Rolling in the Welcome Mat


New regulations could make things more complicated but they shouldn't signal the end of Japan as a strong investment destination. 新例或令市況更複雜,但不代表投資日本不再吸引。

New regulations could make things more complicated but they shouldn’t signal the end of Japan as a strong investment destination.

On a short jaunt to Osaka last year, Hongkongers Kurt and Clay rented an Airbnb apartment, like so many people do now. They were warned beforehand to keep their presence low-key, and were asked to be clandestine in picking up the keys for the flat. They did indeed see suspicious neighbours looking out their windows.

Some would argue that the very nature of Japan's harmony-first, sedate, intensely respectful culture would work in opposition to Airbnb's DNA, but the concept of homesharing, minpaku in Japanese, has a long history, just not on such a large scale. With major events looming in Japan—the 2019 Rugby World Cup, the 2020 Olympic Games in Tokyo—the ongoing emergence of Niseko as a major ski destination and the Japanese government doubling down on their successful bid to boost tourism (now targeting 60 million by 2030) investors bank on it. The pro-airbnb, federal government hopes that it and other home-sharing platforms will mitigate Japan's hotel room shortage, so-called sharing economy seemed poised to explode in the country until Japan introduced new home-sharing legislation in June. Home-sharing platforms (Airbnb is not the first) have become an appealing alternative for investors due to the fact that more revenue can be generated in daily rentals than with long-term tenants. Hong Kong investors have flocked to Japan in the last few years because of a favourable currency, Japan's freehold laws and the simple fact that it is affordable. Japan's booming tourist trade makes it a wealth generator too. But as a disruptor Airbnb has attracted negative attention from the traditional hotel industry as well as city legislators concerned about security and tenants' rights, and Japan isn't alone in struggling to work out where Airbnb fits within its property market.

Here in supply-constrained Hong Kong the government is flirting with a bill that would fine owners illegally renting out flats for the short term a whopping HK$500,000 (up from $200,000) and extending jail time from two years to three. Hong Kong law prohibits leasing property for fewer than 28 days without a licence. In British Columbia, come November owners' corporations will have the ability to levy a daily fine (up to CA$1,000) on owners and residents for violating short-term rental laws. The fines stem, in part, from fears that long-term residents

are losing their flats to the temp market. Australia is considering regulations in the wake of a murder in an investor-dominated apartment block in Melbourne. Various cities in California have regulators actively working on how to police Airbnb operations, Paris (the app's biggest destination) is tightening the noose on secondary flats for short-term leasing after pointing at Airbnb as the reason for a sudden rental shortage, Berlin now demands permits and outright bans subletting, and New York and San Francisco demand registrations only by permanent residents. As of 2015, Santa Monica Airbnb hosts have been required to live on the property during rental periods, obtain business licences and collect a 14% city tax. The measures eliminated 80% of the city's listings practically overnight.

Introduced June 15, Japan's regulators legalised short-term rentals on the condition potential hosts registered their properties with local authorities, obtained the required permissions and did not exceed 180 days per year for rentals (as is the case in Sydney). A month after the legislation was made official, of the 100 cities allowing home-sharing, only half of the applications in 13 locations like Kyoto were approved—and Naha approved only 7%. Tokyo had none. Registrations were slow, with reports that only 25% of Airbnb's Japanese listings were complying with the regulations. Most notably, listings plummeted to roughly 15,000 from 62,000 before the regulations came into effect. One unexpected consequence of the new registration system is hosts that were leasing rooms on a casual, fast-and-loose (often illegal) basis are exiting the market, prompting the remaining hosts to raise prices.

The arbitrary rules that often change from city to city make the registration process complicated too. Quirks such as weekendonly rentals, or the host/owner required to be on site at all times are problematic, particularly for investors. Other requirements include a mandated management service, fire and emergency infrastructure, evacuation instructions and building safety documentation by architects. "Cumbersome procedures and detailed regulations are discouraging homeowners from starting or continuing minpaku rentals," Kyushu University law professor Shinto Teramoto told the Review.

But the added expenses may not add up to enough to sway investors away from Airbnb hosting over standard rental: yields can be up to 25% with home-sharing in prime locations. Other requirements that could be a major inconvenience for local Japanese, such as hiring a property manager, are de rigueur for investors, and will have little impact in the long run. Hongkonger Kammy Kwan, who operates serveral Osaka flats, recommends simply getting permission from the management company before making a purchase in Japan. All cities are different, and investors need to investigate the local rules thoroughly to determine if the investment is legally and financially viable. And remember: no matter what kind of hurdles you need to jump, Airbnb is still taking its 3% per rental.

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