Leasehold investments and ROI
Indonesia is set to become one of the world’s economic powerhouses in the coming ten to fifteen years. As far as real estate is concerned what does this mean for many Indonesians?
In general terms when a country is experiencing exponential growth the consumer class starts to look at their disposable income not just as a tool that allows them to acquire more consumable goods but also as a means to invest.
In developed countries macro level investments are generally classified into two categories:
1. Financial instruments or
2. Real Estate.
Indonesia is no different, but I would bet that the percentage of Indonesians making property investments is far higher than those into financial instruments. This isn’t because Indonesian’s don’t have any trust in the instruments being offered to them here, it’s more to do with a tradition of inheritance and making investments that future generations of the family will enjoy.
Second Property Investments
Traditionally, many Indonesians have looked to Bali as a place for their second large property investment, partly because the island is a favourite holiday destination even for domestic tourists and as such provides an opportunity for these Indonesian investors to generate a passive income through renting out their villas.
In years past this was quiet a straight forward operation; Indonesians would buy a second property located in a tourism zone, like in Sanur, Seminyak or Canggu for example, and either give the property to a management company to handle the operational side or roll up their sleeves and do it themselves.
However, Bali’s tourism industry has continuously grown year in year out for the best part of 15 years and so has the freehold value of these types of property, so much so that any savvy investor would think twice before committing to a purchase.
The Value of Freehold
The reason I say savvy is because any investor looking to achieve a healthy return on investment (ROI) will always be looking to achieve a benchmark of 10% return per annum.
Now, with Freehold land values in Seminyak, Sanur, Batu Belig and some parts of Berawa in the USD 100k range per 100 square meters it starts to make that dream of buying a freehold, 3-bedroom 250 sqm villa with pool on 500sqm land become far less attainable.
And for those investors who can afford to buy a property in this price bracket it becomes very difficult to achieve that 10% per annum. The main reason for this is that buying a property with a freehold title doesn’t mean the extra costs of purchasing the property can be transferred to patrons who rent it out.
This wasn’t always the case though.
Up until about 3 years ago investors were happy to achieve 5% return from their rental income and were then getting the other 5% from capital appreciation of the land.
However, this can no longer be used as a marketing or selling tool to investors, as the majority of investors will very well know that land prices in Bali’s most popular areas are no longer experiencing this level of year on year growth.
Rather we are now seeing an increase in the 2%-3% range per annum. Which then leaves many of these investors short of the minimum ROI levels they would like to achieve.
The Value of Leasehold
For savvy middle class Indonesian investors this has left them in a quagmire. They want to buy a second property in Bali but also want to enjoy the benefits of getting strong returns from it.
For us at Seven Stones Indonesia this is where we have started to try and inform our Indonesian clients on the advantages that they have of buying properties with Leasehold titles.
Yes it is absolutely true that with leasehold properties your only true asset is the time that you have left on the lease. But for many investors, what’s often more important is the time in which they get their investment back.
For a budget of USD 500k you’ll get more for your buck if you buy Leasehold. Generally this means the size will be larger, quality will be higher and the area it’s in nicer.
What this equates to is that your average nightly rental fee or yearly rental fee will generally be 30-40% higher and this allows investors to achieve that magic 10% or more ROI just from the rental income that they can generate.
So, if an investor buys a property with a lease of 25 years, the first 10-11 years of that will get the initial capital investment back, but after that it’s pure profit (minus running costs) until the lease runs out. It’s also worth remembering leases can usually be extended at any time.
Maybe I’m wrong, I sometimes am, but I don’t know of any banks in Indonesia or anywhere else for that matter that are offering 10% return per annum. Do you?
First published on Gapura Bali
Seven Stones Indonesia is a property company headquartered in Bali, Indonesia, with a mission to help people who are interested in buying and selling residential and commercial real estate.
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