TT-840 (Tourism Edition) -- New Minpaku Rules Make Most Airbnb Listings Illegal

* * * * * * * * 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 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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