Private equity funds pour money into hot spring resorts in Japan amid tourism boom ahead of Olympics

Investors sense an opportunity as long-established family-run inns struggle to find successors and plan for the future

Funds based in Hong Kong and New York are snapping up ryokan they see as undervalued and mismanaged, and putting in professional managers

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Visitors warm their feet at a hot-spring spa complex built on a man-made island in Tokyo Bay. Investment funds are buying into Japan’s spa business. Photo: AP

Published: 8:00pm, 21 May 2019Updated: 8:00pm, 21 May 2019

For Japan’s growing flood of foreign tourists, one of the top internet search terms is onsen, the traditional hot springs where travellers have soaked since the days of the samurai. Now some of the world’s oldest businesses are attracting big new money.

Private equity funds like SoftBank-owned Fortress Investment Group and Hong Kong-based Odyssey Capital Group are spending billions to tap into the appeal of traditional inns amid a tourism boom that’s ramping up ahead of next year’s Tokyo Olympics. The big funds are moving in as centuries-old spas, many of them still family-run, struggle to find successors in an ageing country where small towns and villages are losing young people.

Odyssey, along with two other investors, last year bought its first Japanese onsen, an inn with 28 tatami-floored guest rooms near the Sea of Japan called Kagetsu, or “flowering moon”. Christopher Aiello, managing director of Odyssey’s Japan real estate business, says the firm plans to spend US$500 million in the next three years buying about 20 more traditional Japanese hotels, which are known as ryokan.

“The Japanese hospitality sector has tremendous opportunities for investment,” Aiello. “Many of these ryokan are very undervalued after experiencing so much recession and mismanagement, but a lot of them are located in beautiful natural settings.”

An outdoor hot springs bath at the Kagetsu inn in Yuzawa, Niigata prefecture, bought last year by a Hong Kong private equity fund. Photo: Bloomberg

At Kagetsu, the founder’s granddaughter, Tomoko Tomii, greets her guests at the inn’s stone-paved entrance, dressed in a delicate pale-pink garment like a kimono. The 40-year-old says the family decided to sell to the Odyssey group last year because debts had piled up and they needed money to update rooms and design an English-language website.