Greig McAllan, former head of Tourism Australia in Asia, acknowledges that he is one of a handful of foreigners working in a uniquely Japanese industry.
But for McAllan, who spent many years in Japan during his 20-year stint with Tourism Australia and the Australian Tourism Commission, getting a foothold among the country's 25,000 love hotels was too good an opportunity to pass up.
And it's a niche that he says has allowed him and business partner, fellow Australian Miro Mijatovic, to carve out strong returns in a country that's being increasingly forsaken as an investment destination because of its stagnant economy.
Love hotels -- rooms for rent for amorous couples who lack privacy at home -- are something quintessentially Japanese, which visitors to the country tend to titter about. But it's serious business for McAllan and Mijatovic's company, Alchemy Japan, and for ordinary Japanese citizens.
Alchemy Japan has grown from one hotel in 2006 to the fifth-largest operator in the country. Reaching that milestone with just 15 hotels shows how fragmented the industry is.
McAllan, 53, says most are owned and operated by individual Japanese, and standards and practices can vary widely.
"Ninety per cent of them are owned by people who have one to three hotels. (The industry) has never really had any foreign investment before. If you are a foreigner you seem to look at it in amazement and say: 'What is this? Is it legal? Is it yakuza? Is it prostitution?" he says.
"(But) most of our customers are people in their 20s or 30s who live at home. Say a daughter (who) lives at home with parents -- there's nowhere to go for personal space. Or guys living in a dormitory or at home, or are married and live with their mother-in-law. Japanese apartments are small and have screens and you can hear through these things."
McAllan says the minority of hotels at the raunchy -- or just plain whacky -- end of the market (there are ones with Batman and Robin, Disneyland and Winnie the Pooh themes, as well as mirrored ceilings, outlandish beds and spas, and darker sadomasochistic themes) attract the most interest.
But he says most, including Alchemy's, are more far more utilitarian versions designed to fulfil the needs of average Japanese couples.
"There are 25,000 of these things in Japan," McAllan says. "And like anything, when you have got that much volume, you have got the good, the bad and the ugly. Unfortunately the extremes of the industry are what the media and people focus their attention on."
McAllan likens Alchemy's approach to that of Starbucks in Japan: introducing common standards and products and branding in a fragmented industry.
The sector is facing a regulatory shake-up.
Hotels that operate an antiquated but discreet system, whereby the reception desk is screened by frosted glass and couples who rent rooms must pay at an in-room console before the door unlocks to let them out, will face tough new hurdles.
For Alchemy, which has already switched the hotels under its Urban Resorts banner to an open reception system, the change represents an opportunity to pick up hotels from owners keen to exit the industry.
Although Alchemy offers institutional investors exposure to the so-called "leisure hotel" market, McAllan says the company is no longer searching high and low for new backers.
"Would we be interested in Australian investors? The answer is yes, but we are not chasing it," he says.
"The days of us running around doing roadshows are gone."
McAllan says the hotels are highly profitable, generating net operating income margins of up to 50 per cent (excluding cost of finance, fees, maintenance and tax), making them an attractive investment.
The rooms rent for between Y2000 ($25) and Y5000 for the minimum time of 90 minutes, and are typically turned over 2.5 times a day during the week and 4.5 times a day on weekends.
"That gives massive turnover compared to a regular hotel," McAllan says.
"In a year we have a million people go through our hotels and we only have 15 hotels out of an inventory of 15,000.
"Room for room, we get more for our rooms than a five-star would get for their rooms, without any of the overheads."
McAllan says Alchemy has introduced cleanliness and food guarantees, and reporting systems to produce the kind of information and monitoring institutional investors need.
"Unless we can show investors our results and our systems, we are just another bunch of gaijin (foreigners) with a good story," McAllan says.
He chuckles about the strange turn his life has taken since leaving Tourism Australia.
But he says he loves the job, enjoys working with a dedicated and motivated Japanese staff and is confident about the company's success in an industry where demand is certainly not about to dry up.
http://www.theaustralian.com.au/business/getting-a-foot-in-the-door-of-japanese-love-hotels/story-e6frg8zx-1225882955250
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