The Water Does Not Increase — 27,899 Sources and 2,839 Onsen Areas as a Finite Resource

According to the “Hot Spring Utilization Status” survey published by the Ministry of the Environment’s Nature Conservation Bureau, as of the end of March 2025 Japan had 2,839 onsen resort areas and 27,899 hot spring sources. The number of areas fell by 18 from the prior year, and the number of sources by 21. This contrasts with a recovering demand side — accommodation facility counts and total guest nights (125,414,300 in FY2024) — while the underlying resource base, and the number of onsen areas in particular, has declined for six consecutive years since FY2019, a cumulative loss of 132 areas.

This asymmetry is what elevates water rights to a primary variable in ryokan acquisitions. Demand is returning; the resource is not expanding. New drilling, moreover, requires prefectural governor approval under Article 3 of the Hot Springs Act, and permission is withheld where there is a risk of affecting the discharge volume, temperature or composition of existing sources, or of harming the public interest. Applications are customarily referred to the hot spring subcommittee of the prefectural environmental council, and in many municipalities that subcommittee convenes only about twice a year. In other words, the assumption that “you can simply drill for it” does not hold, at least not in the core of an established onsen area.

The resource is also highly concentrated geographically. By prefecture, Oita stands out with 5,094 sources, followed by Kagoshima with 2,735, Hokkaido with 2,249, Shizuoka with 2,185 and Kumamoto with 1,339. The top five prefectures account for roughly 48% of the national total.

A high source count does not, however, translate directly into “easy to own a source.” Within Oita, the distribution is extremely concentrated: Beppu has 2,831 sources with a discharge of 101,856 litres/minute, Yufu has 1,074 sources at 51,998 litres/minute, and Kokonoe has 435 sources at 85,736 litres/minute (Oita Prefecture disclosure, as of end of March 2025). In an area with high source density such as Beppu, holding an individual source can be a realistic option for a ryokan; in an onsen area with only a handful of sources, the only ways to obtain water are a piped-water right or centralized management from the outset. What the buyer can choose is not the form of the right, but rather the method the onsen area has already adopted.

Three Forms of Rights — Where the Hot Springs Act, Customary Law and Distribution Rules Overlap

Rights to hot spring water are not settled by any single statute. The Hot Springs Act (Act No. 125 of 1948) governs drilling, deepening, the installation of powered equipment, and the utilization permit required when water is supplied for public bathing or drinking. Who may use the water on an exclusive basis — the private-law question of ownership — falls outside the Act.

On that private-law question, the courts have taken a distinctive approach. The right to draw hot spring water directly from the mouth of a source and control it exclusively is known as a hot spring right (温泉権, also 湯口権 or 温泉専用権), and it is treated as an exception to the numerus clausus principle of real rights despite having no statutory basis. The Great Court of Cassation judgment of 18 September 1940 recognized an exclusive hot spring right as a real right under customary law, and the Yamagata District Court judgment of 25 November 1968 likewise recognized the existence of a usufructuary real right under customary law. As a general rule the right is contained within land ownership, but in onsen areas with long histories there are cases where it has come into being as a real right independent of land ownership. The land register alone, in other words, does not settle who owns the water.

In practice, the ways a ryokan obtains water can be organized into the following three forms.

Of the three, the one hardest to read from the outside is centralized management. The ordinances and rules are public, but how many cubic metres of permitted water volume a given property actually holds, and what a change of title requires, are matters specific to that property. And it is precisely those property-specific circumstances that create room to negotiate on acquisition price.

Expressing “What You Are Buying” as a Formula — The Value Structure Set Out in the Basic Circular on Property Valuation

Japan already has a public formula for pricing rights to hot spring water: Section 9 of the National Tax Agency’s Basic Circular on Property Valuation, “Spring Land and Rights Existing Thereon.” Although it is a valuation standard for inheritance and gift tax, it is worth referencing in M&A valuation design because it sets out, at the level of the text itself, how the layers of rights stack.

Translated into acquisition practice, each of the three forms demands a different question. For an owned source: will that wellhead continue to deliver the same volume and temperature, and will the permits transfer into the new name? For piped water: is the apportioned volume fixed as a number, and does the contract survive a transfer of management control? For centralized management: what is the permitted water volume, and whose approval is required for a change of title? None of these appear in the financial statements.

Distribution Systems Can Be Read from Public Sources — Actual Figures from Atami, Kusatsu and Gero

In onsen areas with centralized management or municipal distribution, the tariff structure and membership conditions are published as ordinances. This is information that can be secured free of charge and with certainty in the early stages of an acquisition review, and it is useful for getting a sense of the order of magnitude of the actual figures.

Article 22(1) of the Kusatsu ordinance is instructive for anyone assessing a centrally managed right: continuing to draw the water can itself be a condition of retaining the right. In renovations involving a long closure, or in turnaround projects where the opening schedule slips, this kind of suspension clause enters the critical path of the business plan. Conversely, an onsen area whose procedures are set out explicitly in an ordinance is easier to assess, in the sense that the route to verification is clear.

Mapping the Onsen Areas Covered — Visibility of the Distribution System and the Distribution of Estimated Settled ADR

The onsen areas covered in this article are plotted on the map below. Circle size represents estimated settled ADR for June 2026; colour distinguishes whether the municipal or cooperative distribution system can be confirmed from published materials.

Ranking the estimated settled ADR levels, as of June 2026 Atami leads at ¥19,400 (N=104 properties) followed by Yufu at ¥19,200 (N=141 properties), then Ito at ¥15,900 (N=126), Minakami at ¥15,600 (N=49), Kusatsu at ¥14,600 (N=91), Kokonoe at ¥14,100 (N=46), Gero at ¥12,900 (N=48), Shibukawa at ¥12,600 (N=45) and Beppu at ¥12,100 (N=124). On the Hokkaido side, Noboribetsu is at ¥17,100 and Toyako at ¥14,300, but both cover only N=15 properties — smaller than the other areas — and are treated as reference values.

What deserves attention here is that a large number of sources does not correspond to a high ADR. Beppu holds 2,831 sources — the largest resource base in the country — yet its estimated settled ADR for June 2026 sits in the lower half of these 11 areas. Gero, where sources are centrally managed, is likewise at or below the middle. In other words, the volume of water itself is not the primary driver of pricing; other variables — the mix of property sizes, guest segments, and the level of capital investment — are doing the work. Water rights are not a device that lifts ADR directly; they are the foundation that determines the continuity and cost structure of the business generating that ADR.

Viewed as a year-over-year overlay, all four areas share the same seasonality: a peak in August with troughs in June and September. December is also a peak in Atami, Yufu and Kusatsu, though in Gero the highest month within 2025 was November (¥21,700). Yufu has been setting recent highs — ¥27,100 in December 2025 and ¥26,200 in January 2026 — with January 2026 up roughly 8% against the same month a year earlier (¥24,300 in January 2025). Atami likewise reached ¥27,200 in January 2026, up roughly 22% from ¥22,200 a year earlier. June 2026, by contrast, sits below the prior-year month in every area, which may reflect both demand adjustment during the rainy season and the fact that the number of properties observed rises seasonally in that month.

Translating the Cost of Water into an Annual Per-Room Figure — a 40-Room Model

Differences in the form of the right ultimately surface as differences in annual cash outflow. Below, with the assumptions stated explicitly, we assume a 40-room onsen ryokan and convert only those costs directly tied to obtaining and maintaining the water into an annual per-room amount. Bath cleaning, mains water, labour and building depreciation are excluded.

Sensitivity to fuel and electricity prices — optimistic, central and pessimistic scenarios

The central case above assumes Class A heavy fuel oil at ¥110/L and electricity at ¥22/kWh. Reheating fuel, however, accounts for ¥91,000 of Case B’s ¥225,000 annual per-room cost — roughly 40% — making it the single largest variable, so a swing in unit prices moves the gap between the forms directly. Below we flex fuel and electricity prices by ±30% while holding every other assumption fixed (water volume, temperature gap, equipment cost, distribution fee and usage charges), giving three scenarios. Centralized management (D) requires no reheating because water arrives at 55°C, so it does not move in this analysis.

Two things follow. First, the ranking of the forms themselves does not change when unit prices move. In every scenario the order from lightest to heaviest is D → A → C → B: centralized management is lightest, and an owned source with pumped extraction plus reheating is heaviest. Second, the size of the gap depends heavily on unit prices. The capitalized value gap between B and D ranges from roughly ¥96 million to roughly ¥143 million across 40 rooms — a spread of ¥47 million. The value of verifying source temperature and actual fuel consumption in due diligence is proportional to the size of that spread. Read the other way, a property with a heavy reheating load has correspondingly more room for its valuation to improve when fuel prices fall.

What this estimate shows is a counterintuitive ordering. The lightest cost belongs to centralized management (D, ¥31,000 per room per year), and the heaviest to the owned-source case requiring pumped extraction and reheating (B, ¥225,000). The gap is ¥194,000 per room per year, or ¥7.76 million a year across 40 rooms.

The reason is straightforward: under centralized management, the cooperative or municipality absorbs the equipment risk of drilling, maintaining and pumping the source, and where water is distributed at 55°C as at Gero Onsen, reheating fuel is unnecessary as well. An owned source, by contrast, means covering the entire temperature gap out of your own fuel budget whenever the discharge temperature falls short of bathing temperature. “Owning” a source can, in cost terms, be a burden. That said, there is also the option of treating that heat as a revenue source rather than a cost — monetizing it through heat supply or binary-cycle power generation, an approach with its own capex profile and site-suitability conditions.

But this is a discussion about cost, not about value. Centralized management has the smaller annual cash outflow, yet the permitted water volume is capped by the rules, a change of title requires the managing body’s approval, and the permit itself can lapse if suspension continues. An owned source carries the larger cash outflow, but so long as the operator controls the wellhead it can decide on its own initiative to add rooms, draw more water, or build a new bath. Valuation has to hold both sides in view at once.

Cap Rates of 5.5%, 6.5% and 7.5% — Converting the Cost Gap into Asset Value

The cost gap attached to hot spring water is a fixed expense that recurs every year and feeds directly into NOI. To bring it into a discussion of acquisition price, the practical approach is to capitalize it at a cap rate and restate it as a per-room value gap.

Restated at a 40-room scale, at a 6.5% cap rate the water cost structure alone produces a value gap of roughly ¥119 million for the property as a whole. Even a seemingly small difference of ¥50,000 per room per year becomes ¥769k per room when capitalized at 6.5%, or roughly ¥30.8 million across 40 rooms. Whether due diligence pins down source temperature and the actual distribution fee to a single digit determines whether you hold negotiating material on that scale.

Seen from the other direction, this also shows where the upside sits. A property with a heavy reheating fuel load has structural room to reduce cost — by replacing heat exchangers, insulating the storage tank, or shifting to a bath design suited to a low-temperature source. Being able to price in that post-acquisition improvement potential creates a negotiating shape that satisfies both the seller’s expectations and the buyer’s required return. In a centrally managed onsen area, the equivalent upside question is whether the permitted water volume secured on joining can be sized to a future room-expansion plan.

What Guest Reviews Say About the Water Itself — Mentions of Free-Flowing Springs and Water Quality

The form in which water rights are held is invisible to guests. But the experience of the water — “free-flowing from the source,” “water quality” — surfaces in reviews. Below we look at the distribution of mentions over the most recent 24 months, drawn from NLP analysis of guest reviews by MetroEngines Research & Consulting. Note that a mention rate is not a rating score; it is the frequency with which guests touched on that element.

The distribution in Gifu is worth noting. Gero Onsen has managed its sources centrally since 1974, distributing water at 55°C to each ryokan. Even so, Gero Onsen Suimeikan records 436 mentions of water quality (a 15.7% mention rate), an outlier nationally, and Hotel Kusakabe Armeria records 200 (13.0%). Guests’ own words indicate that centralized management does not, in itself, diminish the appeal of the water.

Mentions of “free-flowing from the source,” by contrast, come from a limited number of properties nationwide. Those meeting the threshold of 10 or more mentions judged positive within a prefecture number 13 in Shizuoka, 7 in Gunma, and only 2 in Hokkaido. Free-flowing water occupies a scarce position both as a resource and as a marketing term. How far that scarcity is being recovered as an ADR premium is a separate question from the form of the right, and one worth examining on its own terms.

An Acquisition Due Diligence Checklist — What to Ask, by Form of Right

The analysis above translates into verification items usable in a live transaction. None of them can be read from financial statements or the real estate register; each is settled only by enquiry to the seller, the managing body, or the competent municipality.

These checks are not simply an exercise in pushing the price down. If anything, a transaction in which the water rights are clearly documented is easier to explain in a lender’s credit review. Where the apportioned volume is fixed as a number and the succession procedure is set out explicitly in an ordinance or set of rules, both the collateral valuation and the future cash flow can be presented to third parties in a structured way. Conversely, a transaction in which the contours of the right rest on oral custom is both negotiating material on price and an opportunity to build value after acquisition by putting the arrangement in writing.

Conclusion — Water Rights Are Not a Cost. They Are the Price of Operating Freedom

What this analysis shows is that annual water-related cost can range across roughly a sevenfold spread depending on the form of the right — from ¥31,000 to ¥225,000 per room. Capitalized at a 6.5% cap rate, that is ¥2,985k per room, or roughly ¥119 million across 40 rooms. It is a variable that moves acquisition price at least as much as visible factors such as building grade or guest room size.

At the same time, the cost ranking and the value ranking do not coincide. The lightest form, centralized management, carries constraints on permitted water volume and succession procedure; the heaviest, an owned source with pumped extraction, buys with that burden the future freedom to add rooms, draw more water, and expand the bathing facilities. What the buyer should be pricing is not the water itself, but the operating freedom to do something with it.

As the Ministry of the Environment’s statistics show, the number of sources has fallen for six consecutive years and onsen areas are contracting. New drilling requires permission under Article 3 of the Hot Springs Act, and permission is withheld where an effect on existing sources is found. Under this structure, existing ryokan that have already secured water rights hold something scarce in the access right itself. Whether due diligence can read those water rights one level deeper is not merely a matter of avoiding risk; it is a question of whether that scarcity can be priced correctly.

And finally, it is worth restating what the Gero Onsen reviews showed. Even under centralized management, mentions of water quality ranked among the highest in the country. The form of the right determines operating freedom and economics, but what determines the value of the water as guests receive it lies on the operating side — in how that water is used. Due diligence on the rights is the entry point for measuring that operating latitude.