China’s Wealthy Are Flocking In, Making Operators Rake It In… Vacation Rentals Remain Profitable Despite a String of Problems—Operators Set Their Sights on the “Next Hot Spot”

Soaring Demand for Vacation Rentals

The vacation rental industry is at a major turning point. The number of business registrations filed with the Japan Tourism Agency has risen to approximately 57,000, and the market size is now estimated at 800 billion yen. While the industry continues to grow as a major sector, repeated conflicts with local residents—such as noise and litter issues—have become a cause for concern.

In July, the Japan Tourism Agency and other authorities notified local governments that “if the living environment in residential areas is impaired by vacation rentals, local ordinances can effectively prohibit operations in those areas.” The government has also expressed the view that banning vacation rentals is appropriate when they adversely affect the local living environment.

In response, private lodging operators are growing increasingly concerned. A man who runs a private lodging business in Tokyo confides:

“Around 2017, before the Residential Accommodation Business Act—commonly known as the New Private Lodging Act—was enacted, the private lodging industry was in a bubble-like state, with a proliferation of facilities that did not meet the standards.Although the boom temporarily subsided during the COVID-19 crisis, the number of operators entering the vacation rental market has surged over the past two to three years. Demand is skyrocketing, particularly in central Tokyo. It’s no exaggeration to say that, within the 23 wards of Tokyo alone, there are vacation rental properties near virtually every train station.”

It is well known that the increase in foreign tourists visiting Japan is behind this surge in demand. Soaring prices at hotels and other lodging facilities are likely also fueling this trend, as vacation rentals are more affordable than hotels or traditional inns. The man mentioned earlier revealed, “If we set our prices 10 to 20 percent lower than those of nearby APA Hotels, our bookings fill up quickly.”

Differences in travel styles also seem to be contributing to the growing demand for private lodging. In Nakano Ward—known for its scarcity of hotels—an American family dragging their suitcases explained why they chose to stay at a private lodging:

“We often stay in vacation rentals when traveling abroad. They’re affordable, and we can live as if we were at home. If a family is planning a long-term stay overseas, a condo or a single-family home is more suitable than a hotel. I think there are quite a few foreign travelers who feel this way.”

The Shirahama Area, a Hub for the Affluent

Amid a proliferation of vacation rental operators riding the wave of the government’s inbound tourism policy, the new vacation rental law mentioned earlier came into effect in June 2018. Although the market has gradually matured since then, the situation facing vacation rental operators is reportedly deteriorating. The operator mentioned earlier continues:

“Most vacation rentals in central Tokyo are essentially sublets of properties leased under rental contracts. Based on our experience, over 90 percent of landlords refuse to allow vacation rentals due to concerns about conflicts with neighbors who dislike disturbances. Even when we finally find a landlord willing to rent to us, we’re often charged rent that’s nearly double the market rate.

There are also costs involved, such as installing security cameras. It’s not as easy as just starting a side business. Still, since it doesn’t take that long to recoup the initial investment and it’s not particularly difficult to turn a profit of about one million yen a year, there’s no shortage of operators willing to enter the market despite the effort and upfront costs.” (Ibid.)

So, which areas are vacation rental operators currently targeting?

“The Shirahama area in Wakayama Prefecture is popular. It has hot springs and the ocean, and the appeal lies in its ‘somewhat nostalgic’ atmosphere. Over the past three years or so, everyone who has purchased a property in Shirahama from us has been Chinese. A business model has taken hold where affluent Chinese purchase vacation homes, sublet them to operators, and Chinese tourists then use them as vacation rentals.The properties are also managed by Chinese nationals. This stands in stark contrast to Osaka, where many private lodging operators in the Special Zone are crying out in distress due to falling prices following the end of the World Expo.”

The increase in vacation rentals, particularly in city centers, goes hand in hand with frequent incidents such as noise disturbances and trash problems. The Japan Tourism Agency’s policy shift is also said to be due to the rise in conflicts between local residents and guests. It appears that the coexistence of vacation rentals and local communities will increasingly be left to the discretion of local governments and other administrative bodies.