Fastest-growing Airbnb market at risk amid crackdown

[TOKYO] Aileen Jeffery arrived in Tokyo two years ago and spotted what she thought was the best opportunity of her career: Hotel rooms in Japan's capital were scarce and a boom in tourism was exacerbating the shortage.

The 26-year-old former real estate analyst took a 21st Century approach to the business, investing in condominiums tailored for customers of Airbnb Inc rather than travelers inclined to stay at traditional hotels.

That let her offer rooms in residential neighborhoods and sidestep Japan's strict and peculiar seven-decade old rules for hotels, which dictate everything from the length of reception desks to the color of pillow cases. Ms Jeffery's bet seemed like a good one at the time: Japan is Airbnb's fastest-growing market in the world.

Perhaps not for much longer though.

Under pressure from the hotel industry and a populace concerned with the surge of foreigners in their neighborhoods, Prime Minister Shinzo Abe's government has released guidelines for home sharing - called minpaku in Japanese - that could make most Airbnb rentals in the country illegal.

Airbnb hosts would only be allowed to rent to guests who stay for a week or longer, a minuscule slice of the market. The national guidelines only become law if local municipalities decide to ratify them, but that is beginning to happen. Ms Jeffery is rethinking her expansion plans, while Airbnb is seeking ways to hang on to its business.

"If the government is serious about fixing the accommodation shortage before the 2020 Olympics, it can't place minpaku operators at a significant disadvantage," said Ms Jeffery, who analyzed hotel and residential properties for a London investment firm before moving to Japan to be with her fiance and starting her rental company.

Airbnb, now the third most valuable startup in the world, was founded in 2008 and has encountered far fewer obstacles on its path to global acceptance than the app-based car service Uber Technologies Inc, its companion in the so-called sharing economy.

Even so, there have been assorted battles, including clashes over the rules for home rentals in New York and San Francisco.

Stumbling Blocks

But Japan shows potentially serious stumbling blocks as the company expands further abroad. Ota, one of 23 districts within Tokyo, became the first municipality to fully adopt Mr Abe's proposal last week.

Osaka, the country's third-largest city, will begin implementing the laws in April. More authorities plan to follow, possibly including the Sumida district in Tokyo where Ms Jeffery is nearing completion of a seven-story building.

That crackdown comes as Mr Abe is trying to draw more tourists to boost the economy, and the nation prepares to host the Rugby World Cup in 2019 and the Olympics in 2020.

His policies that have weakened the yen and the relaxing of visa requirements pushed tourists to a record 19.7 million last year from 8.4 million in 2012 - and made Tokyo hotel occupancy rates tighter than Paris, Hong Kong or New York. The number of visitors will hit 35 million by 2020, according to an estimate by Goldman Sachs Group Inc.

Ruling Liberal Democratic Party lawmaker Masaaki Taira acknowledges the new rules may create "severe restrictions" for hosts of the 26,000 properties in the country, but says the guidelines are a reflection of the competing interests of his constituency.

"The hotel industry had very serious concerns, so we set the minimum number of nights at a level that lowers the chances for competition," said Mr Taira, who was directly involved in drafting the government's guidelines.

"Of course, there's a possibility we may shorten that minimum going forward."

Japan Accommodation and Lodging Foundation lobbyist Taito Itoh said allowing more direct competition would be unfair to hotels, which unlike Airbnb operators have to comply with the lodging laws.

Any hit to profitability would remove incentives for hotels to keep investing in properties, undermining Mr Abe's ultimate goal of creating a robust infrastructure to accommodate the tens of millions of tourists in the coming decades.

Country manager Yasuyuki Tanabe, who runs Airbnb in Japan, is pushing back against new restrictions on his business. The company won't directly enforce the new rules, he said, though it will ask property owners to adhere to local regulations. He added that hosts may be able to avoid the rules in certain circumstances, without specifying how they would do that.

Mr Tanabe said the government should create new laws specifically for the sharing economy, rather than employing a modified version of lodging rules that are almost 70 years old.

The number of Airbnb guests in Japan soared more than 500 per cent last year, the highest rate in the world, he said.

"Rather than concerning ourselves with hotel laws, we'd like to think about creating a new rule from scratch that applies to platforms like Airbnb," he said.

Japan's Airbnb chief has the backing of some of Japan's biggest tech firms. The Japan Association of New Economy, headed by Hiroshi Mikitani of online retailer Rakuten Inc, argues it makes no sense to regulate Internet businesses with laws drafted when computers didn't exist.

Even if the government, hotels and sharing-economy businesses find common ground, there are still neighbors unhappy with the new rental practices. Lawmaker Mr Taira says a major concern is that foreign travelers will cause trouble in residential areas. The guidelines he helped draft require aspiring Airbnb hosts to first inform neighbors of their plans.

That's done little to comfort people like Daisuke Hoshikawa, who heads a resident association at a 33-story condominium in Tokyo. He said not only does Airbnb undermine security, it also means common facilities like the gym and swimming pool can used by "an unknown number of people."

"It just ruins the atmosphere," said Mr Hoshikawa, whose building banned Airbnb and other hosting sites last April.

"It's great the government is promoting tourism, but they need to do so after thoroughly taking care of many things from the start. We understand it may help some people, but we're opposing it."

Work-Arounds

Terrie Lloyd, who heads online travel portal and consulting firm Japan Travel KK in Tokyo, said Airbnb and other home-sharing businesses may find ways to avoid restrictions even if they become law. For example, an apartment owner could book a guest for a full week, but then require the person to stay for only a couple of days.

"Airbnb doesn't want to do those work-arounds, but the people who run the actual places may end up doing that anyway," he said.

Aileen Jeffery doesn't want to build a business dependent on skirting the law. As she closes in on completion of her seven-story building, she is scrapping her original plans for mostly Airbnb rooms and converting more than half to standard apartment rentals, replacing magnetic key card-readers with traditional steel locks.

"It's difficult to work around details that are constantly changing."

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