welcome back for part two of Market insights on the Bali Business review my name is Jing and today we're going to go even deeper into the question that we were tackling in the previous episode so what are we talking about today we're going to talk more about the potential risks of an oversupply of short-term rentals in a property Marketplace in Bali so if you own a villa in semak or a lodge in ubot or you have a guest house in changu or you're planning to buy an Off plan property from a developer then this is
a must critical video for you to make the most effective investment decision who hasn't heard about the overy promises of gigantic return on investment and beautiful model selling 3D render properties that are just delightful to look at so we're going to go and dig into the history into the evolution of short-term rentals and Bali through the advance of Airbnb we're also going to go and independently verify whether the claims that so many developers and sellers are making can actually be proven we're going to Insight such that you as an audience watching this video understand what
it is that you can do in order to get the best value out of your investment so stay tuned and we'll dive into all these particular topics I'll break down each of these areas one by one until they are crystal clear until you have a excellent understanding as well as I do first off I want to break it down into three main categories we're going to go into talking about the air BNB effect and Market over Supply how do we get here what was the initial draw why does it continue growing and what will be
the eventual outcome next we're going to talk about the ROI illusion we're going to talk about why developers might not have the same incentives as the actual purchases of property how some of the misalignment of incentives have led us to the situation that we see here in the marketplace today third we're going to look at the long-term impact we're going to consider what Market strain has in terms of its effect on existing investors but also opportunities for new investors but also the ability to figure out what are the opportunities and even the worst of times
in conclusion we're going to provide insights to anybody who is Savvy looking to get a good deal getting to understand the data do a little bit of homework and basically cut through all the hype and find out what it is that they can do to gain the best possible investment decision all right stay tuned and we're going to dive into it right right now so once again to introduce myself my name is Jing and previously I introduced my background as being a former market manager for Airbnb and also a 15-year resident and also participant in
the real estate industry in Bali that's not quite true I'm a 20-year resident but only have been actually working in real estate for about 15 of those years now let's get back to the picture again now we're going to go back to this point in history where where there was a transformation and actually the takeoff of the short-term real estate market so we go back to 2011 and this is right when the market failure from the previous model of doing business which was buying freeh hole property had already begun seeing an unlock with the rising
model of buying leas hole property so let's get into the facts and figures and try to figure out what happened at the time and I have a great actual statistics to show you so the one thing you should go is you should always use some data to make decisions but here's a really handy dandy site this is called Google Trends Okay Google Trends is a freely available website you can just look for it on Google of course type in trends. gooogle and you can put it in and you can set the setting to look for
keywords that are rising in popularity over time the one that I always like to do is just for fun you can look up cats versus dogs this is my standard little first demo of Google Trends and depending upon what country you're in you can see the relative popularity of cats versus dogs currently I'm in the United States here in California in Silicon Valley and you can see that dogs are more popular than cats today and then if we can click here we can select to worldwide and we see worldwide apparently for the day cats and
dogs have different popularity Dogs coming out on top okay this is not just a great tool for figuring out just a fun trivial pet preference it's actually important for finding out let's let's say history of booking platform so let's go back up here and instead of cats we'll put in Airbnb over here we can also put some the other leading travel platform such as Yoda and travel Loca and probably even Expedia okay so we put all these up there and now we go from worldwide to 2004 till now so now we see almost a 21-year
history of each of these particular platforms and they're incline and decline the one thing that I want to actually have you notice is this right you can do this yourself just by checking on the internet I would encourage all our viewers to just do a little bit research so that there's no magic trick there's no like little faint here this is independently verifiable and you can see essentially what has been happening here okay so if you look up on the screen you'll see that the blue line is the one line that is taking off and
the blue line of course belongs to the let's see over here it belongs to Airbnb Airbnb is the blue line and took off ever since its launch date about in 2011 and it's gone all the way up to the right in fact it is far more popular than any of the existing platforms Expedia used to be the really big gorilla in the room it was a Microsoft company but it's been seeing Decline and all the other ones have also not really taken off and been able to get the same kind of popularity with Airbnb now
so let's go back into this particular picture and ask ourselves what's happening here why does this particular acceleration of Airbnb from the 2011's to today have anything to do with short-term rentals and B that's it isn't it so when Airbnb came out essentially it unlocked the frictions that had been previously happening which you can watch in my previous video that were happening in the real estate market for short-term rentals so once these frictions have been unlocked what that created was what we call the network effect so Airbnb created a safe wall Garden for its users
to transact for those of you unfamiliar with this concept of a wal guard it essentially means that those who sell can expect safety and trust and those who buy can expect safety and Trust if you look at most of the major Platforms in which you buy things on the internet in which you get a ride or a plane ticket or any of these things they all happen generally within wall Gardens it's very rare where somebody goes to a direct website to make a transaction and the point behind that is is that people don't feel safe
sometimes dealing with a brand that they don't actually know anything about so the platform essentially carries on the responsibility of building the brand trust and the brand relationship between the two sides of the users and that's what greatly unlock the short-term rental industry in Bali so as a result now everybody now in 2012 2013 is now really wrapping up the acceleration to getting into short-term rentals even even investors that previously wanted to purchase large Hodel projects like I said before they are now putting their money behind smaller more Diversified projects all throughout Bali of different
styles different locations and just essentially spreading out their risk and putting not all their eggs in one basket but in different baskets see this is a huge transformation in the previous iterations because it was always better when there wasn't a platform like Airbnb or travel Loc are these platforms to put all your eggs in one basket because once you saw success it made sense to compound that but now with this particular let's say The Branding marketing have been essentially unlocked one of the greatest problems in the short-term rental industry was beginning to be solved that
really changed the feel of how short-term rentals were now beginning to now take on essentially the hotel industry which is something that Airbnb was also always chating about okay so then now we see the mechanism behind the growth of the short-term rental industry we understand why what the fuel is that's essentially burning it and keeping it going on so long so who is essentially pushing back to the short-term rental industry as said before in the previous episode there is nobody pushing back there is no developer that doesn't want to sell more units using this particular
model now there is no government agency that wants to overregulation and shut off their income from licenses permits applications Downstream Upstream every particular direction the more people who invest the more visitors come to Bali the more visas can be sold this is a very healthy positive feedback cycle so that is essentially rising and rising and rising up to what do we see that's the problem there is no limit at this point nobody wants to kill the Golden Goose why would you do such a thing so then we get to where the next phase is coming
in and this relates to other particular very challenging problems so one of the challenging problems that we see is this idea of investment value so I'm going to go and talk a little bit about this idea of investment value and how Cally the lack of a standardized model for picking out what is a good investment and what isn't is hurting the industry okay so this actually Segways into another critical question which I want to really bring up which is what what is the effect of overestimating rental yields and how can that actually create Financial strain
for investors it's an excellent question and let me go into what's happening what's going to continue to happen and how a smart investor can understand the situation with this insight as you can see over time when essentially a developer wants to sell a unit a property they're going to always offer a high return on investment CR correct because that entices people to want to buy you'll see Promises of return on investment for 10 15 20% even but here's the inherent irony here's the inherent I wouldn't to call it irony maybe the right word is the
inherent conflict the internal conflict and maybe perhaps in extreme cases the hypocrisy for a developer to promise High return on investment and for those of you who are watching do pay attention because this is a critical Insight any return on investment that a developer gives to a buyer is value that is not going back to the developer okay so I'll say that again any High return on investment that it gives to an investor is value that they are taking off their own table and giving back to their to their buyer what do I mean by
that okay let's calculate what essentially a strong understanding of return on investment means a strong return on investment means essentially you take the income from that investment and you divide it by the cost of that investment pretty simple right income divided by cost is equal to your Roi here's a good question if the developer expects that there's going to be a high amount of income coming from that property then they are much better off holding on to that asset and then generating and capturing the rental yields that come off of that so then they would
probably not sell that they would keep it inside their portfolio and therefore they would essentially then benefit from the cash flows to then fund their next development okay so that's on a high yield producing investment what about let's say the other case let's say the yield of this particular investment is moderate then if the yield is moderate then I'm better off selling it but I want to sell it for the highest prices possible so what do I do I hire models I buy podcast Studios I create really good interesting content on the internet and I
try to get my my buyers to commit to a dream of a higher return on investment therefore they can be good parties to offload my particular asset off to but then the problem is if I've essentially I've sold it for maximum value if I sold it for the highest price as a developer then now my buyer has a terrible return on investment because they began the relationship with a huge denominator which then puts any particular rental yield under a lower Roi okay hopefully that explanation makes sense maybe I could refine that explanation over time but
let me try to simplify it if the numerator is really good the yield is really good then the developer would be less inclined to sell it they would be inclined to keep it then they would probably try to optimize the denominator which is the sale price to the end buyer thereby diminishing the overall return on investment and this is nothing to say that developers are bad people it's just simply an aspect of business and also the development companies that do the entire stack of both the marketing the sale and the management you can see this
is like where this particular model has come from so now this particular idea is this right how does one then get a fair rental yield for their particular property now this is a really difficult Market Behavior analytics condition I don't even know if I have the right background to explain it but let's just ask a simple question in most marketplaces the appraised value if somebody goes to essenti look for how much value can this particular property give me they would probably go to a third party get a valuation from a third party pay for that
valuation and then they would get a real number but for one reason or the other a lot of investors in B do not go through the particular process of doing their own homework or seeking independent advice so they just believe whatever the developer will tell them because it's easier that way and you have to remember that the developer in a particular case who's selling your property has a conflict of interest to actually see to it that you get a high Roi any High Roi that you get is value that's removed from them so therefore this
particular phase of the market is a condition of let's say perhaps a unawareness that in this particular Market there is a conflict of interest so hopefully with this Insight you'll start seeing that inherently developers real estate agents do have a conflict of interest to attain a high return on investment with the particular party who's buying a seller does not want to give you a high return on investment a seller would only want to get the highest sale value for themselves that for anybody who has a financial background should not be hard to understand all right
so that's where a lot of the strain that we see in many of the folks who are owning short-term rentals is coming from they entered the market at valuations that were way too high being promised on a particular sale price that was above market value value for returns that were simply not correct now why did this happen how did this happen having seen and read a lot of developer brochures I can tell you that some of the math on it was just simply ridiculous it was so bad and no one detected it and I guess
most people were just in a hurry to buy property they didn't detect this here's the most simple math mistake that you can see in most development guides okay pay attention to this and you will be able to save yourself hundreds of thousands of okay so when you look at the developer return on investment breakdown they'll show you an occupancy rate and an average daily rate okay and they will promise 80% occupancy and they will give you the absolute highest average daily rate you multiply those together and then you think you get the revenue right wrong
so what really happens is this right if you want higher occupancy your rate start dropping and that's probably not hard to understand because as you are essentially raising the occupancy levels you have to actually start thinking about how to sell every particular night on the calendar and it should come as no surprise to any Savvy investor that not every date on a calendar can be sold at Peak prices it just doesn't make any sense it doesn't matter on the quality of design or how many amenities or if you put a coal pool or an pool
in the property what simply matters is that not every date is equally valuable you just have to be really honest with yourself and ask does anybody really travel in the middle of November does anybody really travel in the low season of February no people who can travel are probably working right now saving money so that they can come and spend that high average daily rate that you want during peak season so one of the largest mistakes in the calculation of return on investment was to use Peak occupancy multiplied against Peak rates okay that is wrong
anybody with any understanding of algebra calculus should probably be able to identify that that's not a strong calculation all right so these particular let's say lack of strong calculations and lack of correct investment mathematics so to speak then led to the over entry overpriced entry points for many investors which is causing some of the strain that we see at the moment too as well all right let's talk about in the future what we can do about this so what is the plan what is the plan for an educated investor at this point to overcome the
proliferation of so many short short-term vacation rentals in The Bolognese Marketplace I would say my clearest advice at this point is to have a plan so it all begins at the initial onset of your entry point into the marketplace that entry point probably has a huge impact to what you're going to experience as an investor whether it's disappointment disgust or Delight so if you do enter into the market at the lowest price possible then you can expect that no matter what the outcome in any particular Market turbulent situation Good Times bad times you're probably going
to do great because your denominator in that Roi calculation is already very low so that is an opportunity I think that is going to be abundantly available in the next 3 to six months as let's say less Savvy owners are looking to exit take their money and then invest elsewhere so that can be a really good plan that we encourage all investors to consider right consider acquiring the property at the lowest price possible don't get seduced by all the marketing by the sexy offices by the amazing YouTube videos that you see with the models dancing
around and mini skirts showing essentially how great the property is that is all just meant to essentially boost your entry price to the highest price possible and making a less rational decision we recommend that is a pretty good plan to actually avoid any disappointment by entering into the short-term rental market the other plan is independent verification you should not ask the barber if you need a haircut that is just inherently going to be a bad question which then results in a bad answer we see this a lot on YouTube we see some of the questions
that our users ask us they ask us things like what price can I get for a particular property in a particular Marketplace the truth is that it's a really hard question to answer and I'm answering your question right now if you're watching this too right it's a hard question to answer because there is no fixed price that expectation that if I have a three if I have a three-bedroom property in a particular location it's just going to hit that 250 price every single day that is not the fact and that could be nothing farther than
the truth the truth is that every particular day you're going to be competing with tens of thousands of other properties plus the hotels in the marketplace to get that particular customer's decision to vote in now if you're not competitive on that particular day that day's price will have to go down and you're also looking at macroeconomic conditions of what's happening in terms of global desire to travel and willingness to go to Bali as a destination as you can probably guess there's some turmoil in Europe there's some turmoil in North America there's fewer Chinese Travelers traveling
to Bali there's fewer Russian Travelers coming to Bali so it's not essentially a time where we can say all right the projection that we saw two years ago saying that I'm going to get $300 a night for my three-bedroom Villa and Bali however we believe that it's always a better strategy to think of it more in terms of a longer term the consistency of performance and branding and such over the longer term generally is able to compensate some of the short-term fluctuations that you see in prices so the better question is not to ask what
is the price that I can get per day the better question is what is the long-term value across my lease if I'm looking at a 25-year lease for a particular piece of land or property how much can I expect to get at the end of that particular lease in terms of an overall amount of Revenue given Bali does have a very good long-term Trend it is always going up and to the right and all this temporary Market turbulence that you see currently does add up to actually some overall benefits it does make Bali a very
diverse very abundant very affordable destination that more and more people are are attracted to so that part of the over Supply does lend to really good long-term growth trends that helps B out compete against locations throughout the world where there is less Innovation where there's less diversity of product where there's less competition if you want to have the best sushi you should probably go to Japan if you want to find the best apps you should probably go to the Silicon Valley so Bali is essentially with let's say these particular Market turbulences proliferation of short-term rentals
ending up overall as a very excellent long-term choice for a destination for international travel so that part is strong but as an investor we think that the main disappointment comes from focusing too much on the short-term rental picture and not enough on the long-term rental picture which often stabilizes and works out pretty well we see people jump in and jump out of the market and that is the worst decision I think that one can make in terms of having a plan as an investor if you always buy when everybody else is buying and you sell
when everybody is selling that means you pay Peak prices and you get the lowest exit points so to take the long-term view of the appreciation of Bal can be a little bit counterintuitive but just ask yourself this what was the initial reason that attracted you to Bali probably somebody told you right probably somebody told them so that particular chain of good word of mouth is essentially continuing to spread despite the traffic despite the short-term temporary things Bal does remain unique as a very very attractive long-term option for a tropical holiday in the world okay so
that's the second part of the plan the last part I think of the plan is to really consider this particular idea of what can you do if you are just about to enter or currently in the market in a short-term rental property should you go longterm should you pivot into a different area should you go to lumo should you do all these particular things and these are topics that we will examine again in a future Market insights video we've already used up our time today but once again my name is Jing I'm the CEO of
book of Vista and of course I'm going to always approach this with my own biases with my own opinions and I do look forward to engaging with our audience on the comment section below I will read your comments I will respond in the best way possible my interest is to sustain the long-term success of the Bal property Market all right if you haven't done so already please subscribe comment give feed back I'm learning how to do better YouTube videos too as well but I hope that the lack of let's say marketing fluff is made up
for more than by competent insights that I'm delivering across this medium okay stay tuned for the next Market Insight this is Jing again for Market insights on the bul Business Review we look forward to catching you on the next episode [Music]
