Japan Just Legalized Minpaku. What Opportunities Does That Open Up, and What Trouble Has It Run Into?

If minpaku once looked much like an ordinary homestay, the line between minpaku and traditional inns is now blurring fast.

Before 2016, renting out a spare room in your own home to travelers at a low price was illegal under Japanese law. As visitors poured into the country, the lodging business boomed, and conservative Japanese slowly began to think about how minpaku might be made legal.

This April, Japan's Hotel Business Act finally loosened its grip on minpaku in a way that means something. The law now applies in many parts of the country; the required stay has been cut to two days and one night; and 3.3 square meters of floor space per guest is enough to qualify as legal. The old requirement to apply for permission before renting a place out has gone soft as well, replaced by the vaguer "obligation to notify the local municipality."

Minpaku: a new way to put idle housing to use

As Japan's birth rate falls, the number of vacant homes keeps climbing. One recent figure put the country's total housing stock at 60.63 million units, of which 8.2 million sit empty. Tokyo alone has 81,700 vacant homes; Osaka has 67,900. The owners have little idea what to do with them. Japan's property market has been sluggish for years, and the market for used homes is no better. Renovating an old house, meanwhile, costs a fortune. So the owners have no appetite for renovating.

At the same time, hotel occupancy in popular destinations like Tokyo and Osaka has passed 80%.

With the lodging industry looking less and less able to keep up, and all those empty houses waiting for an answer, renovating them into minpaku has begun to look like a sensible use of what is already there.

In April 2016, Wedge magazine reported on one such company: in an old building in Ikebukuro, Tokyo, a Chinese real estate agency with a staff of three occupies an entire floor. The firm, a property management company, was born out of the minpaku deregulation, and the clients it is after are precisely the Chinese who come to Japan to buy property. One of its managers told Wedge: "The number of Chinese tourists coming to Japan has exploded. In their eyes, minpaku are cheaper and more personal than a traditional hotel, and if the minpaku is run by fellow Chinese, communication is easier, which makes it more appealing still. So more and more Chinese are thinking about investing in Japanese property and turning it into minpaku. Minpaku is becoming an important lure for Chinese money going into Japanese real estate."

These agencies have built a bridge between the owners of empty houses and the people who want to run minpaku. As middlemen matching supply to demand, they have taken some of the pressure off Japan's glut of vacant housing.

A new answer to "regional revitalization" in the mountains

Sasayama, in Hyogo Prefecture, is about an hour by train from central Osaka. Set among the mountains, it is an old town with more than 400 years of history, and as a hub between Kyoto and the San'in and San'yo regions it holds several nationally designated districts for the preservation of traditional architecture.

NIPPONIA is a cluster of minpaku at Sasayama Castle in Hyogo Prefecture. Unlike other minpaku, it spans four buildings — ONAE, SAWASIRO, NOZI and SION — each of them more than 100 years old. You check in at NIPPONIA's main building, then eat and sleep in these four houses that together make up NIPPONIA.

The company behind the conversion, NOTE, works on regional regeneration all over Japan.

Since Sasayama's first minpaku opened in October 2015, NOTE has finished converting more than 60 old houses in the town. According to Takeshi Fujiwara, NOTE's representative director and a Sasayama native, roughly 1.49 million old private houses still stand in Japan. Most of them are empty, and without renovation they will simply collapse and rot. Of those 1.49 million, even if NOTE took on only a fifth of the work — at a pace of 30 houses a day and a cost of 30 million to 40 million yen per house — that would come to 10,000 houses a year and a bill of 300 billion to 400 billion yen.

"Government subsidies alone are nowhere near enough. As things stand, the only way to build up the money is to turn these renovated houses into a private-sector industry," Fujiwara told Discover Japan.

Because Japan has relaxed its minpaku rules, this plan to turn old houses into lodgings has been able to move ahead smoothly. Through the whole process NOTE plays the "middleman," and for this conversion project it has designed a workflow in which several parties each take a job and each take a return.

NOTE starts by finding old houses that suit a minpaku and sit in a decent location, then negotiates with the owners through the local neighborhood association. Owners hand the houses over for nothing, or for a token fee. NOTE takes out a renovation loan from the Development Bank of Japan, uses the money to find a suitable architecture practice, and hires professional architects to do the work. Once the house is finished, NOTE brings in a professional management company to run the lodging and dining side, and leaves advertising and promotion to Ikyu Corporation.

Why has NOTE been able to work so smoothly and so fast?

Here is why. Owners hand their houses over for next to nothing, but once the renovation is done the house counts, for a time, as an asset of the company operating it as a minpaku. That operator takes its profit from ten years of running the place. After ten years, the house goes back to its owner in good condition.

In this way the neighborhood association both saves and repairs its old houses and gets the regional revitalization it wanted. The owner gets a house that looks brand new, and the operator and the lending bank recover their costs over the ten years the house runs as a minpaku.

Professional management companies arrive, and minpaku start going "unmanned"

By the old definition, a minpaku was an owner renting out part of his own home to travelers at a modest price, giving them a more local experience than a hotel could. But as tourist numbers grew and the law opened up, more and more people saw the huge potential of minpaku as a business model. Some ended up with several properties running as minpaku, and managing them all became a headache.

Professional property management companies have appeared to take that off their hands. With management fees running at 20-30% of the room rate, this looks like a decent business for any company with tight operational control and enough people.

Business is business, but the trouble goes well beyond collecting rent.

A management company has to perform every function of a landlord: field complaints from the neighbors, check the property for damage, hire cleaners to do the rooms.

Unlike hotels, minpaku are scattered all over. Relying on people alone would leave these companies badly inefficient, so some technology firms have started building high-tech products for the minpaku market that can do what a person would otherwise do. To deal with noise complaints, for example, a smart noise-monitoring system is already on sale in Japan. Installed in a room, it contacts the management company automatically the moment noise passes a preset decibel level that might disturb the neighbors. The company then takes whatever step is needed to have a word with the guests.

Cleaning companies have found their opening in the boom too. Axismotion, a property management company in Shinjuku, Tokyo, has solved its rising cleaning workload and staff shortage by drawing on housewives with free time during the day. "We think this is a good option for the housewives as well. Working part-time in a restaurant means being spotted by someone you know now and then, and they find that embarrassing," said the firm's representative, Shoji Tanaka.

The boom has also pushed several established property management companies into new lines of business. Investor Cloud, which began as a mobile app for real estate listings, now sells, through its subsidiary taterukit, a smart in-room terminal that links guests to landlords. The tablet works in English, Chinese, Korean and other languages, and lets guests hold a video call with the management company. The owner can run a safety check without being there and answer a guest's request from anywhere. taterukit's technology also ties the whole house together — lights, air conditioning, the room's security system — all of it set from the owner's phone.

Last month Investor Cloud went further and set up a subsidiary devoted to minpaku, tateru bnb. Its services run from converting an ordinary home into a minpaku, to applying for the operating license, listing the place on Airbnb for the owner, handling management and operations, and cleaning the house. For all of that tateru bnb takes 20% of the room rate as its fee — and its all-in service is making it steadily easier to become an Airbnb host.

Professional managers have made it possible for one person to run several minpaku at once, which also means minpaku are going "unmanned": guests no longer need to speak to the owner at all.

The outlook is bright, but plenty of problems are still waiting

The Japan Ryokan and Hotel Association, which has 15,300 members, argues that "today's minpaku are no different from hotels." In practice, though, these minpaku fail to meet fire regulations and the Building Standards Act, and they carry real safety risks. Of the 26,000 Japanese minpaku listed on Airbnb, moreover, about 61% are "unmanned" properties — which is to say they have drifted away from the original point of putting empty houses to use, and exist to make money.

The growth of the business hurts not only traditional innkeepers but the people who live next door.

On the question of whether minpaku affect the neighbors, JustSystems surveyed 290 homeowners in Tokyo between the ages of 20 and 69. Of those, 61.4% thought running a minpaku out of their own home could affect the people around them, and 55.2% did not want anyone running one near their house. The Japanese, who hate being a nuisance to others, are plainly not enthusiastic about the idea.

"Last year we had no complaints at all. This year we have already had 23 about minpaku. Each one takes an enormous amount of time and effort. Airbnb has no inquiry service for this, and if the host says nothing, working out what actually happened is extremely difficult," Section Chief Kamimura of the Chiyoda Ward Public Health Center in Tokyo told Wedge. Complaints about garbage sorted the wrong way are a particular problem in Japanese society.

Fierce opposition from neighbors, plus earlier cases of suicide inside minpaku, have given apartment buildings a bad name and eaten into property values. At the end of last year the high-rise Shirokane Tower drew up a set of measures banning minpaku. Management watches Airbnb's site, and if a unit in the building turns up listed there as a minpaku, the resident gets a warning.

At bottom, the opposition is about this: the more minpaku there are, the more they threaten the traditional inn and hotel trade. Against minpaku that pay far less tax and offer a better, cheaper stay, hotels keep losing ground.

And running a lodging business inside shared living space has an enormous effect on the ordinary lives of the residents — which is what leaves the established interests so worried.

The line between minpaku and traditional inns is blurring by the day.

Related websites:

Axismotion: http://axis-motion.co.jp

Investor Cloud: http://www.e-inv.co.jp

taterukit: https://www.taterukit.jp

NOTE: http://plus-note.jp

NIPPONIA: http://sasayamastay.jp/about/

Reference magazines: Discover Japan, April 2016; Wedge, April 2016; Toyo Keizai, February 6, 2016