Originally published here
When Airbnb (Private:AIRB) was in its infancy, not many people knew about home rental in Japan. Now that everyone wants to ride the boom, fewer hosts are making money.
Akasaka Real Estate CEO Erik Oskamp reports Airbnb hosts in Tokyo - especially those who sublease - are either not making money or are losing it. "Hosts put in a lot of work and they're not making a dime," he says, noting that returns on Airbnb hosting are often no higher than on ordinary rentals.
HouseCare founder Justin Clune also reports Airbnb hosts are finding profitability more elusive. While his Tokyo based next-day house cleaning online booking service soars along with Airbnb, HouseCare's hosting clients are taking longer to earn a return. Before, it took home owners two or three months to reach breakeven on their hosting investments. "Today it takes six months," he notes.
Airbnb grew by over 500% in Japan last year, causing the market to become fiercely competitive. Margins are squeezed as competition drives down the rates which hosts can charge. Real estate prices in central Tokyo also rose by 40-50% since Abenomics began 3.5 years ago, further pinching profits.
Hosts additionally face increased vigilance from apartment managers and doormen. In the past, building managers turned a blind eye to Airbnb guests. That is no longer the case. Once two or three Airbnb hosts move into the same apartment building, neighbors become alarmed by the sight of backpackers entering and leaving. Noise is the lead complaint. But all it takes is one guest who fails to separate the trash or fails to take it out on the correct day to disturb neighbors, says Clune.
Building managers know the law and are taking action by confronting guests asking, "Where are you staying?" and "How long will you be here?" As soon as they confirm that guests are staying at an Airbnb unit, they call the health department instead of the police. Hosts are often in breach of Japan's hotel licensing laws. "It is not a criminal matter," says Oskamp. Managers then tell guests, "Before we can let you in, please have the owner send us a copy of the rental contract."
Airbnb requires that hosts obey local laws set by Japan's Hotel Business Act which governs overnight stays. Few can comply. For example, the Act states home rental businesses must have a reception desk. Instead, most Airbnb hosts work in a legal gray zone as they often do worldwide. As long as nobody objects, hosts continue to operate. Once guests complain to Airbnb that they were denied entry to their accommodation - it's 'game over'.
First, Airbnb informs hosting clients they are in violation of Airbnb's terms and conditions. Then they cancel the client's account. Where the host has also sublet the apartment, rental management firms like Akasaka Real Estate typically cooperate with building managers to evict them. In such cases, hosts lose everything, including rental deposits and furnishings.
Oskamp reckons that margins will continue to get squeezed as Airbnb grows in popularity. So while Airbnb profits as its market share climbs, independent hosts suffer. If the trend continues only professional hosts, for instance those owning entire buildings, will remain profitable.