Japan's love hotels flirt with retail investors

TOKYO (Reuters) - An industry known for its privacy is flirting with the public, as Japanese love hotel funds look to entice retail investors with attractive returns.

Many of the hotels popular with secret lovers and young couples evading their parents at home look shabby compared with their heyday in the bubble economy of the 1980s.

But they hold out the promise of sweet returns for investment funds that renovate and securitize them for the debt market.

Following the example of offshore private equity firm MHS Capital Partners, whose love hotel fund raised $10 million (5 million pounds) from foreign institutional investors a few years ago, local fund managers are targeting individual investors.

Tokyo-based investment group Global Financial Support Co. (GFS) is launching the 11th and the last of its fund series this month with investments starting at 500,000 yen (2,078 pounds).

GFS's previous 10 love hotel funds have raised a total of 11.6 billion yen since 2004, offering average payouts of 8.4 percent annual interest with a five-year maturity.

That compares with less than 1 percent on most Japanese savings accounts.

GFS said it would offer a similar payout with the 11th fund.

"That's exceptionally attractive given that it would be almost impossible for most retail investors to earn such high returns from other products," salesman Daisuke Ishibashi told a news conference.

GFS's funds have all sold out as they attract investors left cold by other real estate funds' soaring prices and low returns.

Japan's bullish real estate market has also seen investment banks such as Goldman Sachs and Morgan Stanley take over golf courses and city hotels.

But love hotels, which range from the tacky to the luxurious, are exceptionally profitable.

Rooms rented by the hour earn fatter margins and more free cash flow than ordinary hotels rooms since they may be occupied three or four times per day.

GFS's renewed property Hotel Asia P-Door is located in one of the love hotel districts in central Tokyo, and offers its guests a selection of 23 rooms featuring palm trees and water fountains for as little as 2,980 yen for two hours.

It is said there are about 27,000 love hotel properties across Japan, creating an industry estimated to rake in close to 3 trillion yen in annual sales.

But high returns come with high risks.

GFS warns investors that their investment in the love hotel funds is not fully guaranteed, which means they can lose out if the hotels go out of business, burn down or get entangled in crime.

One of the reasons why the business has failed to lure more institutional investors is that it is often associated with organised crime and red-light districts.

(Additional reporting by Dan Sloan)