For ‘love’ and money

Miro Mijatovi´c believes he’s on to a sure thing.

Miro Mijatovi´c believes he’s on to a sure thing. The Tokyo-based Australian lawyer says he has uncovered the “last unpolished diamonds in the world’s second-largest economy” and “the most profitable real estate sector in Japan.”

But the jewels he’s referring to don’t have the shiniest of reputations: Mijatovi´c is building a real estate fund based on leisure hotels, a.k.a. “love hotels,” small Japanese lodgings that rent rooms two hours at a time.

The estimated 20,000 such inns represent a $30 billion industry with gross returns averaging 50 percent, according to Mijatovi´c. “It’s not unusual for establishments in big cities to have daily occupancy rates of up to 700 percent, ten times the top level for conventional hotels,” he notes.

The lodgings are burdened with an unfairly seedy image, Mijatovi´ c contends. “They don’t have mirrors on the ceiling, revolving beds or sex toys in the bathroom,” he says. In fact, Japan’s infamous love hotels come in as many varieties as candy bars do. Some are dark; many are lighthearted or kitschy. They are found on every corner in Japan’s red-light districts and scattered across the cities and suburbs.

Mijatovi´c reckons he can bring transparency to the sector, starting with foreign investment. His Hong Kongbased private equity firm, MHS Capital Partners, launched a ¥500 million ($4.75 million) pilot fund in the spring of 2004 and bought its first, 19-room hotel in Chiba, a city outside Tokyo, in November. Mijatovi´c says he’s now raising money for a $20 million fund. “Foreign institutions are starting to take notice,” he reports. He recently recruited two managing partners, one from Merrill Lynch and the other from Instinet.

MHS expects to own 50 to 60 hotels within six years, and Mijatovi´c says he’ll be able to deliver a 20 percent annual return to investors almost immediately. His next step would be to create a real estate investment trust to be listed on the Tokyo Stock Exchange -- and then hope for a credit rating that isn’t XXX.