Condotel and managed property investments opportunities are currently booming in Indonesia. This mini guide provides advice related to vacation or retirement oriented investments in hotel or managed villa projects. Whilst this guide references Bali, some of the advice provided is relevant to any managed resort type of investment in any major destination in Asia.
Guaranteed return 8% … Own a piece of paradise and you can stay in it up to X weeks free a year
Whether you are driving around (Bali), walking in a tourist area or shopping in a mall, you will likely notice a billboard, kiosk, or attractive sales person handing out flyers containing marketing material typically including the above terms and promoting investment in the booming vacation property market. The sales pitch generally contains some form of “Guaranteed Return” or the attraction of having a suite, villa or unit readily available for your use for a set period of time in each year.
Indeed, many frequent Bali visitors would find it hard to miss the huge growth in hotels and villa projects, which seemingly are sprouting up like trees (weeds?) in every available open space or rice field. To fund these properties many are marketed as “condotels” or managed resort style projects. Suffice to say many of them would not exist, if there wasn’t a demand for them. When considering purchasing this type of investment it is important to understand, that, this is a relatively new investment trend in Indonesia, and the legal protections and agreements covering these investments may be significantly different than the terms of similar investments that are available in more developed Western economies or markets.
Many are bought by middle class tourists who, probably intoxicated by the beauty of the resort area, signed the contract and wrote the cheque, so they could “own” a small piece of paradise. This guide, is written for people, who may be considering such an investment, but hopefully have a “sober moment” to fully understand what they are investing in before they sign that sales contract and hand over their well earned cash to “own” their rights to use their retirement or resort property for a period of time each year.
So without much further ado, here are some questions and points you may want to answer yourself or get answers to, or think about, when considering such an investment.
What is your Objective ?
Is it capturing a nice investment return on a booming real estate market? or Having the right to stay every year at a beautiful resort in a stunning location and save money down the road ?
If any of the above are your objective you may want to assess carefully whether, this is the right investment for you.
If your motivation is capturing a return on what you believe to be an appreciating real estate market, be aware that what you are investing in is probably not a real estate investment. As it is probable that you do not have direct ownership, registered title, and/or access rights to the underlying land. In most cases, the investment you will really be making is in fact a “quasi” partnership in a private resort business. Quasi from the perspective, that in most cases in Indonesia, it is unlikely that the investment package even contains an explicit partnership agreement.
The success of this type of investment will largely be dependent on the resorts ability, to increase and grow their revenues, and control their ongoing operating and maintenance costs. If you are comfortable and understand resort investments, then this may be the right investment for you! However, it would probably be advisable to compare this investment to the potential returns from an investment in a public hotel company such as Marriott, Four Seasons etc. whose investment, is regulated and probably has the legal protections offered by a developed country legal system and where you also have the benefit of a ready secondary market for selling your ownership rights (shares).
If this investment still meets your investment criteria, then a review of the financial assumptions that the developer is making should be completed to determine whether they are realistic or not. Specifically you will want to check the resort developer’s forecasted revenues, occupancy and room rates and make an assessment, given the resort location and current trends in tourism and hotel/room supply, whether they are realistic, or not. A check of the rates offered online by travel agencies and a google of current and forecasted occupancy rates for the resort location/area should assist here.
If saving money on future vacations is your incentive, then you should ideally assess this investment in the context of making an advance payment on future hotel vacation costs and determine whether it will save you money in the long term. Especially, if you think hotel or resort room rates will be rising drastically, over the next several years. Keep in mind, that hotel rates can move quickly, in Bali for example 2-3 years ago a resort property whose room rates were probably US$100 per night is lucky if they can currently get a rate of US$50-60 dollars per night, simple reason being the supply of rooms in paradise is currently significantly outstripping the demand for rooms.
But It Has A Guaranteed Return of 8% ? Guaranteed! - and I can only earn 3% if I put the money in the bank!
a guarantee is as only good as the guarantor
There is a saying in the finance industry that a guarantee is as only good as the guarantor, and indirectly the legal terms and provisions covering such a guarantee. So especially in Indonesia, when the term Guarantee is being used, for marketing purposes, you really need to assess and understand who exactly is your guarantor.
A guaranteed return is great if a AAA insurance company or a major bank is providing the guarantee, but if your guarantee is coming from a single investment private resort company, whose only projected profits are going to be made from the property your investing in, it is probably almost “guaranteed”, if they ever face requests to deliver on the guarantee, that the guarantor (ie. the resort company) wasn’t able to run the business as profitably as they projected in those glossy sales brochures, so good luck on enforcing your guaranteed return.
Ah, yes, I hear you responding, “but the sales person indicates that the funds for the guarantee will be held in escrow, by a credible notarist or third party!” If that is the case, and the “guarantee funds” are being held in trust from the date you invest, then with a high degree of certainty, I would suggest, that the only reason, this is possible is that you are overpaying for the property, and that in effect you are funding your own guaranteed return. Rather than paying a higher price for that guarantee, you probably would be better off asking that the sales person reduce the price for your resort unit, by the estimated amount of the “guarantee” payout, and forgo a guaranteed return as you will essentially have received it upfront.
Are you buying because there are only 3 units left?
Effective marketers, like to create urgency when making the sales pitch to buy a unit, and it is not uncommon, just like many hotel booking sites do, to create a false sense of urgency when trying to secure that sale. As a result, it is highly likely during a sales presentation to hear the marketing person tell you that “you better act quickly as there are only a small number of units remaining unsold”. This in fact may be a truthful response. But one should keep in mind that it is not uncommon for developers of these projects to presell units to related parties or affiliates, to artificially generate the perception of a high demand project.
Legal and Other Mundane But Important Questions
Assuming you are still comfortable proceeding with your investment the next step is to get the legal agreements that will govern the terms and provisions of your investment. This is especially, important for this type of investment, as you likely don’t hold any direct title to underlying land or liquid shares that can be traded on the stock market. Typically, these agreements will include a Sale and Purchase Agreement, A Management and Maintenance Agreement, and if a credible guaranteed return is being provided possibly a separate Guarantee Agreement.
Most people I know, both professionally and personally, have a great deal of difficulty understanding legal agreements. To many people, legal language is like a foreign language. So you probably want to find a reputable and independent lawyer to review these agreements. You may be tempted to just take for granted the explanation provided by the resort owner’s lawyer, the notary (note that notaries are not necessarily licensed legal practitioners), or the friendly sales or marketing person (who may or may not be a regulated real estate professional), or saving those unnecessary legal expenses. I would strongly suggest that you find a professional and independent legal advisor to advise you and maybe ask them the following specific questions:
Is a Day really a day ? Sounds like a stupid question doesn’t it ?, but I have seen condotel agreements and marketing material that would lead you to believe that you can use the property for a period of time, ie 2 weeks. However, you do need to check the small print of the agreement, as you may find that the property developer has their own definition of time, and that the agreement you sign, redefines time depending on what time of the year you want to occupy your unit. So it is important that you review the small print here, as you may find when you want to use the property during high season that 2 weeks is equivalent to 1 high season week. Want to stay beyond that week - you have to pay.
What rights do you have with respect to management or mismanagement of the property? Most agreements contain provisions that the management company can demand additional maintenance payments from the unit owner, usually, at their discretion - and failure to pay could result in legal actions against the unit holder. As a unit holder you need to understand whether you could face such a scenario.
Does the Developer have the funding in place to complete the construction of the property? This is a really important consideration especially if you are not dealing with a known and financially strong developer. Usually, for a property that is not yet built or in construction, instalment payments need to be made as construction progresses. While the developer may have bank loans for construction funding, often these loans have conditions on them that restricting the availability of these funds based on the number of units sold. If this is the case as the purchaser of a unit your exposed to the risk of the project not being completed if the developer is not able to sell enough units. If for some reason construction does stop because the developer runs out of money, as a unit buyer, you could find yourself in a weak legal position to recover money, especially as in most cases, the developers banker and construction contractor will typically rank ahead of you in terms of being repaid. So you really need to recognise and understand this risk and ensure protections are in place in the agreements you sign if this situation were to occur.
Specifically, what happens in the event of mismanagement or poor construction quality where the resort needs additional funds for repair or ongoing operating costs (electricity, staff) of the resort ? You also need to clarify what rights unit holders have against the management company. For example, if the resort is mismanaged? In developed countries, rights are normally provided to unit owners to call for an audit of the management company and even replace the management company if they are not performing in accordance with the interests of unit holders, you may want to closely check whether you have these rights here.
I am sure there are many good resort investment opportunities available in Indonesia, but for managed resort or condotel types of investments it is important to understand that, in many cases, you are not making a direct investment in real estate. Also, as this is an emerging investment trend in Indonesia, one needs to be aware, regardless of the reputation of the entity marketing this investment, that the sole incentive of the marketing person is to generate an immediate commission on the sale, and not necessarily ensuring that this is an appropriate investment for you given your personal investment objectives.
For foreigners, from developed western economies, considering these types of investments, keep in mind that whilst these opportunities may appear similar to investments being marketed in your home country, extra care is required as the legal system in Indonesia is significantly different from most other countries. Also, it is unlikely, in the event of misrepresentation, that you would have many of the regulatory protections that are available in countries with established and developed legal systems and consumer protection regulations.