The past few years have seen the introduction of the Condotel to the Bali property market. With returns on investment of up to 12% and the added bonus of having ownership of a property in paradise, the condotel concept seems here to stay
Exactly what is a condotel and why is it gaining popularity amongst investors and second home buyers alike?
As the name implies, a condotel is a mixture of condominium and hotel. The term condominium is used more in the USA and in Bali they are more commonly referred to as apartments. So essentially they are apartment developments which are managed and marketed by either the developer or by hotel groups/chains. Each apartment is privately owned. As an owner you get back a percentage of the rental income, usually between 40 and 60%. However as an owner you are also subject to fees for managing and maintaining the property. You are also entitled to free stay in the unit, anywhere from 3 weeks to 6 weeks per year. Some condotels have consideration for peak and high season.
The basic difference between a hotel and a Condotel is that there are many owners involved in a condotel as opposed to one or a single group ownership usually seen with a hotel. This difference becomes relevant when the development is completed and operational and there are decisions to be made relating to maintenance and management of the condotel. This is something which is broadly overlooked by buyers and often times not highlighted in the marketing materials so attention must be paid to this when selecting which condotel you should invest in.
Other considerations follow similar guidelines that apply to purchasing any property. Still top of the list is location. You have to pay attention to locations that will not only suit your requirements but also those of the tourist market, as you will be looking for holiday makers to rent on a short/mid/long term basis. The most popular location for the short term market is still beach front. Following this is ‘close to the beach’ and then ocean view. Seminyak is still the area under most demand followed by Jimbaran and Sanur.
Condotels that have a beach front location are likely to enjoy higher occupancy rates than others so consider this when factoring in your return on investment. Also consider distance to the airport, shopping and entertainment.
Interior and exterior design is also relevant. Holiday makers and potential unit buyers are attracted to ‘wow’ designs which can either take the form of traditional Bali design or modern contemporary tropical design. The latter is gaining popularity in the last couple of years and market pricing and sales suggest that this type of design will reach a broader market appeal. Condotel facilities, such as pool, restaurants, bars and spa will also have an effect on occupancy and ultimately return on investment.
Pricing is often seen as the most important factor in Return on Investment but this can be over rated. Over time, the ability of the condotel to achieve good rental rates and occupancies will translate into greater rental yields for the owners and consequently a better resale price and capital gain in the long run.
So this takes us to the consideration that is oftentimes overlooked by buyers and that is who will be managing and marketing the condotel. Some developers set up their own management and marketing. If they have a track record then check this out and see if they have been successful. If not you are putting your investment dollars in the hands of an unknown entity. What is becoming more of a trend is hotel groups/chains managing and marketing condotels.
These groups usually have well tested systems in place to effectively manage and maintain your unit and have a marketing network set up over years to reach a broader rental market. This is not to say that developers will not achieve the same level of both however it will take time. Many developers offer rental guarantees, usually around 6% to 8% for the initial 2 to 3 years but be wary of this as it is usually factored into the purchase price and is not critical over a long term. It is the rental income they will be able to achieve in the 4th, 5th, 6th years and so on that will be relevant to your return on investment. Also buyers and holiday makers alike respond to brand names when they purchase and rent units just like they do when buying clothing and food.
Lastly, and certainly not the least consideration when choosing which condotel you will invest in, check that they have sound policies written into their contracts relating to sinking funds, maintenance fees and owners committees etc. This is where the essential difference between hotels and condotels become most apparent.
The operator is not responsible to one owner or group but rather to dozens, if not hundreds of owners. Can you imagine trying to get consensus with 200 owners on what should be prioritized for repairs if it is not properly organized? The short answer to this is that chaos can ensue and you will be faced with a barrage of emails and decision making that spirals out of control. So make sure the development has proper systems in place that effectively represent you as an owner and there is a legal structure in place that can represent you should there be need for arbitration.
Some condotels offer ‘private use’ apartments but you will need to check if the apartment has the appropriate facilities, mainly relating to the kitchen, to make it comfortable to live in.
Allocation of rental returns usually comes in the form of ‘pooling’ with your allocation based on the cost of your unit. Be wary of developments that do not have a fair system for this as it will leave the allocation open to corruption (eg. enticing the Reservation Manager with $50 a month to make sure your unit is always on the top of the rental list.)
To sum up, you need to do your homework and it is recommended you seek advice from agents who have experience in these matters and can give you an unbiased account of these factors which will make your decision a more calculated one.
By Michael Martin
Bali Villas and Land Real Estate
