Comparing off-plan residential projects in Bali, Indonesia and Sweden

Certain conditions in Bali have led to the rise of many developers selling residential units off-plan, simply because it can be a lucrative business.

Developers either directly or via sales agents offer a dream, based on Bali’s natural values, beautiful nature, fantastic beaches, lovely weather, which surely influence buyer’s attitudes, judgements and emotions towards buying a real estate.

The off-plan real estate market in Bali is highly influenced by the developers, this article aims to provide fruitful knowledge to the buyers who can shape the same market by being more aware and with reasonable demands on the developers.

This article is mainly for buyers who consider buying real estate as an Investment, however also relevant for those who would buy for both personal use and for Investment. It addresses the current situation and propose more balanced solutions, aiming to share the profit and the risk between developers and buyers with a win-win approach. The idea is also to help creating a more sustainable real estate market and construction industry. For perspective some parts will be compared to development in Europe, Sweden.  

• Residential units such as villas and apartments.
• Off-plan projects, direct buy from the developer with typically 1-2 years construction time left.
• Good locations in areas such as Canggu, Seminyak, Ubud and Uluwatu. (not super great micro locations with very short distance to shoreline or undisturbed ocean views)

1. Price
2. Payment plan
3. ROI and Value
4. Operation and maintenance management
5. Other key demands
6. Buyers’ summary/checklist

The total development cost is relatively low in Bali mainly because of the design and construction costs and this creates opportunities for the developers, who seem to price the objects at levels close to what foreigners would pay in their home countries. Prices typically range between 90-400k USD depending on size, location and luxury standard of the apartment unit or the villa. Included in these prices are typically full furnishment, which is normally never the case in Sweden. Generally, the profit margins in development projects are higher compared to similar projects in Sweden. The tourist sector is growing since the pandemic and the government are easing regulations regarding foreign investments and visas. Altogether these are some of the reasons why many new developers are establishing in Bali, mostly with foreign ownerships via Indonesian company.

Some sales agents/developers might advise you to speculate and ‘flip’ the object tax free, that is to buy and sell the unit during the construction time, and they have regulated terms regarding this in the investment agreement. As an investor/buyer it can be positive to have several options, to sell early, keep and rent and to sell later. However, one can wonder if it signals desperation from the agents/developers pitching flipping. Or if they have a short-term commitment to the real estate market and their clients. When most buyers are looking for quick gains, this speculation can drive rapid growth in the property market, which can lead to an unsustainable market bubble.

Even though Indonesia has a credit rating of BBB by S&P, Bali is mainly a cash only island. Banks don’t usually allow mortgages or loans for buying real estate with a reasonable interest rate and specially not to foreigners. This is the same for the developers when buying land or funding their projects. It is likely that developers buy the land with their own money and develop the projects with the buyer’s money, that’s why the payment plans are starting with a downpayment of between 20-50% and then follows the construction timeline. Many developers have implemented a payment plan themselves for paying off the land they bought to develop.

If the developer is well established since many years and had several previous and successful projects completed, they should have made enough profits and be able to develop new projects with more of their own capital and thereby offer a different/more buyer friendly payment plan to buyers.

In Sweden developers usually await a minimum of 75% sales-rate in off-plan projects before groundbreaking. If similar policies would be adopted by developers in Bali, then also they would more likely be able to offer different payment plans.

40dp-15-15-15-15 is a typical example of a payment plan in Bali, starting with a 40% downpayment and then every quarter 15% until completion, in this example with a 12-month construction time. This means that the buyer’s lose interest on their money during the construction time, normally 1-2 years.

Another solution developers offer their buyers is a downpayment of 75% followed by 2-3 years of rental profits to pay off the remaining 25%. This could indicate that the developer has a strong belief in that occupancy rates and rents will be stable on certain levels, however if it wouldn’t be, the time schedule of 2-3 years would be extended until the pay off is completed. 2-3 years rental period together with the construction time left could mean 3-5 years before you earn any ROI on your unit, at that point the condition of the unit has probably deteriorated because of the earlier usage.

Some developers offer a discount of 1-5% if you would pay the full amount up front in an early stage. If you would do this you should demand at least 10-15% discount on the price (per year), based on the risk you take and, on the alternative, earning you could make.

Good to know is that insurance companies do offer construction insurances for projects in Bali given that the construction progress is less than 10% at the time of approval. Insurance companies also offer full value property insurance for the operation phase. It is, because of the unequal risk sharing, imperative that you make sure the developer has proper insurances.

In case of apartment unit’s, land will not be subleased to you but in case of villas the land should be subleased to you which would mean that you could own the land (by leasehold) from the time you make the downpayment. This means that you would receive some value or security for your pre-paid money. However, this is only the case with villas and not apartment units.  

In Sweden, you would successively pay up to 10% downpayment and the remaining 90% when you are handed the keys to the apartment unit or villa.

In principle it can be reasonable to propose a payment plan according to:
10dp-10-10-20-50, quarterly payments. Based on that it is 12 months left of construction from the time you pay the downpayment. It is important to make sure in the agreement that payments shall be made according to the actual construction progress.

Changes in tourism trends with its seasonal fluctuations, or factors such as natural disasters, and global events like pandemics can obviously impact occupancy rates and rental yields.

The popularity of Bali as a tourist destination has led to a boom in vacation rental properties. As more properties become available for rent, competition increases, which can drive down rental prices and occupancy rates.

-> Regarding the ROI, a tip is to stress test the ROI with 50% occupancy and 50 USD per night. This is to include the risk of overdevelopment and a possible saturated rental market. Micro location, and micro area data is key for real comparison. But also ask for confirmation data for any other information suggested by developers, for example if, “occupancy 80-90% and 120+ USD per night”.

Value appreciation may not be as great as “20-40% within 5 years”, consequently to the massive supply add that’s ongoing together with the fact that the client market with all cash buyers isn’t that enormous who would pay all cash about 100-500k USD per unit. (this is a lot of money for most people in the world!) As more and more properties are built, especially in popular tourist areas, the oversupply can drive down prices.

-> Regarding the value appreciation, perhaps a 1-5% yearly value increase is reasonable. This is to include the risk of overdevelopment and a possible saturated market. Regarding value appreciation it is always recommended that you have a long-term perspective of minimum 5 years.

New infrastructure developments such as the Bali subway project will most likely have a positive impact on real estate values over the coming years.

In Sweden the ownership of housing units with mortgage is about 45% (the remaining 55% either owns without mortgage or rents). Most households with mortgages have floating interest rates, making their property values highly exposed to the fluctuations of the central bank interest rates caused by trying to control the inflation. This dependency means that property values decrease for every period the central bank is raising the interest rate, and vice versa. All cash buyers are rare in Sweden and banks are highly involved in the transactional functionality of the housing market, simply because of their regulations to allow mortgages or not, which also changes over time since their behaviour is usually cautious in uncertain economic times but progressive in good economic times, keeping their risk exposure at the lowest. However, this phenomenon doesn’t really affect property values or the market in Bali since most ownerships are without mortgages.

The housing market in Bali will likely be dynamic over the coming years. It depends on how speculative developers will be in projecting the future demand, while being aware of the actual current demand and the massive ongoing supply add. It would also depend on if tourist/visitor flows would keep growing or stabilizing. Eventually supply and demand will find new balanced intersection, resulting in different, perhaps more stable, price points of sales and rental.

The housing market in Sweden is changing as well, in the short perspective because of a more restrictive immigration policy and in a longer perspective because of the decline in birth rates. Also affecting the motivation for new construction is climate change, which makes it more reasonable to focus on existing buildings rather than new construction. These factors change the earlier projected demand of new built residentials from 67 000 units to ~30 000 (still not a finally confirmed number) units per year, moving forward. The demographics are also changing with a growing elderly share of the population which will create different housing demands in the future.

Developers normally take responsibility to at least initially manage the completed property during the operation and maintenance period, including to manage your daily rental business by marketing your unit/villa, daily cleaning etc. For this they normally charge a management-fee of 20%, which they deduct from the rental income of your unit/villa. They are allowed to hand over this responsibility to another external management company whenever they choose to.

Rental income – 20% [Management-fee] – 8% [expenses] – 10% [tax*] = profit after Management-fee =
62% of the rental income. (*Tax is different for a PT PMA-buyer, within the 3 first years.)

1. Rental income – 8% [expenses] – 10% [tax*] = profit before management-fee =
   82% of the rental income.
2. The management-fee will be deducted from the profit above according to:
   If occupancy rate >50% Management-fee 20%
   If occupancy rate 30% Management-fee 10%
   If occupancy rate 0% Management-fee 0%

(Occupancy rate = average yearly)

3. A limit on expenses should be adopted to make sure it can’t become too high for any reason. In rare cases where the limit must exceed, the property management are required to inform the buyer with explanation and ask for permission.
4. Regarding expenses, operation and maintenance costs, are calculated at 8% above, however since special circumstances on Bali, tropical climate, with high humidity and frequent rainfall, this needs to be investigated and made sure to be a realistic number.

If you are looking for long-term rental business, you should also put aside ~5% from the rental income each year for an internal renovation of the unit/villa after ~5 years.

Almost all aspects of the operation and maintenance phase differ when comparing Bali to Sweden. To mention a couple of the aspects would firstly be the property ownership structure and secondly regarding the laws and regulations of renting out.

In Bali a typical ownership for foreigners would be leasehold 25 years with possibility to extension. Practically it may be, as in current ownership regulations, a formal difference in ownerships titles based on if the object is an apartment unit within a multistorey building or a free-standing villa. Renting out is allowed without restrictions, allowing the market to self-regulate.

• Construction insurance [all risk] and a full value property insurance during operation phase.
• Warranty construction 10 years. (although some developers offer 5 years)
• Previous references/projects.
• Fulfilment of obligations should be considered mutually on both sides, for example what happens if the construction project is delayed and what happens if its on time and the buyer fails to pay according to the payment plan?

1. Make a site visit, meet the developer, ask for references/previous projects
2. Be aware of developers selling you the idea of ‘flipping’
3. Propose a different payment plan
4. If you pay all cash upfront make sure to receive adequate discount on the price
5. Stress test the ROI calculation
6. Think of the value appreciation as a potential bonus and you will benefit from having a long-term engagement rather than looking for quick gains
7. Propose a more win-win solution regarding the operation and maintenance management
8. Make sure the developer has a construction insurance all risk
9. Make sure the developer will have a property full value insurance
10. Warranty construction 5-10 years

You will need a notary in your due diligence process to check certain points such as, zoning regulations, land ownership, legality of the land, building permit etc. It will cost you 1% of the unit/villa price.

Before you sign any agreements, it is recommended using a lawyer review the agreements.

If you need help regarding development plans, budgeting cost and revenue, technical-environmental due diligence, transaction management, negotiating win-win with the developer and more, a real estate professional can assist you.