In Japan, traditional accommodation rules hail from the period following World War II when hosts were required to obtain permission from local regulators before renting their rooms. Under the new framework, owners who choose to rent out rooms using services such as Airbnb, could benefit from five times more monthly income than a long term rental. With the weak yen and resulting surge of tourists, and the upcoming 2020 Tokyo Olympic Games, the demand for accommodation is over the top.

Hotel Shortage

Hotels in popular tourist cities, Tokyo, Osaka and Kyoto are regularly operating now at 90% occupancy rates at premium price. In Japan, homes registered with home-sharing website platforms such as Airbnb, increased in 2015 by more than 370%, the highest rate in the world, and increased in number of travellers using the service by more than 500%. Prime Minister Shinzo Abe recognized the hotel shortage and the demand for the home-sharing service. Furthermore, as part of his economic development plans, he intends to boost the number of foreign tourists to 20 million annually by 2020. He said during a government panel meeting in October, “We need to make the experience of foreign tourists visiting Japan more convenient and comfortable.  For this, we need to expand the number of short-term accommodations beyond hotels.”

New Framework

In late January, Tokyo’s Ota ward won an exemption from the country’s hotel law and became the first municipality in Japan to tackle the chronic hotel shortage. In the ward, residents could legally rent out space to tourists, a business known as “Minpaku” in Japanese, under certain requirements. Under the exemption, Minpaku, must register with the local authority, agree to inspections, and visitors must stay for a minimum period of one week. Regulations relaxed to an inn status, but management requirements were too stringent for owners to comply with, and many tourists did not have a need to stay for a week.

Recently, the Japanese government put together a new framework with three key changes to make minpaku easier to run: properties would fall under designated residences rather than inns, exempting them from the hotel law and eliminating the need for a reception area; second, the new legislation would eliminate the minimum stay requirement; third, Airbnb-style operators must register properties as a Minpaku business when adding listings.  It is expected that for the sake of convenience, many Minpaku operators will hand the responsibility of management of their properties to management businesses. “Management companies” will be obliged to perform background checks of guests, take care of complaints from neighbors, manage keys for the operator, take out casualty insurance, ensure building garbage rules are complied with, etc.

Profitable Market

As one multiple property investor explains, a nearby hotel in Tokyo charges ¥18,000 a night per person, whereas he charges ¥10,000 for the first person and ¥2,500 for each additional guest, so five people could theoretically stay there for the price of one person in a hotel. One of his units is a 30 sqm one-room apartment that he purchased for ¥10 million. The market rate for the unit as a rental is ¥80,000 a month, but he rents it out to Airbnb members and makes an average of ¥410,000 a month. After subtracting expenses and loan payments, he enjoys a return on investment of 25% a year. While the return would vary depending on location, the income is still higher than the current high yield market.

Waiting for Approval

The affordable Airbnb sharing system is becoming increasingly popular, catering to visitors who are not particularly interested in amenities, but looking for a room conveniently located near shopping districts and for sightseeing at their leisure. The Japanese government plans to submit the new Minpaku law to the regular session of the Diet, Japan’s legislature, sometime in 2017. Until then, home-sharing in Japan is still in a grey area, and in breach of the Japanese Hotel Business Law with the exception of special economic zones designated around the country, which have passed a special Minpaku enforcement ordinance, such as Osaka City and Ota-ku in Tokyo. But, the requirement is a minimum stay of seven nights.

Renting out a room to strangers may not be for everyone. In Japan, both regulatory and cultural restrictions pose the greatest challenges. Some say home-sharing spreads noise and causes a nuisance in Japan’s typically serene bedroom communities. Others worry about security risks. In a country adverse to change, many residents see home-sharing to foreigners as a rude awakening, putting it mildly. But, whichever way an overseas real estate investor turns in 2017, the grass is always green: invest in an affordable, high-yield property in a second or third tier city and receive immediate, generous monthly income or, invest in a more expensive property in a top-tier city and gain from the highly profitable short-term home-sharing market.