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Prospect of big profits lures foreign investors to Japan's love hotels

TOKYO—Japan's "love hotels" are hard to miss. Clustered around freeway ramps and dotting the suburbs, the neon-lit hotels often look like faux castles or garish villas from the Arabian Nights.

Customers slip into the windowless hotels without showing their faces or giving their identities, usually exercising discretion in their liaisons.

The hotels are no small affair for Japan, though. Numbering some 19,000, love hotels are a pillar of Japan's economy, thought to provide more tax revenue than all other industries except pachinko parlors, the noisy betting venues filled with pinball-like games.

So it is of note that some of Japan's love hotels face hard times. The owners got bank financing from the go-go 1980s, then plunged into other business. Now they struggle to make payments and can't upgrade their rooms to the amorous needs of 21st-century consumers. That's where foreign investors come in.

"They began expanding into other leisure businesses, like golf courses. The other things collapsed, and their properties are trapped," said Miro Mijatovic, the chief executive of MHS Capital Partners, a firm with offices in Tokyo and Hong Kong.

Sky-high real estate prices in Japan help shed light on the abundance of love hotels. The country's 120 million people crowd together in a land the size of California. Many families live with several generations cramped under one roof. Researchers say that more than half the love-hotel clientele is married couples or young unmarried couples with nowhere to go.

"In the suburbs, married couples use the love hotels to be romantic. Since they live together with grandma and grandpa, and with their children, they don't have privacy," said Jiro Miura, a commentator from the Love Hotel Total Research Office, a consultancy.

Major Japanese banks, for the most part, see the love-hotel industry as unsavory. Other lending agencies have let foreigners tread first. Sniffing for opportunities, investors such as Mijatovic are scouting love hotels for signs of distressed ownership and tallying the couples entering each day as a way to estimate revenues.

What they say they've found is an industry any investor could cherish.

Most love hotels are mom-and-pop businesses with an average of 10 to 25 rooms, although some have as many as 80. Chains are few, usually with no more than two dozen hotels each. In general, rooms rent for two or three hours, averaging about $66 a stay. Overnight stays are possible at a higher rate.

The average love-hotel room rents two and a half times per day, Mijatovic said. For a 40-room hotel, monthly revenue can come close to $200,000, he said. Profit margins routinely run at 45 percent.

Decades ago, Japanese craved the fantasy element of the "love hotels," which explains the kitschy, outlandish design of many of the older ones. But tastes in decor are evolving. Gone are the days of rotating beds, huge overhead mirrors and nothing but pornography on the television set.

"The gaudy look is out of date. The buildings themselves are changing," said Hirofumi Sasaki, an architect with a Tokyo firm that specializes in love-hotel design. "Anything that looks like a castle is out of date."

Modern love hotels look like European rooming houses, jungle-draped lodges or windowless office towers. The rooms often have themes, such as tropical resort, watery grotto or Asian getaway. Huge bathrooms contain scents and dried flowers, ready to throw in the whirlpool tub.

Some rooms don't easily fit into Western notions of romance.

Flipping through a photo album of renovated "love hotels," Sasaki comes across one room that's a shrine to the Hanshin Tigers baseball team, replete with a neon "Home run!" sign. Other theme rooms exalt Budweiser beer and the characters Snoopy and Hello Kitty.

Newer hotels try to offer memorable experiences.

Off the lobby of the P&A Plaza Hotel in Tokyo's bustling Shibuya district, a manager, Naohito Kurose, surveys the backlit displays of photos of revealing costumes that clients can have delivered to their rooms through vacuum tubes.

Nearly all are for women. They include cheerleader and sexy sailor outfits, low-cut tennis dresses, kimonos, beer hall fraulein get-ups and a red Santa's elf number.

"Couples come here and have fun picking out the costumes," Kurose said. "This may be unique to Japan, but the (girls') high school uniform is the most popular. The nurse's outfit is the second most popular."

Each room at the hotel includes menus for delivery of Domino's Pizza or KFC.

Probing the industry for financial details hasn't been easy for outsiders.

"It's a very secretive industry. It's not like you can go down to your real estate office and say, `Show me your love hotels,'" said Mijatovic, a Croatian-born Australian lawyer.

Earlier this year, Mijatovic and two partners, former bankers from New Zealand and the United States, pulled in $10 million to invest in the sector. They've bought two hotels near Tokyo, and seek $35 million to $40 million more for a second round.

Their plan is to renovate existing properties into boutique-style love hotels, creating the sense of being at a chic hot-spring resort.

"If we don't appeal to the females, the hotels won't be successful. The woman needs to feel very comfortable, nothing edgy," Mijatovic said.

At first, Mijatovic and his partners feared they'd find involvement by the yakuza—the criminal underworld—in the industry, but they've yet to uncover it.

Tax collectors monitor the love hotels closely, even measuring water usage for laundry to ensure that owners don't chisel on income declarations.

Already, there are signs that the industry is inching toward respectability, including an annual convention in Tokyo to display the latest wares.

"It used to be that no one understood or knew about love hotels. But people now know more about the industry," said Sasaki, the architect. "In the last two or three years, they have become more popular as investment properties."

He estimated that "maybe 30 or 40 percent" of love-hotel owners are overextended and unable to renovate their properties.

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(c) 2005, Knight Ridder/Tribune Information Services.

PHOTOS (from KRT Photo Service, 202-383-6099): JAPAN-LOVEHOTELS

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