Market Watch - Page 3:

 

same time maximizing liquidity versus tying up capital in a long-term investment.

Secondly, it is a means of alternative project financing. Rather than over-leveraging a project with bank loans, developers are able to bring low-cost equity into a project and accelerate the investment cycle. Equally important is an overall reduction of risk to the developer by diversifying into both the tourism and property markets, hence hedging their bets.

As in any economic boom though, there is a flip side to the coin and some key long-term cause and effects with this type of project. Initially, the restriction of ongoing cash-flow potential for the hotel owner who in a healthy hotel market would stand to make better returns from retaining the units than by selling them to individual lifestyle investors.

Of greater significance is the potential to eventually sell a hotel and cash out on a much larger scale. Hotels are usually valued on a cash flow rather than replacement basis and once you remove a good portion of the hotel units from the equation - though the developer was able to cash out on early sales – the overall value of the asset has been negatively impacted. In other words short-term gain may be long-term pain.

This leads us back to where we started. And what does this all mean to an individual investor looking at purchasing a hotel managed unit? Ongoing yields or rental returns are far more important than with a more traditional house or apartment. Capital appreciation may be viewed differently in a hotel scenario where units must be in the rental pool and the owner does not have an option to live full time in their property. Also a factor is that hotel management contracts have a far shorter life cycle than real property; what happens when the contract expires or there is a change of operators? How might that affect performance?

The brand phenomenon is here to stay, and certainly its entry into the local property market is a plus in promoting Phuket around the globe, not only to realestate investors but tourists as well. For investors buying on strong fundamentals, international brands that have global distribution and sales and marketing networks overseas will certainly perform at the premium end of the market.

Rental returns should benefit from this and ultimately provide an advantage in the marketplace. At the same time, lifestyle investment is just one segment of the property market and one needs to view not only the immediate future but the longer-term horizon.

Only time will tell.