The Santa Clause: Many happy rental returns

PHUKET; What did Santa Claus bring you via your property investment this Christmas? Was it 5% guaranteed net rental return on your property investment? 6%? 7%? A 60:40 or a 50:50 split of all expenses and rental returns after expenses?

Looking at the wide mix of so-called guaranteed returns promised in property ads, online and on billboards in Phuket, it is hard to know what will be underneath the wrapping paper when you have paid your purchase price and received your first income statement from the developer or property manager responsible for your rental return.

In order to understand what is really on offer. It is worth for a moment considering the mind of a developer or a property manager offering a rental guarantee. Please let me assure you that such an offer is not entirely based on charity.

INCREASING SALES OPPORTUNITIES

Property owners may be looking at their buy in Phuket as a mixture of financial investment, but often with the added benefit of receiving what is known as usage entitlement.

This may seem strange – surely you have already bought the property and therefore can use it as you wish to, no? If you accept that the property is bought to create an investment yield, you will also have to accept that in order to maintain that yield, the property needs to be in use, particularly in high season when rental demands and prices are tangibly higher.

Developers are competing against others in the market. Therefore they are forced to ensure that the property not only enjoys an attractive design and location, but also that it can function as a rented-out holiday home so that the buyer is not left feeling that their property is standing idle most of the year.

So, developers sit down at their financial tables, sharpen their pencils and come up with what they believe is a workable formula. This comprises the sale price of the property; the property management and rental management fees and expenses, including human resources to maintain the rentals; and perhaps some capital renovation planning – if the developer is willing and/or able to think that far ahead.

This activity is designed to increase sales opportunities. It is therefore for the buyer to beware and to look carefully at what is really on offer, and to compare the product with other investment-style products.

RETURN ON MONIES, REAL COSTS

There is safety in bricks and mortar, subject to its quality, location, sustainability of the market, demand, political and legal environment, global economy and finally the quality of the property’s legal title.

Investments in stocks and shares for the middle classes of the world have taken a beating due to the ineptitude of wealthy banks in managing monies and risk. However, the banks still take their fat fees on every transaction and charge you for the privilege of deposits, as they have done so since banks first existed.

When you buy a property with a rental guarantee, you are also buying an ongoing contractual liability. More often than not, the rental guarantee will expire after a period of, say, three years.

After this period, the property – even the managed common areas and facilities – will need capital renovation. This will eat backwards into any return you have yielded from the property.

Further, management fees and costs will increase with rising costs in accordance with Phuket’s inflationary costs. Phuket is not a cheap province for costs and services. On that basis, do your math conservatively.

SANTA HAS SOME GOOD GIFTS

Fortunately, there are many positive stories in Phuket regarding rental returns. Typically in high-end or well-maintained, middle-bracket properties with good solid experienced and/or branded management, rental returns in high season can cover all property expenses for the year, and low season rentals then become the cream of the investment.

This applies where manager and buyer share the risks and rewards of the rental returns. For many, the rental guarantee is simply a monthly or quarterly cheque, with the comfort that the property isn’t backed by a derivative hedge fund operating on high commissions and super high-risk investments.

Look carefully underneath your Christmas wrapping paper this year to make sure you didn’t miss anything and have a very prosperous New Year.

— Desmond Hughes