We’re currently working with the owner of the Grand Sunset resort in the Gili Islands, just off Lombok in Indonesia. It’s an amazing little island that is about an hour on a ferry from Bali, which has been getting more and more popular with backpackers and mainstream tourists over the last few years. The visitor count to the island has been growing exponentially year on year and with a host of new international flights just announced by Emirates, this trend is set to continue.
So what’s the deal?
The opportunity is to invest in a room suite at the hotel for $100,000 USD. The hotel has been open for 2 years and in 2016 achieved 85% occupancy and an average room rate of nearly $75 USD. This underscores a minimum rental guarantee for owners of 9% for 5 years, payable annually in arrears.
It normally takes 4 to 5 years for the income from a new hotel to stabilize at its maximum level, so it’s realistic to expect performance to continue outgrowing natural inflationary growth for 2 or 3 more years. If it does, a profit share of 70% of net operating profits will kick in and the investor’s annual return will be higher than 9%.
On top of this, owners can use the hotel for up to 30 days per year with only tourist tax and a cleaning charge to pay – this allocation can be broken up into smaller blocks, given to friends or family and taken at absolutely any time of the year. Nice!
Isn’t $100 USD expensive for a hotel suite in Indonesia?
If you judged it purely as a real estate investment, then yes, it would be. But here, you are essentially buying a piece of real estate that is a part of a hotel operation. Yes, there’s intrinsic value in the property itself, but the real key is the performance of the hotel, marketing resources, property management skills – its ability to attract visitors and generate returns.
So who is running the hotel?
The hotel is the brainchild of Morgan Girouard, a successful guy from the Canadian insurance world. He moved out to Indonesia 5 years ago, fell in love with the place, bought the land, built the hotel and set up the hotel operation under his own steam. Pretty impressive!
He has managed to achieve a high level of occupancy with a smart pricing strategy, all from a standing start without the advantage of a franchise manual or recognised hotel brand to support him.
Why is he selling the hotel suites?
Morgan is an ambitious entrepreneur and wants to invest in a second site on Gili to bring some economies of scale to his operation and exploit the growing demand for accommodation on the island.
In order to do this, he has to lodge a certain level of funds as “Standby Letter of Credit” collateral in order to unlock an initial $2.5M USD loan from Danamon bank. This loan will fund the development of the new hotel, so the process can be repeated. The new hotel can then be refinanced at a lower rate than the returns being paid to investors, with the proceeds enabling the eventual buyback of the units.
10% of the revenue generated by the hotel suites sales will also be reinvested into the hotel, improving the common areas, adding new flatscreen TVs and enhancing the guest experience. This will support the growth in room rates and maintain the occupancy level, helping to guarantee the ongoing returns for investors.
How secure is the return?
Even without that investment, room revenue performance is already at a high enough level to pay investors their 9% return. Those who have studied hotel asset management will know that financial investors in a hotel business typically see a double digit return on their investment, so a 9% return is easily achievable and the results from 2016 are available to show this.
Hotel room rates typically grow faster than inflation, so it’s normal to see the operating margin for a hotel increase over time. On top of that, the hotel company owns a highly profitable on-site beachfront bar and restaurant, which could easily cover any room revenue shortfall, in the unlikely event that the normal trends were reversed.
How can I find out more?
We’ve prepared an online presentation that allows you to see the hotel, view all the contracts, hear from Morgan himself, find out more about the Gili Islands and make an informed decision about this investment. To take a look, please click here register on that page – you’ll then be logged straight in and you can check out the content in your own time and at your own pace.
We’re on hand to answer any questions while Morgan and his team are happy to show you around the hotel if you’re lucky enough to be able to visit!Google+