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New J-REIT dipping a toe in hot spring opportunities

Bettingon ever-increasing tourist arrivals to Japan, Ooedo-Onsen Holdings, one of thecountry's largest hot spring facility operators, is advancing a plan to list asa REIT on a domestic exchange.

Ooedo Onsen Monogatari in Odaiba, Tokyo

Source: Ooedo-Onsen Holdings

Ooedo-OnsenHoldings operates 23 hot spring inns and six bathhouse complexes across Japanunder the Ooedo Onsen Monogatari brand, attracting around 5 million customersper year. It is best known for its feudal-era style hot-spring theme park inthe futuristic Odaiba area on Tokyo Bay, home of many facilities for the 2020Olympic Games.

Turnoverof the business has been growing at 30% year on year since 2007 and reachedabout ¥37 billion at the end of February, according to information provided bythe company's owner, Bain Capital.

Thelisting could also provide an exit for Bain, which cashed in on Japan's boomingtourism market in March 2015 through the acquisition of the hospitality group fromits founding family for approximately ¥50 billion. Prior to the investment, theprivate equity firm was no stranger to turning around chain operators in Japan:It boughtJapanese restaurant group Skylark in 2011 and took it public in 2014.

Iflisted, Ooedo-Onsen Holdings will become the first Japanese REIT purely focusedon hot springs, or onsen as they are known in the country.

Currently,Japan Hotel REIT InvestmentCorp. and HoshinoResorts REIT, Inc. are the only two J-REITs with significantexposure to onsen facilities. But they only account for a small portion of theREITs' portfolios. For example, Hoshino Resorts has 45 properties, seven ofwhich are onsen hotels, according to Osamu Yokokura, the REIT's general managerof planning.

"Ooedo-Onsenhas a very good portfolio. It makes strategic sense for them to become a REIT,so that they can raise more money under the backdrop of the tourism boom,"Yokokura said in an interview.

Itis exactly the same strategy that Hoshino Resorts adopted. The more than100-year-old traditional inn and onsen resort operator took its business to thenext stage by establishing a REIT and listing it on the Tokyo Stock Exchange inJuly 2013, with a clear aim to raise capital for expansion both domesticallyand internationally. Later this year, it is opening the first overseas resort,Hoshinoya Bali, in Indonesia.

Thecurrent business environment may be even more fortuitous for Ooedo-OnsenHoldings' planned listing, as the Japanese government doubled thetourism target in late March. With its goal of drawing 20 million foreignvisitors annually by 2020 within reach four years ahead of schedule, thegovernment projects that 40 million inbound tourists would bring ¥8 trillion inspending in 2020.

An open-air onsen near Mt. Fuji

Source: Hotel Green Plaza Hakone

Andas the tourism market continues to open up, testing out the hot springs will beon the list of essential Japanese experiences, just as trying out sushi orseeing the cherry blossoms.

Thecenturies-old experience of soaking in an onsen was traditionally a staple ofJapanese domestic tourism. While Americans typically spend short holidays atthe beaches, mountain cabins or casino resorts, the Japanese flock to onsenresorts to enjoy the serene hot open-air baths, the tranquility of nature, thesplendor of sumptuous meals and top-notch customer service.

Theonsen resort experience also offers more than just relaxation for the Japanese.It's a commonly held belief that the geothermally heated water nourishes theskin and heals certain ailments such as tendinitis.

Withover 3,000hot spring areas scattered across the country, Japan has morethan 13,000 onsen accommodation businesses, most of which are family-run.

Butas the tourism industry booms, there could be more demand for onsen resorts,according to Mizuho Securities' senior analyst Yosuke Ohata. "If we seemore demand coming up, it could lead to more investment in the onsenmarket and J-REITs will potentially buy more onsen properties," he said inan interview.