In 2012 I started my Airbnb journey by renting out my apartment in Amsterdam. It changed my life. It provided me with enough income to travel the world and work on Get Paid For Your Pad, a business that I'm very passionate about.
Over the years, the city of Amsterdam has started to adopt even stricter regulations to limit the number of Airbnbs. Starting in 2017, hosts were only allowed to rent out for 60 calendar days a year. This led me to sell my apartment and invest in short term rental properties in other locations.
I've since purchased three properties. The first one is a penthouse in Cali, Colombia. This post concerns the second one, a studio villa in a brand new resort in the Philippines. I explain why I bought it, what my expectations were, and how it's panned out so far.
The Philippines is my favourite country in Asia, period. Why? The best way to explain is probably by showing a video that was made by my friend Sabrina, who runs an awesome travel blog called Just One Way Ticket.
Need I say more? Add the fact that English is being taught in the schools as one of two official languages. This means you can communicate with the locals, as opposed to countries like Thailand and Vietnam, where generally the only people that can speak English are the ones that want to sell you something.
Now lets look at some tourist stats. You'd expect that a country that consists of over 7,000 beautiful islands, is surrounded by crystal clear blue waters and where the people always laugh and speak English would be on top of the list of tourist visits, right? It's quite the opposite.
(source: Inquirer Global Nation)
With just over five million tourist arrivals in 2015, The Philippines barely beats countries like Myanmar and Cambodia and well below Vietnam (8 million) and Indonesia (10 million.) Mind you, these are all countries that require a visa for most visitors, whereas the Philippines does not. Malaysia and Thailand both receive over five times as many tourists as the Philippines.
I believe one of the main reasons that the Philippines isn't attracting more tourists is because of the infrastructure. To get to the most attractive places in the country, you'll have to deal with some logistics. Think local flights, connections, several hours of travel by bus and taking ferries or even small Banca boats. This is fun when you're on a two month sabbatical, but it doesn't work for short trips.
If you live in one of the major Asian cities like Singapore, Shanghai or Hong Kong, a weekend trip to the Philippines isn't really feasible, unless you're going to places near Cebu city or Manilla. Places like Phuket (Thailand), Bali (Indonesia) and Langkawi (Malaysia) all have international airports with direct flights to anywhere in Asia as well as many places in the middle-east and Europe.
However, this may change in the future. Boracay's airport is being upgraded to receive larger airplanes like the A320 and Boeing 737. In fact, the first A320 has already landed, but the terminal is still under construction and projected to be finished by the end of 2018.
These planes have flying ranges of over 3,000 kilometres, which opens up the possibility of direct flights from cities like Taipei (1450 km), Shanghai (2,151 km), Singapore (2,315 km), Seoul (2,900 km), Hong Kong (1437 km) and maybe even Tokyo (3,186 km) and Beijing (3,179 km). Given that the South Koreans and the Chinese were the top foreign visitors to Boracay, this is promising to say the least. Places like Phuket, Langkawi and Bali are an extra one to three hours of plane travel for Chinese and South Koreans.
Anyone investing in tourism in Asia has to consider the Chinese. There are 1.5 billion of them and they are starting to go on holiday more and more. It's been projected that the amount of Chinese that hold a passport will double to 240 million by 2020. That's an extra 120 million people that could travel, in two years.
Chinese tourist arrivals in Asian countries went from 12.6 million in 2013 to 18.6 million in 2015. That's almost a 50% increase in two years! As a percentage of total arrivals, China's share went from 12,4% to 17,1%, which is about a 40% increase. This shows that the bulk of the growth in tourism in Asia is coming from the Chinese, so if you're investing in Asian tourism, you better think about where the Chinese would want to go.
I first visited Boracay back in 2008 to do the PADI Open Water scuba-diving course. It became one of my favorite places to travel to. Do a quick search for Boracay in Google Images and you'll understand why. The island has received many nominations and awards for its long stretches of white sand beaches. It even made the top 3 on Travel + Leisure's list of the world's top ten islands.
This didn't go unnoticed. According to the Department of Tourism of the Philippines, a staggering 1.7 million people visited the island in 2016. That's a lot of people, considering the island barely covers ten square kilometers, or about four square miles.
Another way to put this in perspective is by looking at the population. As of 2016, the official population was 33,109. Assuming the average tourist stays for three days, there were 14,182 tourists in Boracay daily that year. As you can imagine, it gets a little crowded on the island and that causes problems.
The infrastructure hasn't been growing in line with the growth in visitors. The roads can't handle the traffic and there is a massive sewage and waste problem. This is why I never wanted to invest in Boracay, and I'm glad I didn't, because in April 2018 the government decided to close down the island for six months to force businesses to solve the environmental problems.
Boracay's neighbouring island Carabao is the opposite of what Boracay is. I had never even heard of it, even after visiting Boracay five times in the last ten years. Carabao (which means water buffalo in the local Filipino language) hasn't been developed at all as of yet. It's an unspoiled island, just a 20 min boat ride from Boracay and about 45 minutes from the airport.
It doesn't have a Wikipedia page, there are no cash machines and only a few places to stay. Now that sounds more like it right? Here's a good video to give you an impression of the island.
When I heard of an investment opportunity in Carabao, I was all ears. Easy access from countries like China and South Korea in combination with the fact that Boracay is nearing (or already at) maximum capacity makes me think that Carabao will be in high demand in the future.
Let's dive into the details of the investment case.
Portofino Ocean's Edge Resort is a boutique hotel resort built on a 22,000 square meter plot located on the North West coast of Carabao island. It rises 30 meters above a small cove and overlooks the Tablas Strait, which makes for stunning ocean views.
It consists of four beach front villas, 14 cliff villas, 44 studio villas and two two-bedroom villas and offers a range of amenities, such as:
When I found out about this project, it was almost sold out. One 40m2 studio villa was still available, at a price of $109,000. I wouldn’t be able to rent it out myself, it would be managed by the resort with 80% of the rental returns going to the investors, with a guaranteed return of 10% annually and a buy-back option at 120% after five years. I would also get 14 days personal use each year.
Not a bad deal, but these guarantees are only good if the developer is in solid financial condition, of course. If the developer goes bust, these guarantees mean nothing. However, looking at what tourists are willing to pay for accommodation in Boracay, the 10% return on investment seemed very realistic.
The resort would have to make $10,900 on the unit, just under $1,000 a month. I figured it would easily beat that. A room at a decent hotel in Boracay is priced well over $100 a night. At that price the 10% would be achieved at just 33% occupancy.
The 10% is guaranteed, but it could be much more. If the resort would make $2,000 a month on the unit, I’d be receiving $1,600 a month, or $19,200 a year, which would be a 17,6% gross return. The 120% buyback option adds another 3,6% a year on top of that return.
The numbers look good, but I had some major concerns. My biggest concern was that I didn’t have time to go visit the construction site, which means I would have to buy sight-unseen. That was a scary thought. To transfer a significant part of my net wealth to a bank account in The Philippines without even having visited the property location felt very uncomfortable.
In addition, I wouldn’t technically be the owner of the property. It would be sold as a lease-hold, meaning I buy the use of the land and the property for 25 years. The contract will be automatically renewed, unless I agree to a new agreement. After five years, I have the option to either convert to a ownership or sell the unit back to the developer at 120% of the original value.
Other than these concerns, there are a number of risk factors involved.
When you buy a unit in a project that’s under construction, there is a risk that the project won’t be completed. The main risk is in the financing. If the developer runs out of money, that’s it. There are plenty of unfinished construction projects around the world. However, for this particular project this isn’t a big concern, because the project was almost sold out at the time that I invested.
Given that the resort is being built on an island with very little infrastructure, that all the materials have to be brought in by small boats, and that the weather conditions are extremely variable, there’s a pretty good chance that there will be delays with the construction of the resort. Every month the opening is delayed, I’m missing out on rental returns. This risk has a high probability of happening, but the financial consequences are limited.
The Philippines is hit by an average of 20 typhoons every year, out of which five are destructive. In fact, The Philippines is “the most exposed country in the world to tropical storms” according to a Time Magazine article in 2013.
In 2013 the country was hit by the second deadliest typhoon in the history of the country, causing 6,300 deaths and an estimated $4.5B in damages. Shortly before the typhoon hit, I stayed at a hotel in Malapascua, a small island located in northern Cebu, famous among divers as one of the only places in the world where you can dive with Thresher Sharks.
I wrote a blog post on my blog featuring the hotel in exchange for a free stay and I kept in touch with the manager. He told me the entire island was wiped out by the typhoon. Not a single palm tree survived and all the hotels and resorts closed down for months to repair the damages.
This could happen in Carabao island too. The resort is insured to cover the damages, but the temporary closure would lead to less rental income.
This is always a risk when you invest in short term rentals. However, given the upgrade of the airport and the growth in tourism that I expect in Asia in general, I’m not very concerned.
On April 26th 2018, Boracay was closed down for business for six months. It’s unlikely that this would happen in Carabao, as there is very little development on the island as of yet. However, anything is possible. The resort could lose it’s operational license for other reasons.
The whole project could be a complete scam. I’ve definitely heard of people losing money investing in projects that didn’t exist. Anyone can put up a simple website with some nice looking artist impression photos.
To mitigate the risks, I did some due diligence to answer some questions and concerns I had.
My first concern was: is the project actually under construction. The developer did send me pictures of the site. However, these could be pictures taken anywhere. I decided to ask the developer to put me in touch with one of the other buyers, in particular one that had visited the construction site. Speaking to someone who had already bought seemed like a good idea anyway.
The developer provided me with the contact details of a fellow Dutch investor living in Hong Kong. I got on the phone with him and he had indeed visited the site. He had invested in similar projects in the past and generally shared my vision on the region and the island itself as an attractive investment opportunity.
I also looked up the name of the investor on social media channels to make sure it was a real person. Call me a skeptic, but I like to cross the t’s and dot the i’s on due diligence when I send over a six-figure amount of cash.
My next area of research involved the developer. Who are they? Are they a legitimate company with a proven track record? Are there any existing projects that are currently in operation?
Who’s going to manage the resort? A company by the name of The Plateno Group. Through some Googling I found out that this company is a major hotel operator in China and manages over 3,700 hotels. One of it’s investors is Sequoia Capital, one of the world’s largest venture capital firms.
As with all my investments, the main three decision drivers are:
1) Would I want to spend time at the property myself?
This question is easy to answer. Watch the video at the start of this post and you'll have the answer.
2) Is it reasonable to expect a 10% return on investment?
I believe so, based on the macro-economical trends and the development of the airport, combined with the prices that are being charged in Boracay.
3) Can I do short term rentals legally for the next 10 years?
In April 2017 I decided to go ahead with the purchase of the unit. The price ($109,000) for 40m2 sounds like a lot, at $2,725 per m2. However, the numbers made sense from a rental perspective. The resort was scheduled for a soft opening in August 2017.
However, it didn’t take long for the developer to push this date forward. In July I was notified that due to heavy rains progress had been very slow and that the date for the soft opening was pushed forward to November 2017. And then to December, and finally to April 17th 2018.
The delays were blamed on the contractor, although admittedly there were circumstances that were out of their control. I witnessed this myself when I visited Boracay in December 2017. Other than kite-surfing, the reason for my visit was to visit the construction site. However, due to stormy weather, boats were not allowed to leave the harbor. The rainfall was so intense that the whole island of Boracay flooded. Water levels were knee-high on most of the streets.
The developer emphasised that the delays wouldn’t affect the 10% guaranteed returns for the investors, that the cost of the delays would be on account of the developer.
Not long after the development was hit with another blow. In April 2018, the Philippine government decided to shut down Boracay for six months, causing all airlines to cancel their flights. This meant no cargo transport to the island. All materials had to be shipped in by small boats as a result. Fortunately the island was re-opened in October 2018.
The resort has finally opened it doors!
The first reviews came in through Tripadvisor and people seem to love the resort.