What could possibly go wrong?
We all know that for sometime it’s been a bit like gold rush out there around real estate in Bali. Market seem to overflow with off-plan villas and town houses as well as apartments and more.
An awful lot actually and one wonder how this will turn out in terms of possible temporarily oversupply for that particular part of the market. Smaller units sold. How will they all compete on the rental market out there?
Personally I think it will be ok eventually, but far from the ROI’s that is promoted. This has to do with management, quality of what’s build and general design/feel, but that is a different story.
Today’s little blog I wanted to focus on legal and permit aspects and risks for contractor, developer (or so called developer) and end buyer as we have seen this wave before in Bali, although not as massive as this time.
Off plan is a good concept in theory and often works well. But it takes a lot of planning and a well-structured path. Both on the actual build but also on cashflow and sales that it will depend on. In other countries, it’s compulsory to have a finance outside of sales as in equity and credit lines. And that is also the case here but not yet enforced.
With the massive need for construction an awful lot of new builders have also appeared and far from all are qualified. Often this is a manager/mandor from another contractor that is tempted to become a contractor, or simply someone seeing a good opportunity and thinking, “how hard can it be?”
Let’s start with the beginning, a site to build on.
Very often the land is not fully secured, or on some kind of payment the plan based on future sales of units. The financial structure of the project and payment of land need to be carefully planned. How many sales do you need to pay for the land and then start building.
Often we see sales happening (even large developers) on land not yet fully paid. This may find its way if all goes well, but if it’s not then what’s the risk for the end developer? It’s a crime and would be considered a fraud.
Let’s say land is secured and you enter into typically a land lease first, then most probably a construction agreement and perhaps a consultant or construction management agreement. So not a straight forward sale.
This may be ok from tax perspective, to be able to sell with less tax implications. But even on tax, there is a chance tax office consider you a developer and tax you on all, including Value Added Tax (VAT).
Again, if all goes well that’s great. But what if it does not?
Risk for contractor is that an audit is done on build and a PUPR (Ministry of Public Works & Public Housing) figures is then used to determine outstanding payments. This will almost eradicate the margins for developer and mature him or her for a settlement.
What are the risks for the developer? First of all, an expat can’t be a developer without a local partner and any discrepancy or attempt to pretend to be may be considered fraud. The margin the developer has added on to the contractor’s figures can not be justified unless you’re a certified construction management company/person. It could perhaps be considered agent fee, but the max commission on this is 5% and also need a certified company.
What if there is no PBG/building permit? This is a crime for both contractor and developer to sell on. And trust me, we see police cases everyday now on this.
Agencies marketing for sale have now finally started to ask for PBG/SLF applications. These should have a barcode that can then be scanned and checked as to their status and progress.
What’s the risk for the end buyer? Risk is a legal battle if there is delays or lack of completion and therefore loss of income and return of funds. A buyer should always have a correct legal structure. Say there is a legal challenge in some shape or form. If you have a PT PMA set up then you’re fine. But if you’re not, then the court case presentation would go something like this:
“Your honor, I bought this land and paid taxes on about half, so cheated a bit there. I bought it on a tourist visa and plan to or do rent it out through an agency that pays all relevant taxes. Oh except my taxes, I did not report those. And I don’t have a legal structure to do business in Bali and Indonesia BUT I am really upset with this developer not performing.”
How can even anyone invest hundreds of thousands of dollars into these structures without any pre-check or evaluation of risk?
What could possibly go wrong investing in paradise? Obviously a lot, but of course with the right structure and advice, there is no doubt the market in Bali is a great opportunity, also supported by a fast growing Indonesian economy.