local partner Kiraku, plans call for developing an initial 10 properties with a
modern day take on an iconic wellness concept.
Underwriting a ryokan investment, especially located in the
regional areas of Japan, is more intricate than the rituals of staying in one.
But Kiraku, Hyatt Hotel Corp.’s equal joint venture partner in developing a new
ryokan brand, Atona, expects an ROI within two to three years upon opening the
Atona will be a hybrid between a ryokan and an international
hotel experience. But Hyatt is not the first to be reinventing ryokans. It is,
nevertheless, the first large global hotel group to envision a branded ryokan
chain of real scale.
Jim Chu, Hyatt’s Chicago-based executive vice president and
chief growth officer, has in mind “at least 50 ryokans” in Japan, when asked
about the number in an interview at HICAP 2022 last October.
We have a track record and a good relationship [with lenders] from our previous projects. Plus, a name such as Hyatt and [its distribution of] 30 million guest profiles, add to the sense of security for investors and lenders.
Hoshino Resorts, the acknowledged pioneer of luxury ryokans
in Japan, has only 22 ryokans under its Kai brand after several years.
The challenges of a bigger scale are manifold. An obvious
one is staying authentic, avoiding commoditizing or standardizing a product
whose charm lies in great part to its individuality.
Underwriting is a lot of guesswork. “There are too many
variances,” said Kou Sundberg, president and CEO of Kiraku, when asked how he’s
underwriting the first Atona ryokan which is targeted to open in 2025. “You
might be averaging 80% to 85% occupancy in say, Kyoto, but 60% to 70% occupancy
in the regional areas. Seasonality is huge. The business model is different
from [normal] hotels. And traditional ryokans have near zero or zero revenue
Atona, announced in September 2022, is still in design
phase. This early, however, it has hit a construction roadblock in the shape of
supply issues and rising costs.
“We’re seeing costs rising by about 30% to 40%, in part due
to weakness of the yen. The lack of supply is shocking,” Sundberg said. “For
example, we got steel for the other projects within four months of ordering.
Now it takes about 12 months. We know that a lot of paused 5-star projects in
regional areas that are waiting to restart after COVID have not done so.”
“We will have to adjust our plans and study the construction
market and costs of materials in order to make the right decisions,” he said.
But Sundberg is still hopeful about an initial rollout of 10
Atona ryokans, the first in 2025. Land costs in regional areas have been
decreasing for the past 24 years, he said. There is also keen interest from
financial institutions and “sustainability-focused” family offices for Atona.
“We have a track record and a good relationship [with
lenders] from our previous projects,” Sundberg added. “Plus, a name such as
Hyatt and [its distribution of] 30 million guest profiles, add to the sense of
security for investors and lenders.”
Before founding Kiraku, Sundberg was investment analyst at
Fortress Investment Group, overseeing acquisition, asset management and
operation of the U.S. firm’s domestic hotel portfolio in Japan.
“With Atona, it is kind of scaling what we have been doing,
even though the concept is a bit different from what we have done,” Sundberg
said. “Nazuna and Kiraku properties are focused on the renovation of cultural
assets and ryokans, whereas Atona is more hotspring-oriented in locations
within national parks and hotspring towns.” said Sundberg.
Good relationship with municipalities is also advantage in
identifying locations for Atona.
“We’re looking at a few places. My vision is for Atona to be
in unique hidden destinations, initially within two hours by car or train from
Tokyo, Osaka or Kyoto, then further, say six hours. So, if you stay a few nights
in say, Tokyo, you could start stepping into regional places and experience a
ryokan stay with Atona,” he added.
But he's also aware of increased competition in the space,
saying a lot of global private equity funds are also looking to renovate or convert
ryokans into luxury accommodations, seeing the high rates they can fetch.
“Everyone is asking me, what are you trying to build, what’s
the cost, what’s your FFP budget? It’s a secret sauce that I don’t really want
to share,” Sundberg said with a laugh.
Experience brings differentiation
Sundberg is counting on his experience in running ryokans in
the past five years for some indicators. Kiraku operates four ryokans under the
Nazuna brand, and 10 eponymous Kiraku private villas.
Sundberg expects Atona to fetch a rate of $600-$800 per
night, per room. That’s higher than the Nazuna ryokans, which fetcha $500-$600.
The two are different models, however. Nazuna ryokans are
small. Nazuna Kyoto Tsubaki Street, for example, is a conversion of an alleyway
of michiyas (traditional wooden townhouses) into a 23-room ryokan. Nazuna Obi
Onsen Resort is a renovation of a large samurai mansion. It has just five
Atona ryokans, on the other hand, are largely new-builds and
have a bigger room count.
“A lot of luxury ryokans have just below 20 rooms, while
luxury hotels such as Park Hyatt Kyoto have around 70 rooms. We're aiming for
that middle point, 30 to 50 rooms, which allows us to operate the F&B as a
restaurant,” Sundberg said.
F&B is a big reinvention area for Atona because traditional
ryokan inclusions such as multi-course Japanese breakfast and dinner served
in-room at specific times daily may not sit well with modern global travelers.
“Whenever I go to a ryokan, I'd wake up in my tatami room at
7 a.m. and as soon as I’ve eaten in the room, the futons are taken away and I
can’t have my second sleep,” Sundberg said. “Or, you might have been out during
the day and eaten a great lunch and all you want is a light meal for dinner,
not a full course.”
Plans are to offer a la carte in a restaurant. Guests can
choose to have a ryokan kaiseki multi-course dinner if they so wish. We’re
thinking a lot about F&B these days. We want to give guests the flexibility
and choice of cuisines,” Sundberg added.
Atona’s room size will also be bigger, around 50-60 sqm. As
the brand centers around hot springs and nature, Sundberg aims to offer a
semi-outdoor or outdoor onsen bath for each room.
He believes the wellness component and a different F&B
concept are two value-adds that will enable Atona to fetch a higher RevPAR in
the market. Atona should also perform better than competitors by running a more
efficient ryokan operation, Sundberg said.
“What we’ve been doing at Nazuna is to keep a high GOP
margin by optimizing the operations,” he said.
All Nazuna and Kiraku properties have implemented Hamlet, a
property management system developed by Kiraku, to manage day-to-day
operations, collect KPI data and improve overall operational efficiency.
While increased construction costs are a bane, current
upswing in business fans Sundberg’s positive outlook for Atona.
Since Japan fully opened borders in October 2022, business
is booming. “Our occupancy in November for Nazuna properties was 91% to 97%.
December ended strongly as well, 75% to 85%,” he said.
“I’m telling the revenue management team to increase rates,” Sundberg said.