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What’s Wrong With Real Estate In Bali?

what's wrong with real estate

There have been a lot of recent claims that property transactions in Bali have slowed down after 15 years of unprecedented growth. Is this true? And if it is, why? What’s happened? Let’s have a look at some of the issues.

 

Issue one: Property Prices.

There has been tremendous growth in land and property prices in all parts of Bali but now we’re seeing for the first time that certain areas are experiencing a slow-down. This isn’t rocket science to the savvy investor, especially if we consider that business ventures have to make financial sense of their investment. And it doesn’t in areas like Seminyak and Sunset where land has reached the dizzying heights of 3 billion Rupiah per are. This hefty price tag combined with things like height restrictions to whatever can be built is pushing interest to other, cheaper parts of the island such as Canggu further west, Ubud to the north and all along the east coast because of the more attractive ROIs.

 

Issue two: Is There An Oversupply?

In general yes. But this is something that any market will experience at this stage of its development. Two-three years ago Australia’s Gold Coast took a nosedive due to oversupply and prices went down by a whopping 50%. Now, however, everyone is talking about next year’s potential price boom because all developers held back and demand did not decrease. In fact, the opposite happened because of an ever-growing appetite from foreign markets. This I believe will also happen in Bali and in the meantime the smart domestic bulk purchasers are running around picking up whatever they can.

 

Issue three: Infrastructure, Energy and Water.

This is a sensitive subject. In general the infrastructure appears to be improving and the new government is addressing issues with speed and a lot of money. For some people it is a matter of too little – too late, but these are the sorts of people who will try to find holes in any initiative, just because they’re wired that way. It doesn’t mean their negative opinions are right. The truth of the matter is that infrastructure projects are being given priority all over the country, particularly in Bali and we can expect to see more projects in the very near future.

 

The central government is trying to focus all provinces towards alternative energy especially in the areas of solar, hydro and geo-thermal, resulting in many projects lining up for the immediate future. Solar energy seems to be the flavour of the month and the Balinese provincial government is trying to get legislation approved to have solar panels on every government owned building.

 

Water is a big challenge for Bali and the next drive needs to be on enforcing hotels and housing projects to recirculate and reuse water. If this isn’t addressed very soon it will peak and ultimately have a negative impact on the island. The political will, or lack thereof, has been the main stumbling block on this issue but now that is changing and positive steps are being made.

 

Issue four: Overbuilding.

In Bali there are many areas already massively overbuilt. The biggest single factor influencing this is connected with the issue of zoning, or more accurately where there has been no zoning enforced. This began to change from 2009-2013 and today it is much clearer where and what these zones are. This is being supported by stricter policies centered on the issuance of licenses and permits and what can or can’t be done in specific areas, including regulations on the size/amount of land needed to build mini hotels. Interestingly more and more developers now understand the need for green developments and see ’empty’ spaces as valuable assets.

 

Issue five: Ownership structures for expats.

This year there has been a lot of talk around this topic, and in particular towards something called a nominee structure. This has been, and always will be, illegal under Indonesian law and is in fact set as such in the Indonesian constitution. Adjustments on other structures such as Hak Pakai and HGB are well under way as is ownership for expats, no matter what self-appointed specialists from other industries may say. These other structures can freely sell at similar values to freehold and interestingly, to set either of these two ownership structures up is actually cheaper than using the nominee structure and the so-called lawyers who have been instrumental in creating the myth. Many people however, are reluctant to change from the illegal nominee structure, perhaps because they are worried about being exposed or fined, or worse, but we strongly advise that if you are one of these people you make the change to a legal structure sooner rather than later as it will not be any easier to change as time goes by.

 

Issue six: Domestic politics.

This year’s elections and the usual tug of war between powers took a long time. Indonesia was also affected by a general world wide economic slow down and a currency war between the US and China. However, since its recent reshuffle, Indonesia has really gotten up to speed, revoking 2,700 regulations, which were hindering investments, and it has issued 6 economic stimuli packages amongst other initiatives designed to encourage investment. We see this as a very positive step in the right direction as Indonesia tries to normalize itself and continue to fight corruption through better law enforcement than it ever did in the past.

 

The new Minister of Tourism has been given a budget, which is 10 times the size of previous years. This is being used across a number of platforms to a number of strategic areas including China and the Middle East and the results are already having a positive impact.

 

What has changed however, is the market. It is now much better informed and is slightly more conservative than it used to be. Prices and ROIs are also more conservative, regulations are easier to understand and red-tape is fast disappearing, all of which attracts a larger market. So, the answer to the question ‘What’s wrong with real estate in Bali?” is … nothing!

 

Nothing is wrong with real estate in Bali. The bottom line is that Indonesia is one of the richest countries in the world when it comes to natural resources with one of the largest productive populations on earth being led by a democratic and proactive government. It receives the second highest amount of foreign investments in the world after China and its debt exposure compared to the National Budget is on the same level as Norway. There is no better place to invest right now and domestic investors are jumping at the opportunities to absorb cheaper assets. Their mind set is simple: Grow tourism and fill the hotels and resorts. All the underlying indicators are solid and positive. They don’t want to lose out, the question is do you?

 

6 thoughts on “What’s Wrong With Real Estate In Bali?

  • on 23rd December 2016

    Dear Mr Nielsen
    Great Article, well construct with toughts and issues.
    Good Job.

    I take the right to add :

    ‘What’s wrong with real estate in Bali?” is … nothing!
    Not sure ?
    I’m not professionaly or actively involved in Bali’s estate market
    But, personnaly I find a wrong fundamental aspect in this estate market.
    It’s made and done exclusively by expats, and investors seeking for “second residence”.

    But not relying on the fundamental need to shelter local peoples and families for their main residence.

    All estates markets worldwide are and evoluate with the basic need to shelter their locals inhabitants.

    No estate market worldwilde can ever live on the basic rules of quick too good ROI and fast tremendous Capital Gain.

    Bali and it’s market of expats, investors propeties is lonely of its kind.

    If 35 % of the expats prospects (buyers) are disapering for any reason, the market will automaticaly collapse, because
    the locals inhabitants can not afford the market prices even if prices are cut down by 50%.

    I’m pretty sure worlwide real estate Experts will qualify at “dangerous” bali’s market.

    Think the opposite way.
    Is New York, Tokyo, Paris, Oslo, Mexico estate market are done by money coming from abroad countries and the foreign buyers. No.
    80 to 95% of the market (buy&sales) is done by locals.
    Is Marbella, Miami, French Riviera, Hawaï, Rio de Janeiro estate market is done from foreign buyers. Partly.
    But still 70 to 80% of the market is done by the locals. Meaning foreigners contribute for 20 to 30 %.

    What is the proportion in Bali ?
    Locals 2 to 5 % ?
    Foreigners 98 to 95 % ?

    • Terje H Nilsen
      on 4th February 2017

      Hi Chris

      Thank you for liking our blog and your constructive views. For sure Bali as any place has its challenges. The main issue being infrastructure absorb growth in cars and motorbikes, garbage management and water supply is dropping dramatically.

      A few points from my side. The main market of investors if we look at south Bali is more than 70% domestic buyers, and less than 30% expats. If one measure the entire island I would be surprised if the expat figures was beyond 2-3%. They do trigger though market interest in many areas, as they are always the first to buy and develop.

      In general property prices in commercial areas and wanted residential areas, such as Denpasar is quite expensive, the market share here is 99% domestic investors.

      Many investors do come for the investment of either ROI or capital gain or both. How ever zoning regulations now being enforced well prevents this from going into residential areas and is focused on tourism zoned areas. Maps of this for Badung regency is available online.

      The strength of the Indonesian economy in general and also property is carried by its domestic market.

      A larger percentage of purchases is also done with cash so the mortgage exposure and potential % of non performing loans is extremely low.

      So the examples you have for other international markets is more or less the same in Bali. This has to do with restrictions for foreigners has been quite confusing, and only recently has the government clearly spelled out what the do’s or don’t’s are. This will probably enlarge the future expat market soon. Not only in Bali but also other areas coming on the map.

      Again thank you for your comments and let me know if we can be of any service if you ever consider investments in Bali.

  • on 27th April 2017

    Really great article! What a key point to keep in mind. Keep up the
    good work and i’ll be waiting for your upcoming post!
    Cheers

  • Martin
    on 15th June 2017

    Excellent well informed article,, Thank you,,

  • Pingback: Real Estate in Bali: Property Prices | Seven Stones

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