Lifestyle Investment Rents and Raves

Lifestyle investment and its reliance on rental options and ongoing yields is quickly becoming a hot topic in the Phuket property market. From hotel-managed residential units connected to hotels to short- and long-term rentals there are a variety of schemes out there chasing the real-estate investors' money. How do you get to the bottom-line return and make an intelligent decision prior to dipping you feet into the market?

Once upon a time in Phuket, property buyers were primarily interested in purchasing a second home either for holiday purposes or intended in later years as a place to retire. In the past few years there has been a rather dramatic shift and a flood of overseas buyers are now looking at property as an alternative investment vehicle, thus lowering their horizons to ongoing returns versus the more traditional capital appreciation model.

Enter the hotel-managed mixed-use projects – while other developers introduced guaranteed returns and estate-management companies started to focus on villas and condo rental products. Each of these has its various merits and a certain degree of risk and reward that requires more than a superficial glance by the buyer.

Let's look at the different products currently in the marketplace. For hotel-managed projects there are rental pools or, in certain instances, leaseback arrangements. Typically owners receive a cut of top-line revenue based on the rental paid, excluding sales from food and beverage, spa and income items. Though there is no set standard, the majority offer between 30% to 50% of rental revenue on a "pooled" basis (pooled being all the units rented divided by the number of units).

For international-brand managed projects, most require mandatory entry into the rental pool versus either living in the unit or renting it out independently. The owners receive annual usage from 30 to 60 days and in many cases a charge is applied to cover the cost of occupying the unit (electricity, linen, hotel amenities, daily cleaning).

In most cases there are often other deductions that apply against the owners return, hence to get a net return versus a gross you need to look at all of the additional costs. Generally these relate to a capital reserve for repair and replacement of furniture, fixtures and equipment (often 3% to 5% of revenue), credit card and travel agents' commissions and reservation expenses. When looking at the contract and calculating your return its important to look at all of these other deductions in order to better appreciate return you will be getting.

There are also many of these projects now offering buyers straight capital-guaranteed returns. In most cases these range from 5% to 6% over a period of three to five years. While it's a more secure short-term investment, the buyer does not benefit from any upside on the investment, that is if the units are returning 8% or 10% then the developer benefits from the difference between the guaranteed and actual returns. Often the reality of guaranteed returns are that these are priced into the purchase price and once the term is over then all bets are off on future returns.

When viewing projects offering aggressive projected returns or term-guaranteed returns, it's important to view fundamentals such as location or proximity to traditional hotel markets, facilities and the capacity to attract guests year round. Branded projects offer some assurances to buyers with global sales and marketing networks, though there are many independently-managed properties that have achieved impressive returns over the years.

For owners of estate-managed and freestanding villas, both the short- and long-term markets have been growing. A large influx of overseas investment has created more expat jobs and business opportunities with many of these folks choosing to rent instead of buy. A host of local real-estate companies focus on offering units on long-term rentals (six to 12 months) and work on 10% to 15% commission basis. The long-term option is preferred by many owners who don't want to use the unit and, while locking in a safer ongoing return, remain focused on capital appreciation and eventual asset divestment.

With the recovery and growth in the tourism market, holiday short-term rentals look to be a long-term factor in the accommodation market. Not only do they offer an alternative to the traditional hotel market, but the niche also services much of the long-haul high-season market from Europe who stay for extended periods of time. Shorter-term rentals from a day, week or month, work on a higher commission basis, for the most part. Viewing the present market, commissions are in the 15% to 25% range with agents often consolidating bookings from other agents, and splitting the commission between agents. Firms such as CBRE and PIPS have introduced and promoted holiday rental programs aimed at this market and demand is rapidly increasing.

To sum it all up there are a number of new products out there for investors. Matching risk and reward goes back to good research and making an informed decision. In the next column we will look at some of the long-term issues facing lifestyle investment projects and what buyers need to look for in contractual commitments.