Can IHG Garner a new sweet spot in Japan’s midscale?

JAPAN – To grow its latest brand, Garner, outside the U.S., IHG goes with a young pan-Asia multi-asset real estate player with offices in Tokyo and Hong Kong that has just made its first hotel investment. The challenge for the newcomer, Axe Management Partners, will be how to make profits while charging less than a Holiday Inn Express rate.

The company recently acquired three WBF hotels in Osaka from CapitaLand Ascott Trust for JPY10.7 billion (US$71 million) and will reopen them as Garner hotels in the fourth quarter.

Axe founders, Gary Kwok and Sam Lau, rub shoulders with the likes of Adrian Cheng in Hong Kong, brother of Rosewood Hotel Group's Sonia Cheng. Adrian Cheng is among its capital funders, along with financial institutions and large family offices based mostly in Greater China and Hong Kong, Kwok told Hotel Investment Today.

Gary Kwok, Axe Management Partners

IHG launched Garner last August with an aim to create a new sweet spot in midscale, just below Holiday Inn Express. Kwok said Axe likes the brand because it will offer guests a better choice than the traditional midscale business hotels in Japan without paying a lot more.

Kwok, who is CEO of Axe, illustrates that if a Holiday Inn Express rate is JPY20,000, Axe would charge JPY10,000 to JPY12,000, lower than the Express but higher than the average rate of a Japanese business hotel of around JPY8,000.

Guests will enjoy a “younger version” of the Express, he said. Each Garner hotel will have a unique design and localization to meet Japanese and international travelers’ needs. Perks include welcome amenities, free hotel breakfast and daily snacks. Guests also enjoy full IHG One Rewards benefits.

“Japan has high quality midscale hotels, like WBF and APA [Hotels & Resorts]. But they are local brands and are pretty standard. We want to offer a premium midscale product that is a notch above what is available because there is demand for it. Although the three hotels we bought are new and nice, we are investing more capex to refurbish and rebrand them,” Kwok said.

The company is spending at least JPY1.07 billion (US$7.1 million) on capex, or more than US$13,700 per key.

Kwok is confident of an ROI of 20%, which bucks the usual 6% to 12% average returns for a hotel investment, citing the attractive deal price and IHG's international brand association as key factors.

Financing remains very cheap. The room rate may be low, but it’s higher than where these assets would typically trade. While IHG may well have higher fees than the previous operator [WBF], the premium does flow to the bottom line supported by above mentioned efficiencies.

Dan Voellm

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Dan Voellm, CEO and founder of AP Hospitality Advisors, said the price of JPY10.7 billion that Axe paid for the three hotels was “overall, attractive” when compared to the purchase consideration of JPY10.29 billion in 2018.

The hotels became part of CapitaLand Ascott Trust when Ascendas Hospitality Trust, now merged with it, bought them in 2018 for JPY10.29 billion, excluding fees and transaction costs.

Located in the Honmachi district, the three hotels finished construction and opened in 2018. Hotel WBF Kitasemba West and WBF Kitasemba East each has 168 rooms, while Hotel WBF Honmachi has 182 rooms.

Observed Voellm, “The properties are relatively new, have a freehold title and a decent size where efficiencies of scale come into full effect. Given that these are relatively new hotels with compact rooms of 11sqm to 15sqm, the renovation amount does not have to be very high.” The capex allocated seems a “reasonable” amount, he added.

Keys to success

But is there really a gap for the brand in Japan? “This segment has yet to be tested for IHG,” Voellm said. “IHG members on leisure travel and some corporate may take advantage of the new value offering in a portfolio that is rather top-heavy. Moxy is one comparison, though it has larger rooms, and it is doing well in Tokyo and Kyoto.”

Voellm believes the hotels will be profitable, although the ROI target of 20% is “ambitious, perhaps even eye-popping to some in today’s hotel investment world, but not entirely out of question for this deal.”

“The key is the low entry price,” Voellm said. “With the World Expo 2025 in Osaka and the distribution power of IHG, the deal has many macro positives. Furthermore, the clustering of the three assets will reduce overhead costs and drive the bottom line. As a limited-service hotel with breakfast only offering, profitability will be healthy.

“Lastly, financing remains very cheap. The room rate may be low, but it’s higher than where these assets would typically trade. While IHG may well have higher fees than the previous operator [WBF], the premium does flow to the bottom line supported by above mentioned efficiencies.”

The hotels will be managed by a team assembled by Kwok, who was CEO of Agora Hospitality Group, a small chain that operates full- and limited-service hotels in Japan.

“We can be cost-effective; it’s what I have been doing for many years. You can run some of these hotels with just 10 full-time staff and some part-time staff. Functions such as housekeeping are all outsourced,” Kwok explained.

The partnership with IHG is non-exclusive. “We are open to work with IHG on its other brands in the future, as well as with other partners. Internally, we have a target [to grow Garner] but we’d rather focus on doing it right than just chasing the target,” Kwok added.

There isn’t any capital involvement from IHG but “they’ve been supportive,” according to Kwok.

“We know they care a lot for this brand and believe it’s the next growth engine for them. We’re working on the brand concept together, as it’s the first time they go outside America with it. Just a few hours ago, we were on calls with them on design matters,” Kwok said.

The IHG factor

IHG is experienced in launching new brands in Asia Pacific. Australia was the first global destination for the Vignette Collection in 2021.

The current cycle is good because the fundamentals are strong. Tourists are coming in because Japan is a great destination. We expect that to continue because of [pro-tourism] national policies. The cycle is also good as interest rates remain low.

Gary Kwok

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“These global brands are rooted in the heart of this region, ensuring their growth resonates both locally and globally,” said Rajit Sukumaran, IHG’s senior vice president and managing director, East Asia & Pacific. “We expect the same to be true for Garner, which delivers all the important things guests traveling in this region value most. And, as a midscale conversion brand, Garner gives us the ability to grow quickly by giving owners of independent hotels the flexibility to easily transition to a global stage with IHG’s powerful systems.”

Japan makes perfect sense for Garner, Sukumaran added. “It boasts a sizable yet predominantly domestic midscale hotel segment and is undergoing remarkable growth amid the government’s ambitious inbound tourism targets and evolving international strategy. These factors are reshaping Japan’s travel industry dynamics, presenting strong opportunities for us.”

Axe is actively looking at opportunities in key cities including Tokyo, Osaka and Kyoto. On Japan’s decision to raise interest rates for the first time in 17 years, ending an era of negative interest rates, Kwok said, “We talked to other investors and, like us, they seem unfazed by it. Compared to the rest of the world, Japan’s interest rate is way too attractive still.“

The Bank of Japan recently raised short-term interest rates to 0-0.1%, from minus 0.1% previously. “The current cycle is good because the fundamentals are strong,” Kwok said. “Tourists are coming in because Japan is a great destination. We expect that to continue because of [pro-tourism] national policies. The cycle is also good as interest rates remain low.”

Beyond Japan, Axe sees opportunities in Hong Kong, China and South Korea and, “potentially” Southeast Asia.

IHG, meanwhile, is already seeing “a strong appetite” for Garner in markets including Australia, Indonesia, Singapore, Thailand and Vietnam, Sukumaran said.