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Paradise for Rent

Category: , Posted:15 Nov 2008 | 12:00 pm

As the wheels of tourist high season crank open the floodgates on our paradise island, it is the season to be renting. Never before have there been so many options for renters, with a range of daily, weekly, monthly and long-term stays on offer. Phuket's vacation rental market arguably remains under serviced and under promoted, unlike Bali and more mature markets, such as the Gold Coast in Australia or Hawaii, where condo hotels make up the lion's share of the accommodation supply.
Given the increasing number of villas, condos and apartments now nearing completion, this, along with the continuing global financial crises – forcing property investors to reduce capital appreciation growth risk vis a vie ongoing rental yield management – has set the stage for market momentum in this sector. There will come a day in the not too distant future when the villa- and condo-rental market is going to become a key competitor to traditional hotel supply. Fueling this trend are significant advances in Internet technology allowing small businesses or individual owners to access international markets. It's a day of reckoning for 'brand equity' arguments. In a nutshell; the Internet is a great leveling of the playing field.
Looking at the success of e-commerce engines, such as Phuket.com, along with the emergence of the low-cost airline carriers (LCCs), such as AirAsia, Jetstar and Tiger Airways, which rely on Internet bookings, it's now normal for tourists making holiday arrangements to put DIY plans together by researching and booking their options on the Internet. A number of large-scale Internet sites which specialize in these types of rentals already exist, such as vrbo.com (Vacation Rentals By Owners), Homeaway.com, and Perfectplaces.com Surprisingly, some of the dominant booking engines for hotels in Asia (Zuji, Wotif, and Asiarooms.) have yet to embrace these product offerings.
Many of Phuket's property management companies offer rental services. The one with the highest profile at the moment is Phuket Island Property Services (www.phuketvillarentals.com). Others in the same league include Knight Frank, Lynx and Phuket Marbella. At the upper end are Shibumi and Phuket Villas & Homes. One locally grown success story is the popular Two Villas brand, which has developed a number of pool-villa projects on the island and spun off a new service: Twovillasholiday.com, which is aimed at providing rental management for villa owners, enabling them to enhance returns and focus on the surging leisure market.
With a continued downturn in residential property following "Black October", there seems to be a growing trend in conversions of villa and condo projects into hotel managed projects, which tap into the island's predominate food chain – tourism. Mixed-use projects, such as Phuket Pavilions, were early starters in selling units under hotel management, and have established room rates and occupancy levels which are the envy of many upper-tier hotel properties. Some international hotel management companies, such as Outrigger from Hawaii, have used these types of properties to enter an extremely competitive market, with Outrigger Serenity Terraces Resort and West Sands Outrigger brandings now in place.
As in any business model, it's not all fresh air and sunshine for owners of these types of units. Traditionally, investors who buy on the basis of aggressive rental yield projections come away sorely disappointed when year on year figures show only a small percentage against the anticipated returns. Looking at leisure markets, such as the Gold Coast or Queenstown in New Zealand, it's common to see ongoing minimal returns or even negative yields (rental revenue minus expenses, fees and management charges) forcing owners to dig into their own pockets to subsidize their property.
Longer term refurbishment of the units, capital repairs and the need to upgrade and replace the required furnishing package are often neglected in developers' sales collateral. However, there is light at the end of the tunnel for many of these type of properties. Capital appreciation and real estate allows investors to skin a cat two ways: rental yields or sale of the property at a profit.
In Thailand, condo hotels and villa rentals remain a gray area of much taxation and statutory licensing legislation, including application of hotel licenses. The recent update of the condominium juristic act makes the appointment of a long-term management agreement with a hotel operator challenging, to say the least, and casts a certain specter of associate risk on this segment. Logically, the relevant government authorities should be pro-active in embracing the tax potential of these enterprises. With the positive income flow though accommodation, the funds going to provincial and municipal tax coffers could be well spent on improving local infrastructure.
For visitors to Phuket, the continued diversity of products is a welcome improvement. There is much to be said for the value-for-money equation between renting a suite in a condo hotel at a similar price to a hotel room or renting a four-bedroom pool villa with family and friends at a similar cost to that of a villa at an upscale luxury resort. As the Internet gives small business the ability to customize and attract niche business, it should be a wake up call for hotels to view this growing segment as direct competition.

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