The Demand For Rental Income in Phuket

ALWAYS HIGH DEMAND FOR PHUKET RENTAL CONDOS AND VILLAS

Although the post-Covid era has changed the Phuket real estate landscape, with a huge increase in the amount of foreign resident’s moving to the island, there is still a large proportion of new buyers seeking investment opportunities.

The potential for long-term capital gains has historically driven most global property markets. While this is most certainly a reasonable expectation in Phuket, the market is also driven by investors, demanding a better return on their money by investing in Phuket property and, perhaps, even diversification over asset classes and currencies in their portfolios.

Returns in Phuket, taken as an average, equate to around 6-7% net per annum. We do see occasional good years beating this average, however, we also see years that underachieve.

If a property to is to ever achieve a much higher return, we have even known one to achieve a net return of 15% each year, it is likely to be a villa, as villa demand in the high season between November and April is through the roof, and it is rare for a villa not to be rented out over this entire period.

Both villa and condominium projects may be marketed as income producing, but condominiums, being more affordable, make up the bulk of individual sales in Phuket. Villas may make up less sales, but have a higher total monetary value of sales, due to their much higher price value.

There are also “condotels,” which enjoy both condominium and hotel licenses. 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).

Sam Fauma and his colleagues at the International Law Office in Phuket have some advice on short-term and long-term rentals.

Are the Guaranteed Returns on Investment (ROI) Really Guaranteed?

Clint Eastwood once said, “If you want a guarantee, buy a toaster.” So what would Dirty Harry make of the guarantees being offered by Phuket condominium developers? Are the returns really 100% guaranteed?

This question does not have a straightforward answer, and without trying to be funny, the best answer really is yes…and no.

First and foremost, the guaranteed return contract must be reviewed by a lawyer to ensure it represents the buyer’s interests. If it is poorly constructed, part of the return could be going to the developer for common area maintenance, while the buyer is left to pay for their own maintenance and management fees. Because these fees are typically absorbed by the developer, this underlines the importance of securing the right lawyer.

Once the wording of the contract is ensured, in our experience, short-term guarantees are realistic because developers usually budget for this expense. In most cases, it will already be built into the sales and marketing costs of each condo unit. In fact, some developers actually prepay the rental returns as a lump sum as soon as the final payment on the condo is received.

The viability of longer-term rental guarantees, however, will be down to the overall health of the tourism industry in Phuket. Any major contraction in tourist figures would almost certainly trigger a contraction of the local economy. A prolonged contraction would have a knock-on effect on Phuket’s property market, as guaranteed returns are based on filling available units with tourists every year.

The number of tourists visiting Phuket has been steadily increasing over the last twenty years. During this time there have been events which negatively impacted tourism (see Black Swans of Tourism in this guide), but after each falloff, the number of tourists continued to reach new highs.

But how bad were the bad years? There was the Asia Crisis, the bursting of the tech bubble, bird flu, SARS, the global financial crisis, military coups and a tsunami in the middle of peak season. These events had a marked effect on tourism at the time each occurred, but both Phuket bounced back with renewed vigour each time.

In terms of rental guarantees, the only thing likely to derail most ROI agreements (aside from poor management or bankruptcy) would be a ruinous contraction in the tourist economy. If a buyer is motivated by the promise of guaranteed rental returns on their Phuket condo purchase, they should have a lawyer carefully review any agreement drawn up by the developer or management company, especially if they are buying multiple condo units at a single development.

The necessary due diligence must find out as much as possible about the:

• credit worthiness of the developer
• track record of the management company
• terms of their own occupancy, and
• consequences should they decide to sell the unit during the guaranteed period (to make sure there are no penalties for doing so).

It is also worth asking what happens when the terms or promises made by the developer and/or management company are not met in full. If the conditions are not met, what other forms of compensation exist?

These checks may be moot if the development prepays the rental returns, which would negate any risks involved with the guaranteed rental return contract.

One of the latest marketing strategies by developers, especially on leasehold units, is to offer buyers a guaranteed buy-back program. This is effectively promising to buy back the condo unit or villa at full price, or even at a profit, after 5, 10 or 15 years.  Here is our article on the subject: 

What Is a Developer Guaranteed Buy-Back Option When You Buy a Phuket Condominium or Villa?

In Summary

The real estate market the world over has proven to be dependable, though not guaranteed. Please be aware of the source and nature of the risks which could undermine an ideal investment property in Phuket, and take all the necessary steps to mitigate, if not eliminate, these risks.

Expert legal advice is essential!