(Bloomberg) -- The ski area of Niseko in northern Japan needs no introduction among the winter vacationers and wealthy elites of Asia. Its famed powder snow has drawn in hundreds of millions of dollars of investment over the years, accelerating a buildup of condos and hotels across two small Hokkaido towns to make it Asia’s best-known ski resort.

But in recent years, the prospects for developers to generate large profits from Niseko have dwindled as speculation from foreign investors drives some of the biggest increases in land prices in Japan. Surging costs of raw materials and a lack of construction labor are compounding the challenges in the remote area, putting a damper on the high investor interest to cash in on the nation’s tourism boom.

Developers that have been working in Niseko for years say the cost of doing a project there has tripled from a decade ago, and gone up about a third in the past two years. Delays, difficulties obtaining bank loans, and new local regulations that limit large-scale developments are making it harder to justify fresh investment.

“It’ll be a brave developer who launches right now,” said Jonathan Martin, founder of Niseko Alpine Developments, a real estate firm in the area. “You’re not investing here for yield.”

Martin said he has had three clients cancel developments in the past two years because of higher-than-expected costs. Another two are on the verge of being called off. Land prices, which used to be just 10% of the cost of a project, now make up 25% or more, said Martin. Construction expenses have also gone up about 20%-30% in the past two years, according to builders.

Niseko has long been seen as potentially becoming Asia’s rival to Whistler or Aspen, with most of its expansion driven by foreign investors, including notable names like Hong Kong’s Pacific Century Premium Developments Ltd. and Singapore’s SC Global Developments. Properties under the Park Hyatt and Ritz-Carlton brands have opened there in recent years, while luxury operators like Aman and Capella have announced projects. 

Investors are still evaluating the opportunities even as challenges mount, but some are having second thoughts.

Singapore-based luxury hotel operator Banyan Tree Holdings Ltd., which had announced a resort in Niseko in 2025, now says the project is being reassessed by the owner due to the new planning rules. More recently, it said it will open a hotel in Hakuba, a ski area in Japan’s main island.

“The economics used to line up, but now things have gotten significantly more expensive,” said Jeff Graves, the founder of Ukiyo Resorts in Tokyo, a real estate firm specializing in hotel and resort development. “The low-hanging fruit has all been plucked. It makes it difficult for the numbers to work.”

An acute labor shortage is one of the biggest contributors to costs. Getting construction workers to come to Niseko is proving difficult due to its remote location and competition for labor with other endeavors of national priority nearby — namely a new high speed railway and a semiconductor plant that has backing from the central government and industry giants like Toyota Motor Corp. and Sony Group Corp.

“Even if we pay more money, we can’t get any workers; the semiconductor factory work has taken all of them,” said Kousuke Miyakawa, head of the construction department at Hokkaido-based builder Nakayamagumi Co. In the past year, the company had to turn down at least five requests for estimates on Niseko work because of a lack of labor.

Read More: Ex-GIC Japan Head Planning $1.4 Billion Ski Haven Near Tokyo

Another constant headache has been the difficulty of securing local bank financing for Niseko projects, depriving investors of the rock-bottom interest rates that have made Japan a favorite for real estate developers as borrowing costs abroad soar. 

“Despite Niseko’s development as a resort for 20 years, for Japanese banks it’s still basically a no-touch area,” said Katsuhide Takahashi, a former bank analyst who has written a book on Niseko.

Loans in a resort location like Niseko fall outside of Japanese banks’ standard playbook for real estate financing, Takahashi said. If the lenders’ property valuation methods are applied to Niseko, it would be considered very overvalued, he added.

One project in the area marketed a private loan last year worth 12.6 billion yen ($84 million) at a 10% interest rate to help fund construction, according to a document viewed by Bloomberg. By comparison, the typical rate for financing projects in Japan is about 1.5% to 2.5%, according to developers and bankers.

And after years of rapid development, the town of Kutchan — which oversees half of the area known broadly as the Niseko resort — has put in regulations that restrict the floor space and height of new builds, a move that some developers say will make projects worth the investment nearly impossible. Kutchan town officials say the rules, which went into effect last October, are intended to scale back development and protect the environment as its water and sewerage infrastructure has been stretched to its limit. 

Akihito Hoshika, a section head in the town planning department at Kutchan, said the rules are to encourage renovating the existing built-out resort area along a few streets, rather than expanding it. The town said it’s no longer at a point where it needs to increase visitors in the winter season. 

To be sure, many still consider Niseko an investment worth the hassle. For developers or buyers of already completed properties, the current challenges may bring scarcity to the market that will keep driving up asset values. Helped by a weaker yen, Niseko remains cheaper than resorts in Europe and North America.

But the rise in costs is also translating into higher prices for the projects when finished, turning off some prospective buyers who have other options for returns.

Albert Chen, a Taiwan-based businessman, said his family looked at buying a condo in Niseko with a budget of about 400 million yen. Most apartments there are sold under a timeshare-like system, where owners use the property for a few weeks a year and turn it over to a management company that runs it as a hotel and pays out an annual return.

One three-bedroom luxury condo priced at 335 million yen that Chen looked at offered returns of 4% to 5% in the first four years. But Chen decided against purchasing the unit, saying he was unsure about the future value appreciation and pointing to other, less risky investments. 

“It’s about the same yield as putting the cash into US Treasury bonds,” he said. “We can take our return and go stay at whatever ski resort we want.”

--With assistance from Hideki Suzuki.

©2024 Bloomberg L.P.