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.

Stunning Colonial 5 Bedroom Villa Berawa
Beautiful swimming pool and gardens are readily available in many villas in Bali.

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.

If you’re thinking about property, ROI, capital gains or lifestyle investments in Bali, Jakarta, Surabaya, and Indonesian’s Eastern Islands and need some friendly advice and guidance then why not email hello@sevenstonesindonesia.com or check out Seven Stones Website | Seven Stones Linkedin | Seven Stones Facebook

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Andrzej Barski

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Andrzej is Co-owner/ Founder and Director of Seven Stones Indonesia. He was born in the UK to Polish parents and has been living in Indonesia for more than 33-years. He is a skilled writer, trainer and marketer with a deep understanding of Indonesia and its many cultures after spending many years travelling across the archipelago from North Sumatra to Irian Jaya.

His experience covers Marketing, Branding, Advertising, Publishing, Real Estate and Training for 5-Star Hotels and Resorts in Bali and Jakarta, which has given him a passion for the customer experience. He’s a published author and a regular contributor to local and regional publications. His interests include conservation, eco-conscious initiatives, spirituality and motorcycles. Andrzej speaks English and Indonesian.

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Terje is from Norway and has been living in Indonesia for over 20-years. He first came to Indonesia as a child and after earning his degree in Business Administration from the University of Agder in Norway, he moved to Indonesia in 1993, where he has worked in leading positions in education and the fitness/ wellness industries all over Indonesia including Jakarta, Banjarmasin, Medan and Bali.

He was Co-owner and CEO of the Paradise Property Group for 10-years and led the company to great success. He is now Co-owner/ Founder and Director of Seven Stones Indonesia offering market entry services for foreign investors, legal advice, sourcing of investments and in particular real estate investments. He has a soft spot for eco-friendly and socially sustainable projects and investments, while his personal business strengths are in property law, tourism trends, macroeconomics, Indonesian government and regulations. His personal interests are in sport, adventure, history and spiritual experiences.

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Ridwan is one of Indonesia’s top executives with a long and illustrious career in the financial world. He holds several professional certifications including being a Certified Business Valuer (CBV) issued by the Australian Academy of Finance and Management; Broker-Dealer Representative (WPPE); and The Directorship Certification for Directors and Commissioners, issued by the Indonesian Institute of Commissioners and Directors.

His experience includes being the Managing Director at one of the top investment banking groups in the region, the Recapital Group, the CFO at State-owned enterprises in fishery industry and the CEO at Tanri Abeng & Son Holding. He’s also been an Independent Commissioner in several Financial Service companies and on the Audit and Risk Committee at Bank BTPN Tbk, Berau Coal Energy Tbk, Aetra Air Jakarta as well as working for Citibank, Bank Mandiri and HSBC. His last position was as CFO at PT Citra Putra Mandiri – OSO Group.

Ridwan has won a number of prestigious awards including the Best CFO Awards 2019 (Institute of Certified Management Accountant Australia-Indonesia); Asia Pacific Young Business Leader awarded by Asia 21 Network New York USA (Tokyo 2008); UK Alumni Business Awards 2008 awarded by the British Council; and The Most Inspiring Human Resources Practitioners’ version of Human Capital Magazine 2010.

He’s a member of the Board of Trustees of the Alumni Association of the Faculty of Law, Trisakti University, Co-Founder of the Paramadina Public Policy Institute and actively writes books, publications and articles in the mass media. He co-authored “Korupsi Mengorupsi Indonesia” in 2009, which helps those with an interest in understanding governance in Indonesia and the critical issue of corruption. Ridwan speaks Indonesian and English.

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Per is the Managing Director of the Seven Stones Indonesia (SSI) Jakarta office and has more than 25-years’ experience in Indonesia, China, and Western Europe. He previously worked in senior management positions with Q-Free ASA, Siemens AG, and other companies in the telecom sector. Over the last six years, he has been the Chairman of the Indonesia-Norway Business Council (INBC) and recently become elected to be on the board of EuroCham Indonesia.

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