Thakral's property bets

Tokyo’s hosting of the 2020 Games was announced in 2013. Since then, many new hotels have been built and are scheduled to open between this year and next, when the Games will be held.

Instead of looking to acquire more hotels, Inderbethal is open to offloading the three hotel properties his company bought not too long ago and putting the proceeds in office properties instead. The company Thakral Corp, which has its roots in trading, is going big on retirement resorts in Australia. It is also trying to catch the revival in Japan brought about by the Tokyo Olympics. currently owns seven properties in Osaka: six office and one retail. “We are shifting from one sector to another. Maybe we can cash in on some of these assets and move on to other projects,” says Inderbethal in an interview with The Edge Singapore.

He could have waited a bit more for the prices to go up further, but he points out that there has to be some upside left for potential buyers to enjoy; otherwise, they will not bite. “That’s a normal property cycle,” he explains.

The three hotels — Best Western Osaka Tsukamoto Hotel, R Hotels Inn Osaka Kita Umeda and Hotel WBF Namba Motomachi — were bought between late 2016 and 2018. The company now aims to sell them as a portfolio at ¥6.4 billion ($79.6 million) to ¥7 billion.

All three hotels are under master leases to three operators, so Thakral’s returns are assured. The operators are enjoying an occupancy rate of between 80% and 90% and due to renew the leases in 2022 and 2023.

In the meantime, the market is feeling the impact of the new supply of rooms. “You see new hotels offering lower rates, whereas the older ones are trying to maintain their occupancy rate of over 80%, but [it is] coming down a bit,” says Inderbethal.

If he does not receive a satisfying offer price for the hotels, he is happy to keep them in the portfolio. “The returns are very strong. There’s no rush to go out there and cash in,” he says.

Last good cycle

Thakral is keen on office properties for a few reasons. The Osaka office market is tight. The vacancy rate has dipped below 1% and rents have started moving “quite aggressively” as a result. Prices, on the other hand, have to go up except in a few “fragmented cases”. Now, just like the case of new hotels, there is new office supply coming, but it will start to do so only in 2022 and more meaningfully only in 2023. “This is probably the last good cycle to pick up some good assets there, there’s much more upside,” says Inderbethal.

He is keen to repeat his tried-and-tested strategy: Look for slightly older buildings, refurbish them and make them more attractive to new tenants. Then, increase the rents with each renewal of the lease. “That’s been our business model. And, of course, as time goes by, when some of these properties are more mature, the market grows to the point that it is feasible for us to exit,” he explains.

Starting from 2014, Thakral bought 10 properties in Osaka. So far, it has sold three. The remaining seven are held through two companies. The first is Thakral Japan Properties and the net asset value (NAV) of the properties held by it has increased from $18.7 million in 2016 to $40.7 million as at 2QFY2019.

The second holding company is an associate of Thakral’s: TJP. Including unrealised fair valuation gains, the NAV of the properties held under this entity has increased from $28.4 million as at Dec 31, 2018 to $38.2 million as at 2QFY2019.

Inderbethal’s renewed optimism in Japan can be largely attributed to the revival of the country’s economy under Prime Minister Shinzo Abe, which has led to steadily growing demand from Japanese companies looking for more office space. Tourists, excited about the 2020 Olympics, are visiting Japan in greater numbers than before. From 10.4 million in 2013, some 40 million are expected to visit Japan in 2020, and the number is seen to surge to as high as 60 million by 2030. “The trajectory is there,” says Inderbethal.

In addition, a younger generation of Japanese are not afraid of pushing ahead to start their own business and carve out new niches. They no longer subscribe to the old notion of life-long employment at the same company. That has led to a more vibrant economy. “The whole engine has started,” says Inderbethal.

Furthermore, the Japanese government has plans to integrate three cities — Osaka, Kyoto and Kobe — into one megapolis that can then be positioned to complement the Greater Tokyo Area and be the second-largest urban centre in the country. Significant catalysts for Osaka will also come from the Expo 2025 and casinos — if they get the goahead.

Trends in demographics are helping too. While Japan’s overall population is stagnant and ageing, the rural areas and smaller towns are the ones more severely affected. The older folk, says Inderbethal, are moving to the cities to join their children, who have migrated there in search of better employment opportunities. “In this catchment area of Osaka, life is good, living conditions are nice and people [prefer living here than in rural areas],” says Inderbethal.

False starts

In a sense, the Thakral family is more familiar with Japan than many other non-Japanese investors are. The family opened its first trading office in Japan in 1936. World War II disrupted the business, but it was restarted in 1951. The family has been active in Japan ever since. “All the way, the philosophy of the group has been to make money from the trading business and put it in property; nothing’s changed,” says Inderbethal.

Over the decades, the Thakral family has seen quite a few turbulent cycles. A house that a family member owns in Japan was initially valued at US$1 million. It shot up to US$30 million at the peak of the property market in the late 1980s and crashed to as low as US$2.5 million before climbing to just over US$4 million now ($5.4 million). The family still owns the property.

Inderbethal is aware that in certain locations in Tokyo, new peaks have been achieved — but this has yet to happen in Osaka. Yet, he is happy to concentrate on Osaka instead of chasing newer, more exciting deals in Tokyo. Besides the historical familiarity with the area, Inderbethal cites affordability as another reason. While he can make calculated bets, there is always the risk that things may not turn out as expected.

He admits that he has seen quite a few “false starts” in the property market. In 2005, the company went in, thinking that the market had bottomed, but the global financial crisis of 2008 threw a spanner in the works, and the market corrected by 20%. In 2010, there was another false start. In 2013, the market did go up quite strongly. Thakral made some offers, but did not manage to buy anything until the following year. “We’ve done well since then,” he says.

‘Burn some dollars’

On Nov 7, Thakral announced that earnings for its 3Q ended Sept 30 increased 417% y-o-y to $4.8 million. Revenue in the same period was $27.7 million, down 28% y-o-y. For the nine months ended Sept 30, earnings improved 31% y-o-y to $9.5 million. The company plans to pay an interim dividend of two cents a share.

Thakral’s investments in properties, in both Australia and Japan, helped contribute to earnings. In recent years, it has stepped up its real estate investments in Australia (see “Thakral’s retirement resort brand GemLife poised for further expansion” on Page 13.) However, losses in the trading and distribution segment, or “lifestyle” division, weighed on the bottom line.

For the nine months ended Sept 30, this division reported sales of $55.7 million, down 41.7% from $95.5 million in the year-earlier period, and incurred losses of $2.3 million. The company attributes the poor sales to “internal issues” in connection with a Japanese brand that it distributes in China.

Inderbethal declined to elaborate on what happened to the Japanese brand except to say that if the brand had not been taken into account, the division would have been profitable.

Despite the setback, Thakral is constantly signing up new partners and brands, and adding new product types as well as widening its network for both physical and online channels. The company, with its roots in trading, wants to remain in this area and is ready to take some short-term pain as it builds economies of scale. “Unfortunately, in this particular field, we have to burn some dollars to get ourselves well positioned,” says Inderbethal