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INVESTMENT IN BALI

Factors & Trends

Bali property has received considerable media and public attention over the last few years. Below please find a variety of factors which influence it and an attempt to explain some of the underlying trends.

Political Risk

In any evaluation of political risk it is important to understand the significance of the recent first direct presidential elections. The event was the capstone to a process of political liberalization that began with President Suharto stepping down in 1997. The current President – popularly known by his initials SBY - enjoys significant support from across the electorate. His anti-corruption stance and considerable efforts at regional and global diplomacy have won Indonesia praise from political watchers both domestic and abroad. Coming from a military background, including a considerable amount of the time spent in the United States, the President is a leader with a good grasp of world affairs and recognizes the importance of building multinational relations both in security and economics. Two of his key cabinet posts are filled by accomplished businessmen displaying clear comprehension of how to make business work.

Both local and international business communities seem optimistic with current trends – indicators such as the stock market, private capital inflows, sovereign debt ratings, consumption and the level of construction activity are all very positive.

Currency

While the local currency, the Indonesian Rupiah does move within a fairly wide band, the underlying cost of land (largely priced in Indonesian Rupiah) is priced relative to the buying power of the United States Dollar. In the secondary market - reselling existing villas - the bulk of transactions are dollar-based.

Viewed from the perspective of income generation by properties listed for vacation rentals there is little currency sensitivity. Rental prices are predominantly quoted in USD while the underlying operating expenses are Rupiah-based.

Bali vs. Indonesia

Indonesia is an archipelago that boasts over 10,000 islands. The island of Bali is located just to the east of Java – host to the nation’s capital Jakarta as well the majority of the country’s 230 million inhabitants. Bali’s has a population of over three million people living on a land area of over 2000 sq miles. The island carries provincial status within the Indonesian political structure and thus benefits considerably from the central government’s policy of regional autonomy (decentralization).

The island has a strong ethnic and politically independent consciousness. Bali is 95% Hindu – very distinct from the rest of Indonesia which is predominantly Muslim with smatterings of Christian, Buddhist and Animist beliefs. The strong independent mindset is also a result of its history – previously something akin to a benevolent feudal kingdom – Bali was one of the last islands to be conquered and incorporated into the Dutch East Indies. Bali is today one of the richer regions of Indonesia and has a broad distribution of wealth creating a largely content middle class.

Tourism, which brings in over 1.7 million visitors a year, along with other industries, such as agriculture, textiles, and furniture production, continue to provide employment for the bulk of the island. Balinese are overtly interested in maintaining social and economic stability as is clearly evident by their actions over the past five years.

Local Land customs

In Indonesia, land is the traditional method of banking wealth and is often used to facilitate inter-generational asset transfer. Among Indonesians there remains significant distrust of large financial institutions as well an inherent conservatism in asset holding. While this behavior is found across Indonesia it is especially prevalent in Bali due to ethnic and local factors. One of the results is that while there will always be land for sale on the market, social factors tend to prohibit its release in unwieldy amounts.

Physical Infrastructure

From an international perspective one of Bali’s most important assets is its international airport which allows for direct flights from major international destinations and hub terminals. Many other popular resort destinations in Asia - notably Sri Lanka and Koh Samui island in Thailand - do not have direct flights which is hugely inconvenient due to transfers and inherent delays.

The continued growth in Bali tourism has given the provincial government sufficient reason to undertake large-scale infrastructure investments. New, broad roads make inter-city connections quick and easy, as well opening up new areas of the island.

Communication infrastructure – including high speed access lines and cellular networks - has improved dramatically in recent years. Broadband internet is now available in most locations in the south of the island and is spreading further north. These types of enhancements make Bali a more attractive place to visit or reside, especially for those more demanding international travelers and business people.

Sophisticated social and cultural scene

Bali can be considered one of the ‘style centers’ of Asia. Traditionally renowned for its skilled craftsmen, Bali has a large diverse contingent of creatively gifted people - international and local artists, fashion entrepreneurs, architects, and writers all find a welcoming home on the island.

This juxtaposes with Bali’s rich cultural heritage – Hindu temples, religious pageantry, local art and craft – and a predominantly pastoral population making it an unforgettable life experience.

International destination – diverse markets

Bali’s source of international visitors has always been quite diverse but in the post 9/11 world, it has become even more so. The percentage of tourists from other Asian nations continues to blossom - Japanese arrivals are at an all time high, while arrivals from China, Hong Kong, Taiwan, Singapore and Malaysia and increasing at a dramatic rate. The effect is a cosmopolitan compliment to those long-standing tourist sources such as Europe, South and North America, and of course Australasia which is now rediscovering Bali.

With a climate that only varies 4 degrees centigrade from its average during the course of a year, it is important to note that Bali is a true year-round destination. Bali enjoys several seasonal peaks due to its diverse source of visitors - Australians come to escape their winter or enjoy the Easter break, Chinese enjoy visiting during their new year, Russians’ Christmas breaks extend through to mid-January.

Bali also serves as a domestic vacation destination. Wealthy Jakartans find Bali’s eclectic mix of international and domestic people a refreshing fun scene and an enjoyable place to maintain a second home.

Bali’s status as an ideal destination is continuously reaffirmed in the international press - Condé Nast rated Bali No.1 island destination in the world for the second year in a row.

Bali’s attracts a wide range of tourists - from budget traveler to those seeking super luxury. The service industry is well established over the complete spectrum of these classes making the delights of Bali an experience open and affordable to all.

Financing

Since the Asian financial crisis, banks have been more than somewhat reluctant to loan to Indonesians on property. While the improved economic climate achieved under the new government has given cause for optimism, lending is still very low by international standards. Resident foreigners – who as a group are significant in Bali property investments – are normally unable to secure domestic financing. With over 95% of the Bali property market transacted through unfinanced purchase, there is little reason to fear prices are being driven by speculation or over-abundant credit facilities.

International banks now dominate the Indonesian banking scene. Obviously there is pressure on to change both the laws on land ownership as well with regards to lending to foreigners. There have recently been some movements in this area. When credit becomes more readily available to foreigners there will undoubtedly be a strong upswing in the market.

Regional placement and trends

If one is a western expat based in Asia, chances are you will be located in Singapore, Hong Kong or Tokyo. However with a steadily growing number of Western business people in Kuala Lumpur, Jakarta, Shanghai and Bangkok, the result is a huge pool of expatriates within short flight time of Bali’s international airport. ‘Expats’ tend to hold non-resident classification in regards to their national countries and are considered tax residents in the countries in which there are stationed.

Hong Kong boasts a tax rate of 17%, Singapore 23%, and Japan offers an initial five year privileged rate for foreign residents. These taxation levels combined with a typically generous expat package of housing and benefits results in a pool of well-heeled, highly liquid individuals. These people tend to have a seasoned Asia outlook and are not overly influenced by media hype.

A considerable number of these expatriates (especially those over five years in Asia) realize they will not be returning to their home countries in the near future and have a desire to own a vacation property with investment characteristics readily accessible and hopefully in the same time zone.

While there has been some recent interest in markets such as Vietnam and Sri Lanka, the two main markets for high end resort destination and home ownership continue to be Thailand (mostly Phuket and Koh Samui) and, of course, Bali.

Property

Bali property prices have seen consistent growth of over 20% per annum for the past five years. Factors which have driven that result not only continue to exist, but indeed strengthen.

Resort property continues to be sought after the world over. The advances made in prices in the Caribbean and Spain are two significant examples. Bali’s attractiveness, with the Indian Ocean on one side and magnificent volcanoes and rice terraces in the interior continues to capture people’s imagination. The only real point of comparison is Phuket where prices have increased dramatically as well, although perhaps not at the same rate.

Rising prices have also brought increased scrutiny of transactions by government departments and the legal profession, generating greater transparency and cleaner transactions which helps to reinforce local and overseas investor confidence.

Last, but not least, in terms of ‘investment attractiveness’ of Bali property is the potential to gain high rental yields. Bali was the Asian originator of both commercially-run private serviced villas, and villas run under hotel banners (most notably being the Aman chain) Consequently Bali is the most mature market for private and hotel villa rentals and therefore has a full compliment of supporting service companies as well sales and rental agents. Bali continues to have low domestic staff costs. By way of comparison a maid’s salary in Thailand is three times the cost of one in Bali.

Combining this low cost economy, a culture which prides itself on hospitality and large numbers of Balinese who have service training in large international hotels, Bali really is "paradise on earth" for potential property owners.