Kyoto’s former red-light district now a hotspot for investors

Gojo-rakuen, a former red-light district between Gojo and Kiyomizu-Gojo Stations and along the western side of Kamo River, is now a hotspot for fast-moving investors. The neighborhood is undergoing rapid gentrification into a trendy tourist district, while land values are seeing strong growth.

Between 2013 and 2019, rosenka land tax values (used only for calculating inheritance and gift tax) increased by almost 70% on some streets. Land that once traded for under 100,000 Yen/sqm in 2011 was selling for up to 550,000 Yen/sqm in 2017. Now, the average market price in this area is closer to 700,000 Yen/sqm. In 2019, government land valuations at several survey sites in the surrounding neighborhood saw a year-on-year increase by as much as 20%, more than double the rate of increase seen in 2018.

What is pricing like?  

  • A 480 sq.ft rental house for 340,000 USD
  • A 1,600 sq.ft block of land for 740,000 USD
  • A 10-room dormitory-stye house for 1.4 million USD
  • A 10-room hostel for 2.4 million USD 

Land values have been somewhat suppressed by a local Yakuza gang that has its headquarters in the neighborhood. While this may be seen as a negative factor to ordinary home buyers, it has little impact on investors focusing on cheap hostels catering to budget-conscious foreign backpackers. Stroll around the once undesirable and underutilized neighborhood and you will find newly opened cafes in restored historic buildings, hipster coffee shops, craft beer bars, event spaces, ateliers, and a plethora of backpackers hostels and guesthouses.  

This red-light district started in the mid-Edo period on former farmland. It flourished towards the end of the Edo period and early Meiji period, and was known as the largest red-light district in Kyoto. For a brief period after WWII it was recognized as a legal red-light district. 

When the Anti-Prostitution Act was introduced in 1958, the district’s name was changed from Shichijo-shinchi to Gojo-rakuen. At the time there were 84 tea houses, 16 geisha dwellings, 15 ryokans, 19 bars, and 100 geisha. If you are lucky, you might see traditional machiya houses adorned with karahafu curved-gable roofs that date from the 1910s to 1930s.

In 2010, prefectural police raided the neighborhood arresting five tea house and geisha dwelling operators for violating the Anti-Prostitution Act. After the raid, several tea houses closed and some buildings were later demolished. The once undesirable neighborhood sat relatively underutilized for the next couple of years. 

The current record low interest rates mean Japanese investors not only have access to cheaper finance but are also actively seeking out places to put their money that will generate even a minor return. A lot of that money is being funneled into real estate, pushing up property values while compressing yields. In central Tokyo, gross yields have crept down to the 3% range both on large-ticket buildings and on high-end condos.

Keen investors are now seeking out undervalued districts in hopes of achieving a higher return. Some of that investment is going to old downtown or shitamachidistricts both in Tokyo and other urban centers, including Kyoto.

Of course, domestic investors move fast and in great numbers which means these little-known-gems don’t remain undervalued for long. 

Source: Nikkei Business, August 19, 2019.

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