Strategic Insights into Bali's Real Estate Market: An Expert Interview

Bali boasts a thriving rental business that many of our readers might find tempting.

For those considering a move to the island, investing in real estate for a local income source is a compelling idea.

In this article, we explore the profitability of investing in Bali's real estate market.

We spoke with a seasoned expert in Bali's real estate sector, Vasiliy Pronin, founder of Villa in Bali, who brings over a decade of hands-on experience to the table.

Real estate investments can yield returns of 15-20% per year, far surpassing typical bank interest rates. Property prices are often listed in IDR but are closely tied to the US dollar.

Desirable properties typically combine prime location with unique features, such as scenic views or innovative design concepts.

Location-wise, it's crucial for villas or hotels to be conveniently situated near essential amenities like beaches, supermarkets, organic cafes, and quality coffee spots. Accessibility to transportation hubs is also vital.

Alternatively, uniqueness can attract guests, such as secluded yet stunning locations like rice terraces or mountain vistas, ideally paired with trendy design that appeals on social media.

An exemplary case is Hideout Bali, initially a humble bamboo hut in the mountains, now a successful villa complex.

Ultimately, successful tourist properties sell either a captivating concept or an unbeatable location. Without a clear idea or strategic location, understanding your target market and how to reach them, your venture may struggle.

Approach real estate investment in Bali with a clear plan: What do you want to achieve?

Simply purchasing a villa, listing it on AirBNB, and hoping for passive income is unlikely to succeed in Bali. Successful ventures demand dedication, time, effort, and a deep understanding of your goals.

Generally, it takes 6-12 months for a project to achieve profitability, unless it's in a highly sought-after area. However, prime locations come with significant market entry costs.

For investors with up to $100,000, it's crucial to find a rental property with strong potential, something that stands out.

Consider it like buying an existing business, such as a café. If that café struggled to attract customers previously, ask yourself: "Why would customers come now under new ownership?"

Many cafés open and close because they lack a unique concept. Simply renting a space, adding a few tables and a kitchen isn't enough.

To succeed, you'll need to transform the café—change its style, its concept, rethink how you promote it. If you're seeking purely passive income, this might not suffice. But if you're willing to nurture the place, enhance its beauty, and craft a compelling narrative around it, success is achievable.

With a starting capital of up to $300,000, consider opting for long-term leasing arrangements spanning 5, 10, or even 15 years.

Ensure you allocate funds for repairs, interior updates, purchasing furnishings, and investments in promotional materials like photos, videos, and a website.

Plan for the initial 3 months for necessary repairs and setup, followed by a focused promotional period.

Within a year, you can anticipate a solid return on your initial investment.

For long-term ownership or leasing, it's crucial to factor in depreciation. Bali's high humidity and strong sun accelerate wear and tear on houses, furniture, and accessories, necessitating frequent replacements or repairs.

Whether renting or buying, assess the technical condition of the property—look for cracks, leaks, and structural integrity to avoid unexpected costs that could erode your profits. Don't rely solely on promises from sellers to fix everything; often, they may only conceal issues superficially.

It's possible to find options even starting at $50,000, but be prepared to invest time in your search. Depending on your luck, you might spend the next 6 months looking for the right property—or find it the very next day.

You can come across properties renting for around $15,000 per year. If you plan to use it for business, expect to pay several years in advance to secure the price.

For instance, renting for 3 years would total $45,000, plus an additional $5,000 to $10,000 for repairs, making the initial investment around $50,000 to $60,000.

However, operating under these circumstances may not comply with legal business requirements. Launching a legitimate property business with this amount could prove challenging.

Investing in expensive real estate often prioritizes capital preservation over immediate income. The goal is to safeguard your investment against risks like fire while expecting long-term appreciation in property value.

Land prices, particularly, continue to rise steadily. Therefore, purchasing more land with a smaller house tends to be more advantageous than the reverse.

Luxury villas typically offer a return of about 3-5%, which can be considered satisfactory. However, this isn't guaranteed.

Buying an expensive villa can be justified if it's for personal enjoyment, with plans to use it for 2-3 months annually, hosting family and friends. A well-managed villa can be rented out during the rest of the year, covering maintenance costs and potentially yielding a modest profit—around 2-5%. In exceptional cases, properties in prime locations like above Balangan Beach, Seminyak Beach, or Batu Bolong's center may achieve up to 7% returns, though these are high-end and costly options.

In summary, purchasing a villa for personal use, renting it out through a management company, and leveraging it for occasional income makes financial sense. Rental proceeds can cover upkeep, utilities, and possibly depreciation, while you and your loved ones benefit from substantial savings compared to hotel stays or renting similar properties.

Remember, savings accrued are akin to earnings!

Additionally, if you decide to sell, you can expect to recoup your investment with accrued appreciation. However, luxury property markets typically have low liquidity, making quick sales less feasible.

BL: What are the legal requirements for operating a rental business? Which documents are necessary, and how should they be prepared to ensure compliance?

In Indonesia, like any country, operating legally and earning income involves adhering to specific laws and requirements.

The comprehensive process of business legalization includes:

- Establishing a PT PMA company, which is a company with foreign capital,

- Securing a work permit (KITAS) for a foreign manager who will oversee the villa operations, welcome guests, hire staff, handle payroll, and manage guest payments,

- Officially hiring employees with insurance contributions (BPJS) and tax identification numbers (NPWP). Tax contributions amount to approximately 15-17% of salaries. The minimum wage in southern Bali is just under 3 million IDR per month and is regularly adjusted by local authorities. Employers are also required to provide a 13th-month salary, the so-called religious bonus,

- Obtaining a tax identification number (NPWP),

- Filing tax reports and paying taxes, including a local tax of 10% (similar to VAT) and a federal tax of 1% on turnover,

- Ensuring the property has a valid building permit (IMB),

- Acquiring a tourist accommodation license (Pondok Wisata) for the property.

A simpler approach to legalizing rental property is hiring a property manager you trust. Sublease your property to this manager, who will handle the Pondok Wisata license, NPWP registration, and receive payments on your behalf into a local IDR account. You will manage tax reporting, both local and federal.

It's important to recognize that such a manager becomes both a friend and a business partner. This relationship requires patience, willingness to teach and guide, and the ability to calmly address challenges.

Avoid using force or aggression in business dealings with Indonesians. Building mutual respect fosters long-term loyalty, though terminating an employee who has worked for over 2 years requires substantial compensation.

To transfer income out of Indonesia legally, foreigners must pay a 20% withholding tax. However, without direct oversight tools, tax authorities may not monitor this unless explicitly stated in your transaction descriptions. Banks may flag such transactions, prompting inquiries.

If you intend to sporadically rent out your property under the radar, hoping not to attract attention, be cautious—raids do occur, especially if you have envious neighbors.

Treating rental as a serious business venture involves brand creation and proper legalization.

Traditional hotspots like Seminyak, Uluwatu, and Canggu remain popular. Alternatively, exploring more exotic locales is also an option.

Predicting upcoming areas in Bali is challenging, but uniqueness always attracts interest.

Accessibility is key in Bali. Properties near major attractions or transportation routes tend to fare well.

For instance, the cliffs along Pandawa Beach may see increased interest once a highway connects Nusa Dua and Pandawa, potentially sparking a boom despite already high prices.

The market is expanding towards Tabanan and northwest areas, though major breakthroughs have yet to be seen.

Canggu continues to present opportunities, and neighboring Pererenan also shows potential, despite its current lack of infrastructure.

For Canggu and Batu Bolong in particular, it were the surfers! Seeking quieter alternatives to Seminyak, they migrated to Canggu. This influx sparked the need for infrastructure, prompting the rise of cafes. As more surfers arrived, more cafes followed suit.

In no time, Canggu transformed into the bustling hub it is today.

Beyond Canggu, popular surf spots are scarce, with Balian being the only notable exception, albeit quite distant.

The east coast lacks developed infrastructure and hasn't seen significant growth prospects.

From a surfing perspective, current spots in Bali are overcrowded, prompting surfers to explore other islands like southern Lombok, Sumbawa, Rote, and Sumba.

Up north in Bali, plans for a new airport have stirred market speculation. Initially, airport rumors boosted market hype, only to subside as reality set in.

Future developments in the north will be intriguing to watch. Many European buyers are eyeing this region for an authentic Bali experience, away from the bustling scenes of Canggu and Seminyak.

Despite lacking surf appeal, the north offers tranquil seas, ideal for family swimming and boasting coral reefs. Picturesque hills and striking grey volcanic sand beaches add to its allure.

Massive northward development could oversaturate the market, potentially lowering property prices. Therefore, unique property characteristics become pivotal in such a setting.

Ubud continues to attract growing interest, but competition is fierce. Uniqueness is key to standing out in the saturated under-$100 per night market flooded with generic Bali-villas.

In South Bali, prices are already steep, reflecting its established popularity.

For those eyeing Bali for passive income, be prepared for an intensive six-month property search. There's no room for complacency; listing any house on Airbnb and expecting immediate bookings simply doesn't pan out.

Bali's iconic tourist spots like Kintamani, holy springs, cliffside Uluwatu Temple, Tanah Lot, volcanoes, and rice terraces are well-established draws for tourists.

In Candidasa, beachfront villas like Tirta Nila Beach House and Villa Na Bali operate at about 90% occupancy. We personally launched and built these villas, and sold the business afterward.

Unfortunately, prime beachfront land in Candidasa is fully developed. Any future growth would likely occur inland, away from ocean views due to the area's steep coastline, simply because Candidasa boasts decent infrastructure.

Traveling to Amed remains inconvenient due to its distance from main routes, and concerns persist regarding its proximity to the volcano, particularly following past eruptions.

Many tourists still shy away from Lombok following the earthquake, not out of fear of a recurrence but to avoid witnessing the aftermath and others' hardships. Media coverage vividly portrayed the devastation in Lombok, impacting visitor perceptions.

The Indonesian real estate market differs significantly from Cambodia, Vietnam, or Thailand, particularly in its reliance on local tourism. During a recent property visit to Thailand, I found local vacationers were virtually nonexistent.

In contrast, Indonesia's economy continues to grow steadily. With a population of approximately 240 million and an expanding middle class, the country offers substantial opportunities. Many Indonesian resorts attract 60-70% of their visitors from domestic tourism, driven by economic growth in major cities like Surabaya and Jakarta, as well as smaller cities such as Yogyakarta, Medan, Balikpapan, and Kupang. The growing middle class increasingly seeks unique vacation experiences.

Local Indonesian tourists are enthusiastic explorers of their own country, often drawn to distinctive destinations. The pervasive influence of Instagram culture means unique ideas can quickly gain popularity among local travelers.

To succeed, your marketing strategy should prioritize targeting the local market.

When I refer to a " unique idea," I mean a concept that catches attention, especially on platforms like Instagram. Your property doesn't need extravagant architecture or expensive interiors, but it must be visually appealing. In today's digital age, being on Instagram means you'll eventually be noticed.

Take Hideout, for example. It didn't gain fame overnight; it took about 2-3 years for its popularity to explode in the last year and a half. This growth was fueled by accumulated energy and word-of-mouth.

Launching a place with a unique concept and character requires patience, resources, investment, and a commitment to maintaining excellence until the project gains traction.

Typically, it takes 6 to 9 months, sometimes up to 12 to 18 months or longer for more unconventional projects, to establish a property and build its reputation. However, this effort sets the stage for long-term success.

Focus on creating an experience that makes guests feel good, beautiful, comfortable, and at ease.

Consider Zen Hideaway, renowned for its swings over a canyon, which sparked a trend later replicated elsewhere.

La Joya above Balangan Beach gained fame for its stunning ocean-view pool. Bambu Indah in Ubud stands out with its ethnic style and use of natural materials.

Building a strong reputation is key. Aim for excellent reviews on platforms like Airbnb or a rating above nine on Booking.com to enhance your property's popularity.

They're slightly cheaper to build compared to traditional materials. Lower construction costs mean lower accommodation prices. If Hideout's rates were twice as high, tourists might not have visited.

Finding the right price point through experimentation is crucial.

Surprisingly, Denpasar, the island's administrative and financial hub, commands the highest prices. In tourist areas, Seminyak and Batubelig range from 1.5 to 2 billion IDR per are. Uluwatu's cliffside land costs about 1.2 billion IDR per are.

However, Uluwatu requires caution; not all areas are suitable for construction. Some lands may be too close to the Uluwatu temple.

There's a regulation prohibiting construction within a 5-kilometer radius of Uluwatu temple, often circumvented with unclear consequences. Illegal constructions there are currently overlooked but could face changes in the future.

Recently, an article highlighted the Indonesian central government's concerns about disorder in real estate nationwide. Some investors flout rules, assuming no repercussions, though discussions in Jakarta suggest this issue will be addressed eventually.

A growing number of investors adhere strictly to laws, disapproving of rule evasion.

There are three main types available to foreigners:

   Long-term lease of the land, with options for extensions totaling up to 75+ years.

   Translated as "Right to Use," granted to foreigners residing permanently in Indonesia with a KITAS permit. It lasts for up to 80 years, also extendable.

   - Agencies like Bali Business Consulting can assist in obtaining KITAS, or you can establish a company for this purpose.

   - Hak Pakai rights are inheritable and can be converted to full ownership (Hak Milik) if sold to an Indonesian.

   This option, translating to "Right to Build’, is reserved for companies. Land must be used within 25 years if acquired through a company, with extensions up to 80 years total.

   - Verification by the government ensures the land is used for its intended purpose during each extension.

   - Major hotels often use HGB. Foreigners can establish a PT PMA company with foreign ownership, enabling property purchase or lease.

These options cater to various needs and legal frameworks in Bali's real estate market.

Yes, it is advisable. This recommendation is based on agencies' thorough document checks, ensuring proper handling. They help prevent common issues like dual certificates and unauthorized sales among family members.

Additionally, a reputable agency provides independent property assessments, evaluating aspects such as land value, construction area, and commercial potential.

One frequent issue arises when transactions proceed without the consent of all family members. While legally owned by one person, many Balinese lands are traditionally considered family property. For example, even if one person signs, approval from four or five siblings may be necessary for a sale.

If any family member opposes, the deal may be canceled or become contentious, impacting your business. Resolving such disputes typically involves extra costs.

Another common problem is the failure to verify land status during a sale—whether it's agricultural land unsuitable for development or too costly to convert. Converting green zone land to residential use involves additional expenses and long-term risks.

There are also cases of deals conducted through unscrupulous notaries.

Additionally, promised road access to purchased land may not materialize due to inadequate agreements with the landowner.

Lease terms have been extended, now allowing leases of up to 100 years. Previously, leases were for 50 years with extensions of 25, 30, or 50 years.

When extending your lease, you have a right of first offer as guaranteed by your contract. The owner will make an offer which you can negotiate. They are obligated to wait for your response.

If you choose not to extend the lease, the owner will seek another tenant. Once your lease ends without extension, you will lose the property.

It's advisable to initiate the extension process 3-5 years in advance to negotiate terms, including price.

In remote areas like Tabanan, for a 25-year lease, you can negotiate the extension cost based on commodities like rice, historically significant in Bali.

The ability to fix prices may vary depending on the owner and their family's preferences.

You have two options for renting out your property. Firstly, you can hire a trustworthy Indonesian manager who handles everything—payments, invoices, and registrations in their name.

If you lack a trusted person, several management companies in Bali specialize in marketing, placement, and price management. One recommended option is Farsight 24, which helps owners maintain control while hosting tourists.

For larger companies like Elite Heavens or Bali Luxury Villas, your villa must be valued at least a million dollars. These companies excel in managing unique or exceptional properties—places with distinctive architecture, villa design, quality amenities like tableware, linens, towels, trained staff, etc.

A reputable management company is ideal for villa owners who view their property as both a personal retreat and a rental opportunity for guests, family, and business partners. Renting out the villa when not in use not only generates income but also offsets costs, effectively providing a return on investment.

Lombok shows promise, but it encounters challenges with local market preferences. Apart from the Hindu-majority areas in the west of the island, Lombok's tourist appeal primarily caters to the Arab market.

While this market is substantial, the ability of Arab tourists to fully occupy all of Lombok's hotels remains uncertain. Moreover, Arab tourists already have established destinations like Dubai and their own coastal attractions, which somewhat diminishes Indonesia's appeal. Other potential markets for Lombok include Indonesia, Malaysia, Pakistan, and Central Asia.

My concern here is the lack of appeal to a wider international tourism.

In contrast, Sumbawa offers a more appealing culture and lifestyle for a range of international visitors.

Sumba is a unique island: predominantly Christian, it is known for its seismic stability as it does not have any volcanoes.

Currently, extensive road construction is underway across Sumba, including a ring road connecting all regions.

Home to the renowned Nihi Sumba resort and the Sumba Hospitality Foundation, the island boasts a skilled local workforce in hospitality.

Sumba offers surfing, boasts two airports, and preserves ancient local cultures alongside Christianity. These elements appeal to photographers and videographers, thereby attracting tourism to the island.

Land prices in Sumba are still reasonable compared to Bali—a hectare costs as much as a hundred square meters in Bali, presenting significant investment potential over time.

Buying large plots allows for strategic development—subdividing, planning roads, and common areas can attract future buyers as infrastructure develops.

Infrastructure in Sumba is still developing, particularly in Southern Sumba where dining and entertainment options outside of resorts are limited. However, investing now could secure a stake in future developments.

Nihi Sumba, known for its luxury offerings, operates at high occupancy rates, demonstrating the island's appeal to global guests. Creating more affordable alternatives could further attract interest.

For example, we recently launched a HARCOURTS PURBA office in Sumba, focusing on real estate sales to capitalize on these opportunities.

Another interesting place is Flores —investors have bought up land around Labuan Bajo port, driving prices sky-high. A new international cruise terminal under construction promises further development, attracting tourists from Australia and New Zealand.

Land prices have definitely been rising. Over the past decade, prices in Bukit have increased sixfold, with even sharper rises in areas like Canggu. A notable factor driving this upward trend is the demand for unique and sustainable tourism experiences.

If you're considering investing, it's essential to align your goals with market trends. Eco-tourism is gaining momentum, with sustainability becoming a key consideration for travelers.

For personal use, buying a villa in Bali to enjoy with family and friends is a rewarding choice. However, if you aim to turn it into a business, understanding market trends and identifying niche opportunities is crucial. Ensure your business model aligns with evolving consumer preferences and adds value to the local or international community.

Before making a purchase, spend time in Bali to familiarize yourself with different areas. Renting properties in various locations will give you firsthand experience and insights into the market dynamics.

When evaluating potential investments, consider the existing infrastructure, nearby attractions, and rental market trends. Research nearby listings on platforms like Airbnb to gauge rental prices and demand.

Taking these steps will help you make informed decisions and maximize the potential of your investment in Bali.

For expert advice on real estate investment in Bali, consider consulting trusted professionals, like Villa in Bali: +62 81 7000 5777 (WhatsApp / Telegram)