Terrie's Take 840 (Tourism Edition) -- New Minpaku Rules Make Most Airbnb Listings Illegal

Mon Feb 29 07:12:40 JST 2016

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan.
(http://www.terrielloyd.com)

Tourism Sector Edition Sunday, Feb 28, 2016, Issue No. 840

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+++ New Minpaku Rules Make Most Airbnb Listings Illegal

Bloomberg ran an article last week about the challenges that Airbnb 
faces in Japan, with the underlying question of whether Airbnb's 
business model would be allowed under the new minpaku rules or not. 
Rather than answer that question directly, the article gave a number of 
factors including the restrictive provisions of the new rules that make 
it clear that most Airbnb renters will still be breaking the law. I was 
interviewed for the article, and although my contribution was mostly 
about how renters are likely to circumvent the law, I thought I'd 
clarify what I think will happen to Airbnb and other minpaku businesses 
from now on.

Readers will recall from my previous posts on the topic (TT-828, 
November 16, 2015 and TT-754, April 27, 2014) that Airbnb's model is 
mostly illegal in Japan and that the new minpaku rules are actually just 
a series of local ordinances that follow some broad guidelines set by 
the cabinet office back in 2014. So far the new rules have been approved 
and adopted by Ota Ward in Tokyo and Osaka city, with both local 
governments setting the same requirement of a minimum of 7 days stay. If 
this seems like a long minimum stay, it is, and was cynically designed 
to discourage self-rentals. Never mind that Japanese hotels have some of 
the highest occupancy rates in the world and are basically full for the 
peak tourist months in all major cities in Honshu.

So by dint of the details, is Airbnb and the minpaku movement doomed? 
The new law has certainly cast the whole minpaku sector into a 
"grey-grey" zone. By grey-grey I mean that prior to the ordinances, 
minpaku was merely in a grey zone and so long as it wasn't addressed by 
legislators the Japanese authorities simply wanted to leave things 
alone. The sense in government was that with over 18,000 "landlords" 
renting holiday accommodation already, the Airbnb horse had already 
bolted. Besides, Airbnb is based overseas and therefore is beyond the 
effective reach of Japanese law. (Japanese courts are notorious for 
their aversion to hear cases involving overseas-based firms and even 
more notorious for their reluctance to enforce the few judgements they 
do make.)

[Continued below...]

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But the authorities did draw a line at mass management of self-rentals, 
busting a Briton several years ago (TT-757, May 26, 2014) and more 
recently (December 2015) two men in Kyoto for renting out 36 rooms to 
Chinese tourists. Japan is the home of grey zone rules, so just like 
everyone speeds about 20km above the speed limit on the highways, they 
know that it's illegal and are unlikely to complain if one day they get 
ticketed. Well, it seems the police are allowing minpaku/Airbnb 
operators to have a similar "speed limit" of around 10-15 units, above 
which the commercial nature of the renter becomes too noticeable to 
leave alone. For this reason, when Bloomberg interviewed their lead 
source in the story last week, the young lady, who is a property 
developer with a Sumida building nearing completion, said that she was 
only putting 9 of her units on Airbnb, while the rest would be listed 
for regular tenants. Presumably those tenants will be told that it's an 
Airbnb-friendly building, though.

My point on the Bloomberg article was that since the Japanese 
authorities accept some circumvention of unreasonable laws - especially 
when those laws were often made under threat of pressure groups -- there 
would likely be workarounds to allow the self-rental business to continue.

Now, I haven't checked to see if the minpaku rules carry prison-time 
penalties for breach, but I'm willing to bet that if they don't (since 
the rules don't address human safety, which in itself is strange). That 
means that although the 18,000 Japanese property renters on Airbnb know 
they are breaking the law, probably they are betting the authorities 
will not chase after them so long as they remain small fish. If they are 
charged, then the penalty will in any case be a modest fine, which for 
many people will simply be the cost of doing business.

I believe that the 7-day rule will be subverted by some simple means 
that follows the letter of the law but not the spirit of it. For 
example, savvy renters will offer the first 3-5 days at the full rate, 
and the remaining days at a nominal fee. Thus, for someone booking the 
place, a shortened stay will have minimal financial impact. I'm also 
guessing that the new minpaku rules don't prevent property renters from 
having multiple guests in the same 7-day period - so on the books they 
will have multiple occupants in the same room. In reality, however, one 
of those guests will have already moved on to their next port of call.

By this simple workaround (which for the record I am not condoning), my 
expectation is that Airbnb will continue to grow and more people will 
semi-legally rent out their places. A "speed limit" of around 10 units 
will become the defacto standard, and most renters will know this and 
abide by it. The message to Airbnb's local competitors, Hyakusen Renma 
and maybe Rakuten (which indicated several years ago that it wanted to 
get into the same business), will be that they will need to have a 
holding company off-shore to build and run the Japan community, and 
operate in the same grey zone.

The message to building developers will be that they can indeed build 
entire buildings to service minpaku customers, but they should not be 
the direct landlords after getting up to a certain number of units. 
Instead, they will need to sell off plan to investors who agree to allow 
Airbnb customers in their building, perhaps even requiring the investors 
to be Airbnb renters themselves, but in any case keeping the developer 
one step removed from the action.

If the government does allow this pragmatic approach to minpaku, then 
the movement will spread quickly into the hinterland of Japan and become 
a useful way for locals to make money from tourists. At that point it 
may even become politically accepted and overcome the objections of the 
hotels lobby. But we also predict that this comfortable grey zone for 
self rentals by the masses will only last as long as there are no 
fatalities due to hazardous rooms or deranged landlords or deranged 
neighbors. As soon as the first fatality hits the headlines, the noose 
will quickly tighten on renters, and the sector may die a quick death.

This is how and why the Japanese bureaucracy allows grey zones in the 
first place, so that they can initially release pressure from an area of 
demand, but can also act quickly when events call for it.

So is this a good environment for real estate investors to start 
building Airbnb-focused units? Probably not - things are too unstable 
and will remain so for a while.

What about if you want to invest in a few units as a private owner? 
Well, that is more likely a good bet, and right now with returns on 
central Tokyo apartments of 100% on Airbnb listings, it's certainly very 
tempting.

This is not to say that there aren't good commercial-grade real estate 
investment opportunities in the leisure market in Japan. There is 
certainly a shortage of ready-built hotels for sale but there are still 
a good number of bubble-era facilities all over Japan that could be 
re-purposed and refitted to become tourist accommodation. Also, as the 
Chinese are demonstrating, there are opportunities to invest in some of 
Japan's overextended local players, as Shanghai Yuyuan Tourist Mart 
(part of the Fosun group) did recently when paying JPY18.3bn for Hoshino 
Resorts' Tomamu resort in Hokkaido.

...The information janitors/

-----------------------------------------------------------

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