SEEKING THE PERFECT HOLIDAY HOME
While personal enjoyment is easy to obtain, securing rental income and capital gains can prove to be challenging for vacation home owners
Some people have a favourite holiday destination in Thailand, whether it is a weekend getaway for a Bangkok resident or a winter home for a European. People visiting the same destination time after time start to think that it would be better to buy a property rather than pay hotel bills. The reason for buying, other than saving on hotel bills, is to enjoy oneself, having more space than a hotel room and not having to worry about booking at peak season or on long holiday weekends. There is also the opportunity to take advantage of the benefits of a property investment with the possibility of rental income and capital gains if one resells.
Developers have been active in selling resort property in Thailand in the major tourist destinations of Pattaya, Hua Hin, Phuket, Koh Samui, Khao Yai and Chiang Mai. Each of these markets is different, with Phuket and Samui popular mainly with foreign buyers, and Hua Hin and Khao Yai being more popular with Thai buyers.
Trying to achieve the goals of personal enjoyment, rental income and capital gains all together is challenging. Personal enjoyment is often the easiest goal to attain with a resort property, but rental income and capital gains are harder to achieve when considering all the sunken and opportunity costs of purchasing a property.
For rental income, owners can be frustrated by regulations. Thai law prohibits renting a property for less than 30 days without a hotel licence. Most hotel and villa projects do not have hotel licences. To rent out villas legally on a daily-rate model, the project needs to be planned from the beginning with the proper ownership structure and the acquisition of a hotel licence.
In most resort markets, long-term rental potential is limited. It could be done through an agent or an asset management company but there are not very many professional options in the market currently. Most villas owners rent their properties through websites such as Booking.com or Airbnb.
Owners often find that achieving the rental income yields they were hoping for is harder than expected. As well, they are frustrated by the amount of time, effort and expense it takes to keep tenants happy. It is difficult to find a professional agent that will market the property, collect rent, check the tenant in and out, provide services during the stay, maintain the property and ensure that all necessary local taxes are paid.
Many prospective resort property purchasers just want rental income to offset operating expenses such as maintenance and insurance and, unlike a city real estate investment, they want to use the property for part of the year as well.
One solution to overcome this problem is for developers of new projects to obtain hotel licences and to provide hotel management services to secure rental income from short-term guests, where the expenses and revenue split are pre-agreed. In most cases the revenue is pooled among all the owners.
This is attractive and removes both the rental management and maintenance obstacles.
The revenue potential is only going to be as good as the ability of the hotel operator to secure guests and efficiently manage the property. Buyers need to look at the reputation of the hotel management company and whether it manages a hotel owned by the developer which is next to and integrated with the project.
Many developers promote their properties by offering “guaranteed yields”, but purchasers should remember the adage that a “guarantee is only as good the guarantor”, and the ability to honour the commitment depends on the financial position of the developer. Buyers should also be concerned about the sustainability of any potential rental income after the end of the guarantee period.
The keys to rental income, in addition to the hotel management company, are location, view,
Many prospective resort property purchasers just want rental income to offset operating expenses such as maintenance and insurance
amenities and facilities, level of management services and availability of food and beverages. Tenants in a privately owned holiday rental have the same general expectations from the property as they would from a hotel room.
In the last five years, we have seen a change in the make-up of the resort property market with a shift to more investment-oriented buyers than own-use buyers. Buyers should have a clear understanding of their primary reasons for buying a resort property before making a purchase to be sure that their reasons will line up with their expectations for the property after the purchase. Resort property markets tend to be less liquid than big-city property markets because a holiday home is a discretionary rather than essential need. As a result, it can be hard to find a buyer for a second-hand property, particularly older properties that do not have a hotel licence or an easy ability to earn rental income.
The possibility of capital gains is much more varied. There have been examples where there have been significant price increases and other examples where sellers have had to discount below the purchase price to find a buyer.
If owners want rental income they need to look carefully at how this will be achieved and how sustainable this income will be once the developer has sold all the units. Buying into a proper rental management scheme with hotel operators is less risky than projects without hotel operators in terms of capital gains and sustainable income.
James Pictchon is the executive director and head of research and consulting at CBRE Thailand. He can be reached at bangkok@cbre.co.th; Facebook: CBRE.Thailand; Twitter: @CBREThailand; LinkedIn: CBRE Thailand; Website: www.cbre.co.th