Most global real estate markets have traditionally been driven by the ability to make a long-term capital gain. In Phuket this remains a legitimate prospect, however, the market here is now predominantly investor-led. And these investors are insisting upon superior annual yields from their investment.
Both Villa and Condominium developments in Phuket advertise themselves to the income-focused investor. But condominiums are more readily affordable to more people, making demand for this sector higher, and ensuring that the majority of Phuket property sales are condos.
This article focuses mainly on the condominium sector.
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Buying a Condo Investment Property in Phuket
If you are buying a property for investment, your most immediate focus is likely to be the rental income that property will produce.
The developments in highest demand are probably those which offer guaranteed rental returns. While the annual yields may vary, the average is around 6-7% per annum. These guaranteed income payments can be paid for anything from 2 years up to 10 years, depending on the developer.
If you have signed onto the development’s “Rental Program,” you will typically be given personal use of your property for anywhere from 2 weeks to 2 months (depending on the condo). It is possible that the personal use you are permitted will also depend whether you visit Phuket in the low season or the high season.
Because you are handing over the rental of your unit to a professional management company, it stands to reason they will want to establish a “brand identity” for the entire condominium. After all, they will be advertising world-wide, and it is important they are able to offer a standard consistent with what people can see online.
When buying off-plan, therefore, you are typically offered a standard choice of finishings and fixtures. Even if the decor doesn’t reflect your personal tastes, for the purpose of renting your property, you will probably be asked to maintain the development’s interior design concept, as well as the standard furniture package.
Think about it this way, if you don’t plan to live in your condo for up to 10 years (or longer), you would probably be renovating it before you move in anyway.
Phuket Condo vs. Phuket Condotel Investment
One very popular type of rental property today is the “condotel.” Condotels are almost exclusively investment properties, and should not be considered future retirement homes. You will find that, beyond the options presented when you buy off plan, you will have no flexibility on the interior design.
Condotels get their name because they enjoy both condominium and hotel licenses, which makes them ideal for short-term rentals.
They have professional management like other condos, but the extra hotel license allows the properties to be rented out on a short-term basis (i.e. for periods shorter than 30 days).
You can read more about owning a hotel licensed condominium here:
You may already be familiar with the controversy surrounding reservation websites such booking.com or airbnb. A number of countries (or in the case of New York, individual cities) have been put under pressure by their hotel sectors to curtail the rise of private room bookings.
Thailand is one of those countries. Anyone who intendeds to rent out their property for a period shorter than 30 consecutive days requires a hotel license to do so.
This is a major attraction of condotels as investment properties. But does this mean traditional condos are not attractive? Not necessarily. A lot depends on the condo’s “juristic person” (a fancy name for the management company).
Many juristic persons will permit owners to accept tenants on a short-term rental basis, even though a hotel license is technically required.
You can learn more about what a Condominium Juristic Person is here:
But a Ministerial Regulation, passed in 2008, does offer a way for individual owners to adhere to the law. It provides for an exemption for any property with no more than four bedrooms, which is able to sleep up to 20 people.
To the best of our knowledge, the license exemption has been applied more often to bungalows and villas than to condos. But if your condominium is not hotel licensed, it is worth engaging an experienced lawyer to assist you with the application for an exemption.
Are Your Condo’s Guaranteed Return on Investment (ROI) Really Guaranteed?
When a Phuket real estate developer offers a rental guarantee, are the rental returns truly 100% guaranteed?
This is a difficult question to answer, and it’s not an attempt at humour to say the answer is Yes and No.
To begin with, a lawyer must review the contract to ensure the interests of the buyer are protected. A poorly worded agreement could see a portion of the guaranteed returns being diverted into CAM fees (common area maintenance) by the developer. And the poor buyer may find that, on top of everything else, he/she is paying their own management and maintenance fees.
These fees are typically paid by the developer if you have a guaranteed return contract, which further emphasizes how important it is to secure a quality lawyer.
Having ensured the correct contract wording, any arrangement for short-term guaranteed rental returns should be realistic. In most cases, this expense will already be accounted for by developers. (Typically, the per unit marketing and sales costs will build this in.)
The guaranteed returns are sometimes prepaid as a lump sum by the developer, typically upon receipt of the final payment for the unit.
Relying on Tourism
The feasibility of guaranteed returns over the long-term will very much depend on the viability of the Phuket tourist industry. A significant reduction in the number of tourists would very likely lead to a downturn in the local Phuket economy.
A long-term downturn would inevitably impact the real estate market because the guaranteed rental yields rely upon tourists occupying the highest possible number of vacant units each year.
The last twenty years has seen a steady increase in the volume of tourists coming to Phuket. These two decades have also witnessed regional and global crises which threatened the entire tourism industry. While there were short-term impacts, the vacationers came back in droves, and record high number of tourists continues to be eclipsed each year.
Were those bad years really so bad? How many of these do you remember: the bursting of the tech bubble, SARS, bird flu, military coups, the Asia Crisis, the 2008 financial crisis, and the Indian Ocean Tsunami, which struck on Boxing Day – right in the middle of Phuket’s peak tourist season?
Every one of the above impacted tourism when it happened, but Phuket (and indeed Thailand) recovered stronger every time.
But why mention the worst times for tourism in modern history? Because, apart from bankruptcy or inept management, a calamitous contraction in the tourist sector would be the most likely reason why a guaranteed rental agreement would fail to produce its promised returns.
And none of the events mentioned above succeeded in bringing down either the tourist industry, or the guaranteed rental market.
You can read our article on Thailand’s tourist industry here:
Ensuring Payment Through the Use of a Lawyer
If guaranteed rental returns are a strong motivation for the buyer, it is important that a lawyer review the developer’s/management company’s agreement. The lawyer should also take a close look at the company – the organization and the individuals behind it.
The due diligence should look into the following:
- management company’s track record
- developer’s credit worthiness
- rules governing owner occupancy, as well as
- ramifications of selling the unit before the end of the rental guarantee period (ensuring that no penalties exist for selling early).
What if the management company/developer does not fully comply with the terms that were offered or promises that were made? What recourse is there to claim compensation?
If the guaranteed rental returns are prepaid by the developer, some of the due diligence may be unnecessary because much of the potential risk will have been negated by the prepayment. But it is still important for a lawyer to be involved in the process.
You can read our article here about getting the best legal advice when purchasing property in Thailand:
“Guaranteed Return” rental programs are above board, and by and large they are also well managed. But they could also be susceptible to outside forces which no developer could reasonably be expected to control.
Nothing in life is completely guaranteed, but the offer of returns from most Phuket developers has certainly been very consistent. For over two decades the vast majority of developers on the island have paid the income they promised on day one. During that time Phuket has endured some significant upheavals in the tourist market – upheavals which other tourist destinations may not have survived.
This is an excerpt from the Thai Residential Phuket Property Guide 2019/20. To download your free copy, please click here.
Read more of our articles on the Phuket real estate market: