Stephen Chan, a doctor in Hong Hong, learned the hard way. In 2004 he put a 10% down payment on a villa in Koh Samui, Thailand. The deal: He would cede control of the home design and the rental revenue to developers; in exchange, he was promised a 12.5% return for eight years, a month’s use of the villa and would have management of his home taken care of when he was not there.
“It’s difficult to get double-digit returns, let alone one that gives you a Thai villa for a month a year,” he says. “It seemed too good to be true.”
It was. Dr. Chan says he and 150 other people from Hong Kong lost their entire investment on a development that was never completed, costing him about $100,000. Because Dr. Chan worked through a large international agent, he says “there was an assumption of trust that any project they were selling was bona fide.” The developers eventually went on the run and have yet to be found. Dr. Chan reached a settlement with the international agent in a Hong Kong court–but never got to sleep in his Thai villa.
Amid Asia’s continuing rapid economic growth, developers are anticipating more interest in owning a vacation home abroad. Resort companies are increasingly hoping to entice buyers by taking on management duties and joining in a co-ownership agreement. Some are wooing customers like Dr. Chan with guaranteed returns. Not all are scams, but buyers should take precautions.
Banyan Tree is one such company that guarantees a return. It promises 6% for the first six years on any of its six residences around the world. Song Saa Private Island, a new resort in Cambodia, is promising 8% for the first five years.
How it works: An investor buys a home in a managed resort that’s part of a rental pool run by a resort operator. That buys the investor the right to occupy their home or an equivalent one for a set number of days a year, often between 21 and 60. The resort company, in return, gets an influx of capital investment.
After the first few years of a guaranteed return, owners typically then get a share of the rent revenue. In the case of Song Saa, after five years, investors receive 50% of the gross revenue–on which they have to pay a 14% tax–while at Banyan Tree, an owner can either sign on for another six-year plan or choose to earn 33% of the net, or after tax, room revenue. According to Dan Simmons, head of sales for Banyan Tree, the owner’s return after the end of the guarantee is on average about the same as during the first six years, though it varies from property to property.
Mr. Simmons says Banyan Tree started to see a major shift toward investment schemes with guaranteed returns in 2007. Now after Asia’s rebound from the financial crisis, the popularity of these investment plans is accelerating. Over the next two years, Banyan Tree plans to open 15 new residences, seven of them in China–all with the option of owning a portion with guaranteed returns.
Of course depending on an operator comes with a risk. David Simister, chairman of the Indo-China region for real estate firm CB Richard Ellis, says what will ensure “capital depreciation is a project that is not run properly. That is something to be very cautious of.”
Another caveat to this scheme is that selling the property during that initial period can be difficult if the developer still has units for sale. A buyer is more likely to purchase a new offer than pick up the previous owner’s guaranteed return, which is fixed to the original purchase price, says Mr. Simister. If a house is bought at $500,000 with a guaranteed 10% return, and the house appreciates to $600,000, then the next owner’s return is only 8.3%.
After the initial time period, it can be easier for owners to sell their property at market value. But most branded resorts require that the unit still be part of the resort pool, even under the new owner — it must be available to rent for most of the year.
Other developers are marketing a variation of this ownership model that skips the guarantee period. Like the other model, investors can choose when to occupy rooms but only have access to them for a certain amount of time.
While there is no promised return, Mr. Simister says with a high-quality building, great location and reliable operator, “you may be far better not to have a guarantee and put your trust in a quality developer.” In a busy location, it’s possible to make more money with a percentage of the revenue–but of course there’s no guarantee.
These schemes leave a lot of responsibility–from construction to maintenance and attracting renters–in the hands of resort developers and operators. How much one should trust their promises “depends on the creditability of the developer,” says David Faulkner, executive director of valuation and advisory services in Asia at Colliers International, an international brokerage firm. “You have to look at who is actually managing it.”
As Dr. Chan learned, if something happens to a developer, investors can lose everything. His lawyers told him pursuing legal recourse in Thailand would be “difficult if not impossible,” a caution that could also apply to many other resort locations in Asia. Dr. Chan reached a settlement in the Hong Kong courts with the international real-estate agent that sold him the property.
Of course one can always go the traditional route: Buy a home on your own, manage it yourself and keep all the rental revenue. Normandy Madden, a Hong Kong-based senior vice president at a digital marketing company, did just that when she and her husband bought a $250,000 condo in Phuket, Thailand in 2002. She added a recording booth for her husband, a voiceover artist; a custom-made bathtub; handpainted walls; a cinema room and a deluxe sound system–something she wouldn’t have been able to do with a resort scheme. “I didn’t want a cookie-cutter plan,” she says.
But while Ms. Madden enjoys frequent escapes to her home, maintaining her piece of paradise takes work. “It’s a part-time job” renting and managing it, she says, noting that she spends time every day dealing with the property. Still, she estimates the home’s value has more than doubled since she bought it and that it is on pace to bring in $50,000 to $60,000 this year.
And at the end of the day, whether a resort scheme or individual purchase, one should buy a place that will be used and enjoyed, says Mr. Faulkner at Colliers. “The driving factor should be the vacation side of it,” he says, though “that’s not to say it can’t also make money.”
Even Dr. Chan, despite his losses, is open to investing in a resort home again. Just this time, he says, “I would definitely do more due diligence.”
Source http://blogs.wsj.com/
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