Leasehold vs Freehold - is a Villa in Bali a good investment? 

Hi Artur, thank you for your feedback! You are right, 1000 sqm is considered huge in the most popular areas of Bali and even in central Bali it is considered large. Density varies a lot between the different areas. With the land prices varying accordingly, the ratios are very similar across the island.. Options to extend the lease are common, but need to be part of the leasehold contract.

So nice of you

I think the market is pretty mature and you will have local intermediaries (lawyer, agents) involved. But then, most leasehold buyers are foreigners in the first place and Indonesians will tend to buy freehold.

I do share your concerns and watch these topics closely. Personally, I believe the market in Bali is huge and can absorb a lot of additional rental properties, even though the volume can look scare when you are on the ground. I am more concerned about the increase cost of land, construction and capital, which puts pressure on the business case of many projects and investors need to evaluate carefully.

Glad it was helpful!

I would expect land price (not value) to increase along with inflation. Increases of value (therefore above inflation) would be a reflection of a change in the supply/demand balance. Long term drivers for this could be a significant increase in tourism or massive growth in the economy, for example by population growth. We have seen these factors in the past decades, but that doesn't necessarily mean it will continue going forward. Population growth has stopped and the growth of tourism in Bali might hit a limit at some point.

The Leasehold is a contract between two parties that grant the buyer the right to use the property for a specified duration. This right can typically be transferred to someone else (i.e. sold). The contract can also be modified if both parties agree, for example to extend the duration.

Glad it was helpful!

My standpoint is that you can reasonably expect land to increase in price along with inflation, but anything above that is purely a speculative gain. Hence, I assume an adjustment in line with inflation on one side, and cost of capital (e.g. mortgage interest) to own the land on the other side.

There is no freehold option - only an Indonesian citizen can obtain freehold title to land under the Basic Agrarian Principles Act and even companies, either Indonesian or foreign owned, cannot obtain it.

Absolutely agreed! Returns in the stock market are similar when you look at the long term. However, I appreciate real estate to balance out the volatility of the markets and provide a steady stream of income.

Hi James, Interesting question! First, I would confirm that your expectations regarding the revenue is plausible. Depending on the location and style/size of the villa, it might not be ideal for short term rental and not get the rates you are hoping for. Also, you will probably need to spend a bit to get it ready for rental, add some missing items, additional linens and towels… Even if your revenue assumption is accurate, I suggest to deduct platform fees (roughly 16%), villa management (20%) and other expenses like cleaning, laundry, electricity (20%); then insurance, maintenance/repairs… So you end up at around 20k per year, which is about your annualised cost of the villa. So you have a lot of work and risk on one side and upside potential (better occupancy) and the opportunity to stay in your villa yourself on the other. Let me know how it works out for your friend!

Hi. I took the expected 200 Euros per night from similar villas in the area and the occupancy rate is taken from airdna. The place is a brand new build and there is a lot of money going into the interior design by my friend but I have already calculated this into the 85,000 euros. I am pretty sure that all the expenses like tax, platform rates and so on are a percentage of the turnover and not the profit. Deduct all this and the initial down payment and factor in a bit of maintenance and I don't think there will be a profit at all. If it's possible for a higher rent ( but stiff competition) or a higher occupation rate ( I think 70 % per annum is about right ) then maybe, but to make money with this model it's also quite a bit of work I guess. Also the upfront money is tied down untill it's back in the bank and cannot be used for other things. What do you think ?

Agreed! There is a high degree of uncertainty involved regarding future revenue, so it might operate at a small loss or a small profit. Keep in mind that Euro and USD is not the same, 9% difference is significant. But yes, comes down to work and risk. An unusual deal to lease a brand new villa that is built for short term rental for 5 years. It also sound like for about 2or 2.5 times as much, you can get something similar off plan for 30 years.

This cannot be done legally. Assuming firstly that your friend meets the legal requirement to have an Indonesian residential permit (an ITAS and none permit running a business) in order to enter into a long term lease agreement then secondly they cannot proceed to rent the villa out on the short term market - they can only sub-lease it long term, if the lease agreement allows it, but they must remain residents of Indonesia while doing so otherwise the primary lease becomes null and void and the property owner gets to keep all the money paid by the foreigner. Under Presidential Regulation 10 of 2021 only an Indonesian micro, small or medium business enterprise (MSME) can obtain a villa short-term-rental license (KBRI 55193) and even a foreign investment company (PT PMA) can't get it because all PMAs are automatically classified as large companies due to the > IDR 10 billion investment threshold. Although many foreigners are actually doing this (historically it has rarely been policed but that's changing now as Immigration is trawling Airbnb matching hosts to visas) either directly in blissful ignorance or through a nominee agreement with an Indonesian citizen both methods are illegal and many foreigners have been deported and lost all of their money as a result.

Glad to hear that

Hi and thank you for your comment! I'm sure you will find this video interesting, where I analyse a concrete example of a property in Bali: ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-WRZ1w5xXAD0.html and I plan to make more videos analysing concrete property offers. In terms of land size and how densely it is built, Bali offers a huge variety, sometimes land size is as small as 60 sqm, sometimes thousands. Seasonality is not very strong in Bali and with a 50% share of self use, you basically reduce the revenue (roughly) by 50% while keeping the cost base unchanged. This might also bring tax advantages, so depending on your lifestyle it can be a very interesting model.

The leasehold contract should state what happens in case of death of a party or other relevant events. PT PMA is more relevant when it comes to taxes. I suggest you discuss the options with an Indonesian tax consultant.

If you adjust for inflation, land prices don't always go up. This depends on other factors like population growth (in that area), urbanisation, in effect demand for that kind of land in the area. In some areas we have seem significant long-term increase in land value as you point out, but in others not so; Hence, this is more a speculative aspect of the investment that I am excluding from this calculation.

@@villanomics you don't mind speculating about stock market returns or interest rates or inflation rates or occupancy rates or rental rates, but you aren't comfortable 'speculating' about land appreciation??? It's arguably the most reliable investment in the world, and it is quite easy to find historical data and professional forecast data around expected returns on freehold land in Bali. Be conservative if you want, but it deserves a better return in your calculation than 0% and more than a savings account which you've given 4%. In 2021 I purchased 5 are (500m2) in Pererenan, Bali for 490 million IDR per are and it is nw worth more than 800 million per are, (and experts expect it will be selling for 1200 million per are within the next 2-3 years). Thats 60% appreciation already, and more expected. That opportunity was the main reason I went through the hassle of creating a corporation which effectively owns the land and all the appreciation. I built 2 villas on that land and now have cash flow and appreciation. Why in the world would anybody buy a depreciating asset (lease), when they could own the appreciating part also??? The small premium for freehold is the best investment in all the calculations.

It depends mosty on the currency, but yes, these days you can get even above 5% in a USD savings account. Google it to find the rates.

With 4% on saving account in this times of 20% inflation u still loose money , I think that’s first person who advice to keep money in the bank 😅

@@LightBringer888 Not advising to keep money in the bank, just using it as a benchmark to compare other investments against. Also, it is very difficult to estimate the inflation we will have in the future.