To gain insight into the changing landscape of the Asian luxury market, look no further than the first-quarter results of Louis Vuitton (LVMH), the world's largest luxury goods group. Excluding Japan, the company's organic revenue in Asia was down 6%. In contrast, sales in Japan soared by 32%.
This is not surprising. The big news in the global foreign exchange market is the continued depreciation of the yen, which has fallen more than 10% against the dollar this year, to a 34-year low. In addition, the weakness of the yen is widespread, with the yen trading at multi-year lows against major Asian currencies.
The depreciation of the yen stems from the large interest rate differential between Japan and the United States. By increasing the spending power of overseas tourists, it is a boon to the Japanese tourism industry. At the same time, this has also increased the attractiveness of commercial real estate in Japan.
According to Morgan Stanley Capital International, Japanese retail and hospitality properties were among the few areas in Asia's commercial real estate sector where investment activity last year was at or above the average annual transaction volume from 2020-2022.
Head of Asia Real Estate Research at Morgan Stanley Capital International said the strong performance of Japan's retail sector "is particularly striking as the country's population is shrinking."
If there's one statistic that illustrates the drivers of Asian real estate demand lately, it's that more than 3 million international tourists visited Japan last month, a record monthly high.
In Asia, the markets where inbound travel has recovered the most are those with the largest local currency depreciation, such as Japan and Vietnam, Bank of America noted in an April 12 report.
In addition, although the number of Chinese tourists visiting Japan is still well below pre-pandemic levels, the per capita spending of Chinese tourists last year was 50% higher than in 2019, due to increased spending on luxury goods and high-value cultural experiences.
The collapse of the yen has provided a rare opportunity for foreign tourists to buy coveted luxury goods at deep discounts. According to reports, a Chanel classic handbag is $1,423 cheaper in Tokyo after a duty-free discount than in New York.
Major retail hubs such as Tokyo's Ginza and Omotesando have benefited greatly from the surge in overseas tourism, with average ground rents reaching record highs in the last quarter of last year, according to Jones Lang LaSalle (JLL).
However, Japan's hospitality sector has performed best. According to Savills, last year's trading volume was 40% higher than the annual average between 2013 and 2022. In addition, the share of foreign investment in the sector reached its highest level since 2008.
No major hotel market has recovered as dramatically as Japan's KPIs. In the first three months of this year, average daily room rates (in US dollars) were 30% to 50% higher in Tokyo, Osaka and Kyoto compared to the same period in 2019, and revenue per available room increased by 18-37%, according to CoStar.
This is all the more noteworthy considering that occupancy rates are still significantly low as a result of severe labor shortages that have prevented many hotels from operating at full capacity. However, the overseas travel boom has made it easier for operators to increase the daily rate.
It has also caused severe supply constraints, with construction costs rising dramatically, while at the same time hampering its development due to a lack of skilled workers. CBRE's head of research in Tokyo said that while supply has increased significantly in recent years, "a very tight market has prompted hoteliers to significantly increase rates".
To be sure, the yen-fueled surge in inbound tourism isn't the only factor. First, Japan's late recovery has led to an increase in pent-up demand for foreign travel and shopping, which has not yet peaked.
Second, Japan relies heavily on domestic tourism. The weaker yen has made it more expensive for Japanese tourists to travel abroad, leading more Japanese to choose to holiday abroad, which has further boosted the retail and hospitality sectors.
Third, a weak yen is only one of several factors that increase Japan's attractiveness to foreign investors, and a mature and relatively transparent market is just as important. In fact, the problem in Japan is that too much money is chasing less desirable real estate assets.
The depreciation of the yen is now a headache for Japanese policymakers on the one hand, but it has played a key role in accelerating the recovery of tourism in Asia. In the retail and hospitality industry, exchange rates are important.