March 27 (Bloomberg) -- Billionaire William Han perches at the stern of Silver Fox II, his 20-meter powerboat, as it weaves through the kaleidoscopic coral wonderland that is Australia’s Great Barrier Reef.
In these pristine tropical waters in 1954, then-27-year-old Queen Elizabeth II and her consort, Prince Philip, escaped official duties to swim and spearfish during a six-month post-coronation world tour. Sixty years on, the secluded headland off which Their Highnesses frolicked is part of Han’s kingdom, Bloomberg Pursuits will report in its Spring 2014 issue. “Welcome to my island!” he says, leaping onto a wooden jetty leading to a sandy, palm-fringed shore.
After paying A$12 million ($10.9 million) for lovely Lindeman in 2012, the Chinese-Australian entrepreneur plans to spend more than A$200 million building a luxury resort on the 8-square-kilometer (3-square-mile) island, while keeping a prime secluded site for his own vacation retreat. “When you first see the Great Barrier Reef, it blows your breath,” he says in cheerfully fractured English. “Buying Lindeman was a bargain. It took me 10 minutes to make up my mind.”
How much of a bargain is a source of debate within the cloistered world of private-island sales. Although the Great Barrier Reef is renowned as one of the planet’s most beautiful and precious places, it has a perilous history. Over the past 80 years, investors have poured billions into resorts here, only to discover that the reef can be as treacherous for them as it was in 1770 for British explorer James Cook, whose HMS Endeavour ran aground near a spot he aptly named Cape Tribulation.
In the past three years alone, four of the most iconic Great Barrier Reef islands, including Lindeman, have been sold for a total of A$25 million -- a fraction of their former valuations. Today, the most prominent property agents specializing in private islands are divided over whether the Great Barrier Reef market has finally bottomed out.
“These properties sold for pennies on the dollar, and we will see an upswing,” says Chris Krolow, chief executive officer of Toronto-based Private Islands Inc. That’s not a view shared by Farhad Vladi, the Hamburg-based founder of Vladi Private Islands GmbH, who says Great Barrier Reef sales reflect a global trend downward, as evidenced by Microsoft Corp. co-founder Paul Allen’s December sale of his Washington state island for $8 million -- a third of its original asking price. “In the past, the market was artificially inflated by greedy real estate agents and overly romantic buyers,” Vladi says. “Only now, when we’re seeing forced sales, is the true value revealed. I think prices will continue to go down.”
If ever a smart entrepreneur could make money while pursuing the idyllic island dream, it should be here, on Australia’s foremost natural wonder. Stretching 2,300 kilometers (1,430 miles) down the country’s northeast coast, this labyrinth of 3,500 shoals, atolls, cays and coral-fringed continental islands is often described as the largest living structure on Earth.
Apart from the dazzling coral formations built from the skeletons of tiny sea creatures called coral polyps, the reef supports some 5,000 other species, from majestic, 40-ton humpback whales to the colorful, comical clown fish that inspired the 2003 Walt Disney blockbuster Finding Nemo.
Each year, 2 million visitors, from billionaires to backpackers, flock here. (In 2011, Oprah Winfrey even showed up with 100 members of her studio audience in tow.) They dive its depths and snorkel its shallows. They ogle it from the air in light planes and skim its surface aboard sailboats and megayachts. The game fishers among them engage in titanic, Hemingway-esque struggles with black marlin that can weigh 450 kilograms (990 pounds). And some decide that the reef is just so special they must own a piece of it.
For one devotee, a A$500 million investment in a 7.4-square-kilometer dot called Hamilton Island, in the Whitsunday archipelago near Lindeman, has fulfilled his wildest island fantasies. Not only has billionaire Australian winemaker Robert Oatley, 85, built what is quite possibly Australia’s toniest resort -- an ultradiscreet, A$1,500-a-night, 60-pavilion retreat called Qualia -- he’s also developed the lavishly appointed Hamilton Island Yacht Club, which in October successfully bid to become the official challenger to Larry Ellison’s Oracle Team USA at the next America’s Cup.
For numerous other investors, however, the music of waves lapping against coral turned out to be a siren song -- their dreams run aground by a disastrous combination of cyclones, unsympathetic bankers, astronomical overheads, overcapitalization, a soaring Australian dollar and competition from cheaper Asia-Pacific resort locales such as Bali, Fiji and Phuket.
Mother Nature has been particularly unforgiving. Since 1858, the region has been struck by more than 200 typhoons, according to the Australian Bureau of Meteorology -- most recently in 2011, when Cyclone Yasi, one of the worst storms ever to hit Australia, devastated resorts and private homes in its path.
Great Barrier Reef investors must also battle what Australians sometimes call the tyranny of distance. Australia is the size of the continental U.S., and the reef itself, if transplanted to North America’s Pacific coast, would stretch from Vancouver to the Mexican border. Yet the domestic tourism market, still the main source of visitors to these parts, draws on a population of just 23 million. What’s more, Australia’s distance from major foreign markets means it received only 6.4 million international visitors during the year ended in September, compared with France’s 80 million.
Even rich foreigners eager to buy private islands find the distance formidable, according to broker Krolow. “Eighty percent of buyers come from the U.S., Canada and Europe,” he says. “Simply getting them here to show them what’s available is a challenge. The distance is insane.”
Indeed, losses and bankruptcies have become so common that banks are increasingly reluctant to lend for island investments, says Wayne Bunz, a Brisbane, Australia–based senior director at CBRE Group Inc., the brokerage that sold Lindeman to Han. One of the tiniest of the resort islands has alone devoured at least A$150 million of investments by successive owners over the past 20 years. Its name: Daydream.
Vaughan Bullivant, Daydream’s present owner, is a native New Zealander who sold his vitamin supplements business in 1999 for A$135 million. He’s spent A$75 million creating a 300-room resort with amenities ranging from an elaborate spa to a wedding chapel. At one stage, in 2002, Bullivant was losing A$600,000 a month, says Phil Casey, the troubleshooter Bullivant brought in as CEO to stem the losses.
“Daydream became Vaughan’s nightmare,” Casey says, as we chat in Bullivant’s two-story island penthouse, with its reverie-inducing views of the Whitsunday Passage. Casey says he has since succeeded in turning around Daydream’s business. The resort, where rates average A$300 a night, delivered a net profit of A$2 million on revenue of A$28 million for the fiscal year ended on June 30, 2013, he says, and has no debt. However, Bullivant, 66, who wasn’t available for comment, wants out, Casey says, and has been trying to sell for a fraction of the A$150 million replacement value. Although Casey won’t disclose the asking price, he says Bullivant recently turned down offers of more than A$30 million.
When he does finally walk away with inevitably lighter pockets, Bullivant will be in illustrious company. Even Rupert Murdoch, Australia’s most famous entrepreneur, managed to lose money on a Great Barrier Reef investment in 1998, when a company he half owned -- the now-defunct Ansett Airlines -- sold luxuriously appointed Hayman Island for A$61 million, a fifth of the A$300 million it had splurged on the resort barely a decade earlier.
In total, A$500 million has been invested in Hayman since the 1980s, according to its current owner, Malaysian tycoon Lee Seng Huang’s Mulpha International Bhd. Hayman will be closed until June 30 while it undergoes yet another, A$50 million makeover, following last year’s management switch to Sol Kerzner’s Kerzner International Resorts Inc., the company that built Atlantis resorts in the Bahamas and Dubai. Hayman, where accommodation costs A$730 to A$12,000 a night, is now marketed under Kerzner’s One&Only brand.
While Mulpha’s Lee persists with Hayman, some owners have simply walked away, leaving behind fully equipped resorts, as eerily abandoned as the Flying Dutchman. On Lindeman, Han, 56, knows all about these somber testimonies to the perils of investing in paradise. After we disembark, he leads me straight to one. In 1990, Club Mediterranee SA paid A$15 million to buy an existing resort on Lindeman and then spent an additional A$85 million transforming it into a 218-room faux-Polynesian village. In 2012, the Paris-based operator shut it down -- selling out to Han two months later for less than an eighth of its A$100 million investment.
Today, the abandoned Club Med property molders away on Lindeman’s south shore. Guest rooms and restaurant tables gather dust. The swim-up pool bar is green with algae. Each day, the eucalyptus forest envelops more outbuildings. Soon, Han will bulldoze the lot and start again with his own, more upmarket vision. “The risk of buying islands here is that the purchase price is just the small part,” he says. “If you’re not careful, you can pour millions more into these places and then actually watch them go down in value.”
Han -- a stocky, self-made tycoon who, during China’s Cultural Revolution, labored on a farm commune for 8 yuan ($1.32) a month -- says he’s confident that won’t happen to him. He and his two brothers own Guangzhou-based White Horse Group, China’s biggest outdoor-advertising agency and an operator of golf and shopping television channels broadcast throughout the world’s most populous nation.
Armed with those marketing resources, Han believes he can lure China’s rich from their pressured, polluted cities to pristine Lindeman, where three-fourths of the land is a government-designated national park. He’s already produced a master plan for a 400-unit resort he describes as six star. “In Beijing and Shanghai, people work 15, 17 hours a day,” he says. “Now, they will be able to escape the noise and pollution and fly down here for five days or a week to recharge. There will be no loud karaoke here. Just blue sky, blue ocean and a feeling of luxury.”
Han isn’t the only investor sensing opportunity amid crisis. Just months before the tycoon scooped up Lindeman, three Australian businessmen picked up other islands on the cheap.
The fire sales began relatively modestly in January 2011, when Chris Morris, founder of Melbourne-based Computershare Ltd., the world’s biggest stock registrar, paid A$6.25 million for Orpheus Island resort -- an exclusive A$1,400-a-night retreat that three years earlier had sold for A$15 million. Lushly forested and just 11 kilometers in circumference, Orpheus Island in the 1950s hosted the likes of Vivien Leigh and Mickey Rooney.
Morris, who owns a chain of pubs and breweries on the Australian mainland, has made the resort even more exclusive by reducing the number of rooms to only 17 from 24. He says he expects to break even this year -- especially given the additional bookings he hopes to generate after buying a casino-resort in nearby Townsville in January for A$70 million.
One of Orpheus’s selling points is its spectacular fringe of coral reef. Another is that it’s one of the few small, superluxury resorts that accepts kids. “Rich people have children, too,” Morris says.
Days after Morris struck the deal to buy Orpheus, Cyclone Yasi swept across the reef, packing winds of 285 kilometers an hour. Although Orpheus suffered relatively minor damage, the storm devastated two islands farther north, Bedarra and Dunk.
Once the property of Australian national airline Qantas, the resorts on Bedarra and Dunk were by 2011 owned by a Geneva-based investment fund, the McCall MacBain Foundation, which put them up for sale after the cyclone. Intrigued, Sam Charlton -- a former fund manager at Macquarie Group Ltd., Australia’s largest investment bank, who spent a year frequenting Bedarra’s seven spectacular beaches as a child -- paid a visit. “I don’t think I’ve ever seen such a fantastic piece of real estate presented so poorly,” Charlton, 38, says of Bedarra. “It looked like a bomb site. It turned a lot of potential purchasers off.”
As recently as 2007, the then-owners had valued the resort at A$24.8 million. Charlton paid less than A$5 million and promptly set about putting the place right. To cut costs, Charlton switched from diesel generators to solar power, replaced air conditioners with natural breezeways and started piping in water from an island spring instead of a desalination plant. He even designed his own barge to ferry in supplies.
Like Morris on Orpheus, Charlton has reduced the number of villas, to just seven from 16, meaning each couple can, if they wish, have a beach to themselves.
In July, 19 months after he bought Bedarra, Charlton reopened for business. He charges A$1,000 a night for a standard villa and A$1,500 for one with a private plunge pool, inclusive of all food and drinks, excepting premium tipple, such as the 2003 Dom Perignon, that guests can help themselves to on an honor-bar system.
Although the occupancy rate rose from 50 percent when he first opened the resort to 93 percent at the end of 2013, Charlton declines to declare his investment a winner just yet. “I am not going to say it’s been a roaring success, because I won’t know that for another five years,” he says. “But it is trading better than I’d hoped.”
One month after Charlton bought Bedarra, Peter Bond, a self-made tycoon who runs Brisbane-based coal, gas and oil company Linc Energy Ltd., snapped up the much larger Dunk for A$7.5 million, 85 percent off its A$51.8 million 2007 valuation.
Bond, 51, and his family fly there monthly in his personal Cessna Citation jet. (He also owns a 1943 Harvard trainer and a 1944 Spitfire.) They and their guests presently stay in 16 waterfront villas that weren’t damaged by the cyclone, though Bond will eventually build his own house. Last year, the tycoon hosted the wedding of his son Adam on his island, fireworks lighting up the sky from a landing barge moored 500 meters (1,640 feet) offshore while the Harvard trainer performed acrobatics overhead.
Bond jokes he’s lost count of how much he’s lavished on Dunk. “I would hate to look,” he says. “When you own a boat, you don’t want to know the cost, and when you own an island, you don’t want to know either.”
While the Great Barrier Reef is never likely to offer property returns on a par with, say, Manhattan, the current generation of island buyers might at least escape with their shirts, according to Ron de Wit, founding partner of Sydney-based hospitality consultant AHS Advisory.
‘Half a Chance’
“When you spend the sort of money people used to pay for Great Barrier Reef islands, it’s very hard to get your money back,” de Wit says. “But at these prices, you’ve got half a chance.”
If the new island owners want to increase those odds, they could do worse than to study the transformation of the Great Barrier Reef’s biggest resort island, Hamilton, under Robert Oatley.
In 2003, Oatley and his son Sandy, having sold their family wine business for A$1.5 billion, visited Hamilton to compete in a yacht race and learned the island was on the market. The Oatleys ended up paying A$188 million before investing a further A$300 million to redevelop it in a more-low-rise, environmentally sympathetic manner. As well as Robert Oatley’s private home, the island boasts three resorts, plus the top-of-the-range Qualia, along with apartments and private villas, which sell for as much as A$2.5 million.
The family spent A$80 million building the yacht club, which has a saillike copper roof that bears some resemblance to the Sydney Opera House. “My father wanted to be able to sit in his own yacht club on his own island drinking his own wine looking at his own boat,” Sandy says, as we share a bottle of crisp, chilled 2012 Robert Oatley chardonnay and gaze out across the marina to nearby Dent Island, where the family has constructed a Peter Thomson–designed golf course.
Although the Oatleys decline to disclose Hamilton’s balance sheet, Sandy says the island operates profitably, with its resorts and 230-berth marina averaging 75 percent occupancy year-round. None of the family’s competitors I spoke with disputes that claim. “Bob Oatley is the one guy who’s made a lot of money out of the islands,” Orpheus’s Morris says.
Back on Lindeman, Han believes he can be the second. He and I trek, accompanied by bird song and butterflies, through the eucalyptus forest to the top of 240-meter Mount Oldfield, the island’s highest point. All around us, the Coral Sea glistens in its Unesco World Heritage Centre–listed glory. Down at sea level, the old Club Med resort is barely visible through the foliage. “Come back in two years, and you won’t recognize the place,” Han says. In surroundings like this, it’s hard not to be optimistic.
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