in central Tokyo last year by Hong Kong tycoon Richard Li to K.K. daVinci Advisors , Japan’s biggest real estate fund.
Analysts said the deal underlines a shift in investors’ strategy to seek riskier assets including shares of companies that hold properties.
“The deal shows that investors’ focus is shifting to assets whose cash flow is not necessarily stable and to assets in local cities, as some of the hotels are located outside Tokyo,” said Daisuke Fukushima, senior analyst at Nomura Securities Co. Ltd.
With quality office buildings becoming scarce and competition intensifying, hotels and other operational assets such as warehouses and hospitals have become targets for property investors seeking higher returns.
KPMG’s Yoshioka said returns on hotel investments are about 100 basis points above those on office investments, given that these assets have such risks as bad weather and economic conditions.
Overall, Japan offers an attractive spread between real estate pricing and finance costs of more than 100 basis points, unlike some other markets such as London that have a negative spread with finance costs.
Yoshioka also said the hotels could be eventually listed as real estate investment trusts (REITs) when property funds mature.
“It’s possible that they use the REIT market as an exit,” he said. “There can be a lot of exit plans as the property market has seen a growing number of transactions.... High liquidity in the market is having a ripple effect and drawing more investors.”
Two listed hotel REITs are Japan Hotel and Resort REIT Inc. and Nippon Hotel Fund Investment Corp.
The number of hotel sales transactions rose to 58 deals from just eight in 2000, according to Jones Lang LaSalle Hotels.
ANA and other Japanese companies are selling hotels, golf courses and ski resorts they bought during Japan’s asset bubble years of the late 1980s to focus on their core businesses, while property investors are snapping up these assets to make them more profitable and boost returns.
ANA rival Japan Airlines Corp. plans to sell its stakes in six hotels this year for more than 70 billion yen, a company source said in February.
Additional reporting by Edwina Gibbs and Sachi Izumi