A Tale of Two Islands, Bali vs Phuket ~ Exploring Indonesia

The shaman inhaled the incense smoke and flicked flower petals into the tropical air. My husband and I were sitting on a patch of earth on the Indonesian island of Bali as the local priest, Ida Bagus Putu Wija, communed with the resident spirits about our vague plans to build a holiday home there. Eventually, the Balinese wise man gave us the news that would literally determine the shape of our future villa. In the parallel spirit world of this devoutly Hindu island, our peaceful stretch of riverbank was actually a bustling spirit town, far bigger than the nearby human village.

What exactly did this spirit city possess, I inquired? The shaman replied: on the lower part of our terraced land, near a rustling stand of bamboo, the spirits had built their own pharmacy, auto-body-repair shop and even a food stall that served fried rice. No infinity-edge swimming pool would be going there, lest we flood the otherworldly denizens picking up a prescription or delivering a motorcycle for a tune-up. We also would need to leave a section of riverbank undeveloped because a local demigod traversed the land on his daily pilgrimage to a volcano up north. My husband and I eyed each other. We'd been prepared for the Bali property market to throw up a challenge or two. But a hopping spirit metropolis and a commuting demigod weren't exactly what we had expected.

Who, sitting at a computer all day, hasn't imagined owning a personal slice of paradise, lush with bougainvillea and frangipani, perhaps a sea breeze carrying the scent of exotic herbs and barbecued delights? Southeast Asia abounds with such dream locales, but two destinations trump all others: Bali and the southern Thai island of Phuket. It is on these two chunks of land, a mere 2,400 square miles (6,200 sq km) combined, that thousands of expatriates have bought tropical vacation homes. Indeed, a global real estate slump notwithstanding, Bali and Phuket's residential sectors are still booming, in part because most of the foreign-owned property on these two islands isn't bank-financed. In Bali, despite a pair of terrorist bombings in 2002 and '05, land prices have increased by at least 20% annually over the past three years, with some prime beachfront land going for double what it did a year ago. In Phuket, which suffered a devastating tsunami in 2004 followed by political jitters because of a 2006 coup, prices for sea-view property on the island's west coast jumped upward of 30%, year on year, in July.

But is there only one heaven on earth? As the holiday-home market has taken off in Asia, Phuket and Bali have nurtured a healthy rivalry with each other, trading off the honor of being listed as Asia's best island in travel magazines. Phuket aficionados talk loftily of the Thai island's superior beaches and cheap but professional hospitals, while Bali fans boast of the island's volcanoes and great surfing spots. Nevertheless, the business of vacation villas isn't a zero-sum game, largely because the members of the international jet set who dig Phuket are a breed apart from the culture vultures who flock to the Indonesian island. "People are usually either Bali people or Phuket people," says Dominique Gallmann, the Swiss-born director of Exotiq Real Estate, which has offices in both Thailand and Indonesia. "They attract different crowds, so the idea of the two islands fighting over the second-home market isn't really true."

Oceans Apart

Despite the seeming similarities — balmy islands in Southeast Asia with international airports, abundant marine life and plenty of cafés serving espresso and freshly baked croissants — Bali and Phuket offer vastly different real estate experiences. First off, Bali is much cheaper than Phuket. Because the Indonesian island is so much larger than its Thai counterpart, Bali offers a wider diversity in terms of topography: verdant rice paddies, soaring volcanoes and several distinctive urban centers. The Indonesian island cherishes its deep cultural roots, with traditions interwoven into daily life, not manufactured for some cheesy ethnic show at a beach resort. But because of these bountiful customs, Bali teems with taboos that can trip up even veteran expatriates. By contrast, Phuket's real estate market is simpler to negotiate with several top international property agencies open for business. Buying a condominium is so straightforward that an increasing number of people — particularly from Hong Kong, Singapore and the Middle East — are purchasing for investment purposes. Yet all that ease, along with better roads and telecommunications, comes at prices that are roughly 40% higher than those in Bali. And for potential buyers who are concerned about cultural authenticity, Phuket underwhelms. Much of the island's vacation-property development follows an anodyne architectural style that could just as easily be in southern California or the Costa del Sol. Phuket may be in Thailand, but large swaths of it don't feel very Thai.

My husband and I chose Bali because we like things a little messy. We're both journalists who enjoy chatting with the shaman, exploring bumpy back-country lanes and trying spicy stews at the open-air restaurant a few rice paddies away from our land. But I recognize that not everyone finds charming the idea of a spirit tax — a contribution to the village partly based on how many spirits reside on your land, and a calculation, mind you, that can only be made by the village elders. Indeed, if you're looking for a stress-free condominium with access to yacht marinas and golf courses, Phuket is the right choice — as long as you have the cash to afford it. "There's a strange situation in Phuket," says Risinee Sarikaputra, head of research for property consultant Colliers International in Thailand. "You have low-end residential units that are bought by Thais, and you have luxury units that are bought by foreigners. But there's no real middle-class level. It's either low or high."

Asia's premier island escapes did not always profit from their coastal charms. Phuket came into its heyday in the 19th century when Chinese tin miners exploited its mineral-rich hills. Later, fortunes were made in rubber trees. The island's main city was originally inland from the Andaman Sea to distance itself from possible devastation by tsunamis or typhoons. So, too, in Bali, where the rich cultural legacy of the Hindu Majapahit culture drew bohemian Western visitors in the 1930s who were mystified as to why most Balinese turned their backs on the lovely beaches, even forsaking fish from their normal diets. (The answer was, in part, because the coasts are considered the domain of demons.)

In the 1970s, though, Bali and Phuket were inundated by foreigners searching for unspoiled hideaways. Tourism soon dominated other industries, with hotels and nightclubs lining once empty beaches. By the 1990s, as overworked Hong Kong investment bankers and Europeans priced out of the Mediterranean real estate market began looking for getaway-home alternatives, the residential property markets in Bali and Phuket began to sizzle. On the Indonesian island, vacation homes mostly take the form of individually constructed villas or those built by smaller developers. The houses, usually designed in a Bali modern style that is now an architectural touchstone for tropical hotels worldwide, are often rented out most of the year to offset building and maintenance costs. Although the Bali model allows for personal creativity, it also means that owners must hire full-time staff to tend to their paying guests, who fork out an average of $200 a night for a two-bedroom villa. In Phuket, however, the vacation market is dominated by condominiums or villa complexes managed by luxury hoteliers. Such management services come at a premium — these properties cost about 30% more than similar nonbranded villas — but you don't have to worry about whether the gardener is feuding with the cook.

House Rules

Buying property in both places isn't quite as simple as purchasing a house back home. Mortgages are rare. Currency fluctuations make buying at the right time all the trickier. And, most importantly, in both Thailand and Indonesia, foreigners cannot own land. Expatriates have two choices. They can either lease land on a long-term basis, which means the value tends to depreciate as the years pass. Or they can set up legal structures in which a local person or company owns the land but usage rights are held by the foreigner. Although tens of thousands of expatriates have negotiated such deals, they can be at a disadvantage should a dispute occur with the local owner. And in Thailand, government officials over the past two years have hinted that they may begin scrutinizing the legality of shell companies set up by foreigners.

Thailand does offer one other option. Unlike in Indonesia, foreigners can own condominiums outright, which explains why apartment complexes are popular in Phuket. Nonetheless, the real lure of Phuket is a villa of your own, preferably with a private infinity pool and ocean view. From 2006 to '07, at least 2,300 high-end residential units were launched in Phuket, and roughly 970 more came up for sale in the first half of this year, according to Colliers International. Prices have skyrocketed, with new buyers from India, South Korea and even Central Asia driving up demand. At the Trisara residential complex, for instance, a sea-view, fully furnished two-bedroom villa managed by the boutique hotel of the same name goes for upward of $4 million for a 120-year lease. A first phase of 18 villas perched over a secluded bay has already sold out, with one three-bedroom property having changed hands four times, its sale price more than tripling to $10 million earlier this year. "It's amazing to see these prices," says sales manager Sukanya Chuaywang, "but they keep selling."

Does the real estate meltdown in other parts of the world presage a price correction in paradise? Surely, as hedge-fund managers find themselves without fat end-of-year bonuses because of the recent market madness, they'll shy away from acquiring luxury second homes. Gallmann of Exotiq Real Estate acknowledges that the financial crisis will dent demand, particularly in Bali where the real estate volume is higher than in Phuket. But he isn't too worried. "Look, I've been involved with Bali for 20 years and through that time we've gone through more than you can imagine, from the Asian financial crisis and a political revolution to SARS, bird flu and two bombings," he says. "But in all that time, property prices have never dropped."

Down to Earth

For me, my current concerns are less global and more spiritual. The former owner of our land, a rice farmer, feels guilty because he failed to erect an on-site shrine to a local goddess. He thinks we should build it to ease his soul and promote village harmony. After all, locals have heard the spirits on our land wailing when they use a nearby water source. Then, in an offhand remark, our shaman tells us about a Frenchman who had built a villa nearby. Wija was called in to bless the land and chat with the spirits about their wishes. He gave advice to the foreigner but apparently none of the spirit-appeasement tactics were followed. After the house was built, a slew of mysterious things occurred. First there was a fire, Wija recounts, then a burglary. The foreigner has since sold his villa and left Bali. Wija smiles. "It is best to keep the spirits happy," he says. We can't agree more — but we still don't know how much happiness will cost us.