Recovery is Underway

Bali Property Report: Three Phases of Recovery

  • As has generally occurred in past recessions,Bali Nirmana Property expects that attractive opportunistic investments will begin to present themselves, but this is likely to take time, so patience will be key.
  • Generally, we expect there to be three phases of our investor’s strategies over the next 12 to 18 months:

Although the long-term impact of the COVID-19 pandemic on the global economy remains highly uncertain, we believe that the potential for a more prolonged recession is more likely to occur in the real estate sector than the stock market as has been reported by Bloomberg, the FT and the WSJ.

While the primary “peak” of new cases in the country may be behind us (and therefore the global shutdown may slowly begin to ease in certain areas), the risk of an ongoing series of localized outbreaks that result in a second wave or even a steady build up of new cases seems highly probable. These outbreaks will likely require further shutdowns which in turn (even if they are limited) will put more downward pressure on the economy. Governments can allow business to reopen, but they cannot force fearful consumers to leave their homes and start spending again.

The negative impacts of such a downward spiral are numerous and while the current disruption in the market will inevitably lead to new investment opportunities, we feel that we are still early in this process and now is a time for caution. Real estate markets move slowly (typically lagging the public stock market), so we believe that it will take several months for the downstream effects of the pandemic and subsequent response to fully work their way into our corner of the economy.

At this point, we feel the smartest thing we can do for our investors is to begin putting ourselves in the position to help act on these opportunities once they do start to arise.

Phase I: Getting the Most out of What You Own

2019 was a robust year in the shares markets. A lot of people made a lot of money and our market here in Bali saw an amazing increase in investment, both foreign and domestic, as investors were bold and properties were flying off the shelf into the first weeks of March 2020. As our market is driven by investment property geared toward the holiday rental market, the returns dried up very quickly once the airports were shut down. Now what? Savvy management companies sought tenants who had chosen to stay in Bali rather than repatriate and that market buoyed several of our investors briefly sagging cash flow models. Some investors who have gone it alone and self manage their investment may not have been so lucky as the competition for tenants was fierce and being here on the ground was a major advantage for those whose assets are professionally managed.

Phase II: Hold Firm, Mind Your Maintenance and Do Your Research

As the shock of the shutdown continues to reverberate through the economy, some of our investors will feel the pinch more than others. Because Bali is primarily a cash purchase market, we will not have a lot of mortgage-stressed properties being foreclosed. However, diminishing lease terms may present the greatest degree of fear and uncertainty.

Hold firm. If you have not been able to get a tenant to rent your property over the course of the last 3 months, it is not too late to find one. Managing your property from abroad is challenging under the best of conditions, so why not reach out for a little help? Scour the blogs, websites and social profiles of a wide range of companies and consider joining forces with someone up here who can help look after your investment with a bit more care than your staff may be capable of. If your villa is empty, now is the time to fix those nagging little concerns as you prepare for the tourism market to reemerge.

Bali has slowly begun to reopen. September 11 has been targeted as the day that we will open our airport for international tourists. What will the balance of 2020 bring? Well we believe that it is wise to curb our expectations a bit as Q3 and Q4 will not be setting any arrival numbers records. Communication is the key. Working our trusted sources in the industry we can get our fingers on the pulse of the data of the daily rental business. Who is coming? When? From where? Under what conditions? How long will they stay? The answers to these questions will help forge all of (our) the marketing strategies as we all adjust to the new normal in the short term. How are all of these properties which have been hanging on by a thread manage to compete with the more robust properties where management has kept “bums in the beds” and taken the time to improve the aesthetics and the functionality of their property roll?

Phase III: Capitalize on opportunities for higher potential return

Chris Connelly of the Ellington Management Group (and my best mate since childhood) had the following to say when I asked him where his real estate market is heading over the next 18 months. “Capitalizing on opportunities to acquire assets whose prices have come down substantially below where they were trading previously will have the longest lead time. This is primarily due to the fact that in most instances, unless an existing owner is in a truly distressed situation, they are unlikely to sell an asset for substantially less than what they had expected to receive before the downturn. In other words, external events must force a sale.
Much like Warren Buffet, we believe it is better to buy great real estate at a good price than bad real estate at a great price. So, we will focus our efforts on those properties that we believe have the strongest fundamentals and long-term growth drivers.

What does this mean for investors’?

For those who are buying, Q3 and Q4 will bring a wide range of opportunities at every price point. Once our investors feel that it is ‘safe’ to come to Bali again, we expect a feeding frenzy.
For those who are selling, if they can afford to maintain their current course of action without too much stress, hold firm and continue to ride this out. Hopefully your other investments are providing some of that positive cash flow that we all need.

The island of Bali has proven to be quite resilient. Since I arrived in Bali in 2002 Bali has suffered – and recovered from – the Bali bombing of 2002, Bird Flu/Avian Flu, H1N1, SARS, earthquakes and volcano eruptions. Bali will rebound from COVID as well. Each of our investors has been forced to ask themselves the tough questions over the first half of 2020, and the second half is likely raise even more questions. How ready are you?

To schedule an inspection of any of our fine properties or to have a phone call to discuss your Bali real estate strategy, please reach out to Patrick on +62 817 973 3031/[email protected]