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. “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 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.”

Natural Wonder
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 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 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.

Rich Foreigners
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.”