Japan: Cashing In on Golf's Comeback

With economic recovery, the game's hot again. Which is why Goldman Sachs and Lonestar are scoring eagles on their green investments

by Ian Rowley

There are few things more emblematic of the crazy, speculative excesses of late-1980s Japan than the nation's golf-course business. Golf club memberships were fetching $2 million-plus at the most prestigious clubs back then, and scores of real estate developers and companies bet big on course developments all across the archipelago. It ended in tears, of course, when Japan's bubbling economy found itself in a Sahara-sized sand trap by the early 1990s.

Now Japan is in the midst of one of its longest postwar recoveries and the country is just as golf-crazed as ever. It is hard to find another economy on the planet where golf course memberships are followed almost as closely as the stock listings. A golf membership price index published by The Nihon Keizai, Japan's leading business daily, is up 37% from the end of March, 2005, suggesting golf is back in the swing of things.

Japan's highly developed secondary market for tradable golf course membership rights is also springing back. On top of that, U.S. investors such as Wall Street giant Goldman Sachs (GS) and Dallas-based Lone Star Funds, both of which spent sizable sums acquiring failed golf course operations earlier this decade, are cashing in big-time on the golf industry comeback.

THE RIGHT TIME.

On Nov. 1, Goldman will sell shares in its Accordia Golf, which it formed back in 2003 by buying up interests in a gaggle of failed courses. That looked like a bizarre move back when the Nikkei was flirting with two-decade lows, and price deflation gripped the economy. It looks smart as heck now. The share sale is widely expected to raise $1 billion, which would make it the third biggest initial public offering in Japan this year. Japan's biggest golf operator, Pacific Golf Group International Holdings—the golf unit of Lone Star, a U.S. private equity outfit—raised about $340 million in an IPO last year.

Why all the enthusiasm? For one thing, now that Japan's economy is back in the groove, there's a glut of cash-rich baby boomers about to retire. And golf's appeal is widening beyond just men. The upshot: Course operators are finally witnessing an upswing in interest and profit opportunities. "Golfing activity in Japan is set to receive a massive boost from demographic changes and rising consumer spending during the next 5 to 10 years," says Oliver Cox, an analyst at Macquarie Securities in Tokyo

The early stages of the recovery are already underway. The number of visitors to Japan's 2,400 golf courses increased 2% this year through March, having fallen in four of the last six years. Meanwhile, the number of rounds per year played in Japan, having once topped 100 million, has stabilized at around the 80 million mark.

LINING UP.

Just as important, Japan's 11 million golfers seem again willing to spend serious yen to guarantee getting on the course. Membership at really exclusive clubs such as the Yomiuri Golf Club in suburban Tokyo will still set you back a cool $500,000. But there is also growing interest among Japanese duffers to get into less expensive clubs.

"An increasing number of individuals are now prepared to pay membership fees of $25,000 or more—that's a big change from a year ago," says Yaeko Sagawa, president of Sakura Golf, which trades golf club membership rights.

That's helping the bottom line of golf course operators. Pacific Golf Group, Japan's biggest with 99 courses, expects to make net earnings of $7.7 million this year, compared to $3.3 million last year. Macquarie Securities estimates that Pacific Golf's operating profits will grow at 25% per annum over the next three years. That will be a nice bonus for Lone Star, which still owns a 65% stake.

TIGRESS WOODS.

Demographics are another big factor driving the turnaround in Japanese golf, with the number of retirees surging. Between 2007 and 2009, Japan's wealthy baby boomer set (dubbed "dankai no sedai" or the cluster generation) will leave the workforce.