Warning signals for Phuket’s unlicensed accommodation sector

PHUKET: Part of every real estate cycle across Asia since the early 1990s is the appearance of exotic property investment propositions. Imagine it’s Groundhog Day and the past is destined to replay, time and time again. We can always count the condominium hotel sector to surge as we crest a wave of undying consumer exuberance.

Over the past few months as part of our island property research I’ve come across between 20 to 30 new developments offering rental programs, term guaranteed returns and rental yield investment opportunities. As I start to read the information, what remaining hair there is on the back of my head starts to stand on end.

The majority of these projects are informal options for unit buyers who can of course avail themselves of the unique opportunity to cash in on the island’s boom. Vague descriptions ramped up return projections, often-promised long-term returns, and numbers that defy any historical paradigm – we have seen them all in the Phuket marketplace.

Where the sector has some very credible players at the other end of the spectrum are developments which don’t have hotel licenses and avoid paying any form of tax. They do not report guests to immigration as the law requires, nor do the budding hotel-type operators have experience in the running of hospitality operations.

For hotels that pay tax, obtain permits, and operate under the applicable legal system, this is clearly not a fair playing ground. For the island, taxes that should rightly come back into the infrastructure arena are not paid and guests at many of these establishments put themselves at a safety risk, given that their presence in condominiums or villas is often unknown to authorities. In times of emergency, no one knows that there is an actual tenant.

Certainly, there are issues for developers or operators who may wish to obtain licenses for hotel operations, but due to the vague hotel geared legislation, are unable to qualify even if they wanted to.

At a time when Phuket’s hotel supply edges closer and closer to the 50,000-room level the reality on the ground is that a swelling new inventory of unlicensed establishments is creating a substantial gray accommodation market. Management of these properties, given they have no statutory requirements, can offer low-cost prices which legitimate hotels simply cannot. At the end of the day, if increasing quality is the island’s tourism mandate, this alternative market could easily derail the process.

More critical though, is consumer protection for real estate buyers. The island’s buying demographic is shifting and the new markets are perhaps a bit more inclined to take the offering of high-sustained rental yields at face value. As history has shown, this clearly will not be the case. Non-traditional accommodation typically prospers when there is a hotel undersupply. But once hotels are plentiful these offerings can only effectively compete with lower prices to induce demand.

While I’m a big fan of entrepreneurism, and also to some extent, well-crafted, hospitality-led residential offerings, the sector does have a very dark side. As buyers have found in developments such as Laguna’s Allamanda, there is often no guarantee that a hotel managed property investment is going to stay that way in the long term.

For the island’s government the issue of addressing both unlicensed establishment and creating broader, more practical ways that villas and developments which offer rentals can come into the mainstream, is much needed. As for vigilance in consumer protection, potential buyers need to appoint experienced legal advisers to read the fine print and need to ask serious questions about managed properties.

Sadly Phuket is not alone in this debacle. Bali has experienced the same growing pains. What’s amazing to see is the skyrocketing fortunes of Internet accommodation booking giant AirBnB, whose growth depends on so many properties operating without licenses or paying tax. At the end of the day, tourism remains Phuket’s primary growth engine and the bigger it becomes, a rational degree of regulation is simply mandatory to control the beast within.

— Bill Barnett