Investment Insights

South Lombok has been on the investment property radar for several years now, due mainly to the government’s +300M USD Mandalika Resort project in Kuta.

Speculative land-bankers started buying up large parcels of land across the entire coast from Ekas to Pengantap, which was strongest around the international airport opening in 2011. As with any early investment cycle market, returns were high but title and liquidity risk were equally high.

Despite the Mandalika project only just starting construction now with a series of major hotel announcements in 2016, the improvements in access and infrastructure opened the doors for a lot of small scale developers over the past 5 years which has continued to propel prices albeit at a slower and more sustainable rate.  We’ve seen average sizes continue to decrease and price per m2 increase in response.

A lot of the early land-bankers have struggled to exit their purchases without undergoing a process of subdivision. However that process requires public access and infrastructure, which is why we’re seen certain areas outperform and others lag

Land-banking versus Development

The property market in South Lombok has been dominated by land-bankers for the past several years. Being essentially a macro play on the overall property market, land-banking is less demanding, only requiring some general market catalysts, such as an international airport. The returns are high but the risks are too with a lot of title issues arising from the creation of land certificates for the first time.

With virtually all the beachfront in greater Kuta purchased years ago by large domestic groups, a lot of land bankers in the hillsides are now facing liquidity issues on the exit. Prices per m2 may have appreciated 300% on paper but due to their large sizes the total purchase price puts them outside the budget of retail investors and commercial developers simply aren’t interested in hills this early in the cycle. As a result, a lot are being forced into subdivision developments, which have a different and more complex set of requirements such as electricity, water and telecommunications.

For standalone locations with no tourism development, there are also additional challenges being first mover such conditioning the local community and selling buyers on locations that don’t have any restaurants/cafes nearby.

Like any legitimate market, such as oil futures or company equities, without a genuine end user the market is highly speculative and does not reflect true value. In our market, this is tourism developers. With this in mind its great to see the first phase of genuine development sweeping across the coast.

Catalyst Theory

For an area to take off it either needs a unique (normally natural) feature or a development of a certain size/scale to kick start things.

Being first mover in a new location often requires heavy infrastructure investments and marketing programs to make it development ready, raise awareness and educate the public. They also need to be large and self contained, due to a lack restaurants/cafes in the area. That’s not economically feasible for a standalone villa.

A lot of retail investors especially want to see a development successfully sell, build and operate before starting themselves. The larger and higher end the development the more confidence they’ll have in pushing forward.

Often referred to as momentum trading, the initial development acts as a catalyst for others to follow. It’s the small retail investors that provide the momentum.

An excellent example of this is Selong Selo in the hills above Selong Belanak. They have extended electricity, fiber optic internet cables, conditioned the local community and bringing several hundred new people to the area every week thanks to their hugely popular Aura clubhouse. As a result other smaller developers are pushing ahead with their projects nearby such as Hotel Milu, Coconut Creek and Selong One80. In turn more smaller developers, perhaps even individual villas, will follow once there are enough restaurants/ cafes.

All of this requires a catalyst development to kick start things.

Local Community Matters

Although a catalyst development conditions the local community for tourism development, it does not guarantee their support and without that an area will always struggle to take off.

Local communities in Lombok are very poor with low education levels, low English ability and have difficulty seeing ahead past their next meal. Although logical to foreign investors, local communities often cannot see the benefits of tourism development. Likewise local politics and corruption of power brokers, can prohibit development due to vested interests.

Hence whilst early developments set the tone for community relations it’s the collective attitude of the developers that follow that ensure an areas sustained growth. That’s done through educating the local people and creating a real sense of community. Area’s where developers have CSR programs such as Jabon Hills above Selong, will always do better than those without.

Concentration better than Diversification

Whilst it makes sense to diversify a property portfolio, we’re seeing concentration a better strategy for investment in south Lombok. It allows investors to work together addressing issues such as electricity extension or the local community for example. Issues that otherwise would not be possible to address individually. That’s partly why certain areas which have started developing seem to have a lot of momentum, notably Gerupuk, Are Guling, Selong Belanak and most significantly Kuta.

The other reason is a tendency of investors to want to be around other similar investors, referred to as herd mentality. From a tourism point of view, it always nice to have restaurants and cafes nearby.  From an investment point of view its nice to have friends nearby. It gives a sense of security and belonging to a community, however loosely defined.

Kuta for example has seen the highest concentration of investment and development over the past 5 years, despite there being much nicer cheaper beaches down the coast with the same access and infrastructure e.g. Selong Belanak. The early backpackers and local cafes formed the base from which it has grown. As it grows it gains momentum and moves up the value chain to mid range and eventually high end developments.

Soft Macro versus Strong Micro

The macro economic picture remains strong with the Indonesian economy robust and defensive, which has proven a winning combination over the past 8 years with the troubles in the U.S and Europe. The recent currency moves were attributed more to USD strength post-election than problems in the Indonesian economy.

However softening of regional property and equity markets has tempered the local property market somewhat over the past 2 years. Singapore and Hong Kong have seen their residential property markets hammered by regulatory changes. Perth has seen a pullback due to weakening of the mining sector and oversupply. This combined has weakened investor sentiment. Prices are still appreciating but volumes are still low.

Likewise professionals in the financial markets across the region, which constituted a large part of the early cycle land-bankers, have seen dramatic reductions in bonus payments which has translated to reduced disposable income for secondary residences and alternative investments. The average budget in South Lombok has reduced by 30-40% whereas the average property price has increased by 50%.

Locally the news flow has been very positive. The Mandalika Resort project looks to be finally underway with a series of high profile announcements, clearing and excavation of land, as well as perimeter fencing and completion of supporting infrastructure. Last year the first water desalination plant was completed for example.

Indonesian President Jokowi has made a few high profile visits and there’s a steady stream of local media coverage. Perhaps partly because of this there has been a huge increase in police presence, resulting dramatic reduction in reported crime, and a lot of road works everywhere.

Where to from here?

We see the overall market grinding higher with pockets outperforming in our 3 focus areas.

We also see a lot of the early land bankers having trouble exiting their investments, especially hills in standalone locations. Such properties may come to market at distressed prices but the additional access/infrastructure requirements to be priced in to gauge real value.

We expect a lot of unresolved problems coming to the surface with investors who purchased properties direct or via unprofessional / local brokers. Being a 3rd world property market and early in the investment cycle, there are a lot of potential title, access, zoning and local community issues which only become apparent later normally at time of resale (new buyer’s due diligence) or commencement of development.

More Info

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