All eyes may be on Rio this summer as it hosts the 2016 Olympics, but in the investment world it may be smarter to look to Japan to see what opportunities it holds in the run-up to its own turn as host in 2020.

Tokyo 2020 will, of course, lead to a spike in inbound tourism and growth for Japan’s hospitality sector, but this will not be a one-off. Japan’s proximity to other Asia-Pac economies with established or growing middle classes means it has recently seen its tourism industry flourish. In 2015 the country reported a staggering 47.5 per cent growth in arrivals: Chinese visitors rose a whopping 109 per cent, with Hong Kong (up 67 per cent), Korea (up 44 per cent), Singapore (up 34 per cent) and Taiwan (up 30 per cent) all contributing to the boom.

Correspondingly, average daily hotel room rates (ADRs) have already grown by 40 per cent over the past three years in Osaka and by approximately 20 per cent in Tokyo. The boom may have been contributed to by some factors which are potentially temporary (currency devaluation and heavy overseas marketing by the Japanese government, for example), but there are more permanent factors also in play: changes in visa rules from key Asian countries and a successful open-skies policy which has lowered the cost of flights. In the medium term, therefore, hotels asset appear to be a good home for capital.

That said, the market will not be suitable for everyone: investors in this space must be nimble and be realistic about the possibility of disruptive events which could dramatically change the outlook of the industry. In addition, cap rates have compressed significantly recently, so entry costs can be high.

However, if you have the initial outlay, income growth should justify this in the long-term as we expect ADRs to rise further in the coming years.

Further information

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