Investing in tourist hotspots amid uncertainty

Singapore

THE external environment has become more uncertain in 2019. There is a lack of clarity whether trade tensions between the US and China will eventually reach a standstill, and how Brexit will pan out. The escalation of oil prices due to the latest attacks has added further downward pressure on the global economy.

Amid these uncertainties, investors have naturally gravitated towards safer assets - bonds and real estate in established cities. Yet, the risks from these external events have cut across assets and countries. Accordingly, some investors have turned to sacrificing potential yields for assets, in hopes of reducing their portfolio risks.

However, investors who are less exposed to overseas markets are likely to overestimate the risks in investing in emerging economies, without considering their growth potential. The growth story of South-east Asia is well-documented, with the growing population of the middle class underpinning economic growth in select cities. A poll conducted at the Asian Financial Forum in 2018 found that 39 per cent of respondents believed that South-east Asia would offer the best investment returns in 2019, followed by mainland China (35 per cent) and the US (16 per cent).

Still, many investors consider investing in places such as Indonesia and Malaysia extremely risky, despite many upsides and their greater affordability. While there is a degree of institutional risk involved when investing in emerging countries, there are ways to mitigate them.

Location selection

Investors with higher risk appetites will typically look for lower tier cities in emerging countries, with the anticipation that the future development of infrastructure supporting intra-state travelling will help push up prices.

However, more risk averse investors will find these cities less appealing, as there is substantial institutional risk, as well as a longer investment horizon.

To mitigate risks, a good focal point would be on populous cities that exhibit greater growth than the rest. These cities are usually at the forefront of technology and attract talents from surrounding towns or states, due to higher wages and better quality of life.

Next, it also bodes well to select cities known to be top tourist destinations. Tourist hotspots generally benefit buyers who have a planned exit strategy within the first five years. In emerging cities, locals tend to be less likely to go after properties targeted or previously owned by foreign buyers.

Hence, foreign owners can get higher prices if the homes are located in areas with a higher density of foreigners. Given that foreign buyers will be attracted to areas of familiarity and those which offer an attractive lifestyle, properties in tourist hotspots are more likely to yield buyers. Second, rents of serviced apartments and residential properties in tourist hotspots tend to be at the higher end of the spectrum.

Besides being places where both locals and visitors naturally gravitate towards, Bali and Penang are among the locations consistently earmarked as key tourist hotspots in South-east Asia. Interestingly, both cities previously faced periods of adversity, subsequently rebounding to stronger positions than before.

Bali, a renowned top tourist destination, is an appealing location for investments in residential properties and serviced apartments. Other than its relaxed lifestyle, it offers a plethora of food, nature and rich cultural elements. Mastercard's Global Destination Cities Index ranks Bali as one of the top 20 destination cities in the world, registering a 6.4 per cent increase in international overnight visitors to hit 8.26 million visitors in 2018. The tourist influx generated US$8.86 billion in international overnight visitor spending in the city, ranking Bali 14th out of 19 cities.

Within South-east Asia, Penang is another place that has emerged top among tourist destinations. In 2017, CNN ranked Penang second in a list of top places to visit in the world and its capital, George Town, has been recognised as a Unesco World Cultural Heritage Site. Additionally, Penang is known as a prime medical tourism destination in its home country. According to data from the Malaysia Healthcare Travel Council, the city generated some RM500 million (S$163 million) in revenue in 2017 alone. Medical tourism in Penang accounted for 40 per cent to 50 per cent of Malaysia's tourism revenue, which grew by 14 per cent to RM1.5 billion in receipts from some 1.2 million medical tourists in 2018.

Buyers' due diligence

While both locations are likely to appeal to investors, buyers must conduct their due diligence prior to investment as the applied rules are different. For instance, foreigners cannot own freehold land in Indonesia and are subject to certain restrictions.

Given the complexity of the regulations, legal advice is best sought to understand best practices for investment in Indonesian real estate.

Separately, risks can also be mitigated by seeking out established and renowned operators, such as brand names in the hospitality sector, or developments with the backing of trusted legal firms. For the more risk averse, it is worthwhile checking the operator's stake in a project to minimise risk. Buyers of new property launches should also travel onsite to check the progress of construction.

Despite the proximity and perceived familiarity, investors in Malaysian properties need also beware. Among the pointers to note are checks on developer track records, sale prices and past project occupancies.

Online research notwithstanding, in-person visits and scrutiny of past projects are also essential. Market insight can be gained via conversations with locals in the area, or reputable agencies.

Investing in emerging overseas markets requires greater risk appetites, though the uncertain external environment has made safer assets less attractive.

Still, residential and hospitality properties in tourist hotspots may be a good way to yield higher returns, while mitigating risks.