Sometimes there is a significant gap between what we believe our house or business is worth and what an investor or buyer is willing to pay. Why does this happen?

Investors and buyers come in all shapes and sizes and have different motivations. Many genuinely want to give back to the community, recognising the importance of belonging. However, most investors need to see fair value for their purchases, as this determines the return on their investment.

A return on investment allows them to make a living and give back sustainably. Regardless of an investor’s motivation, typically they require a return on their investment; otherwise, they are essentially giving their money away, which is unsustainable and detrimental for everyone involved. This brings us back to the question: What are investors looking for? To answer this, we need to consider Return on Investment (ROI) and Risk.

Return on Investment (ROI)
There are various ways to measure the return an investor requires. Most of us understand that a bank charges interest for providing a loan. In the Cook Islands, interest rates may approach nine per cent. This nine per cent is a key source of revenue for the bank’s sustainability.

Risk and Inflation
The difference between a bank in New Zealand offering a seven per cent interest rate and a bank in the Cook Islands offering a nine per cent interest rate reflects the risk.

The extra two per cent charged in the Cook Islands represents the higher risk of operating there, not necessarily making more money. It’s the same with investors. Typically, investors look for a higher return than what they could get by leaving their
money in the bank (say 5.25 per cent), plus the rate of inflation (say five per cent), plus an allowance for risk (say two per cent).

In our experience, investors look for around a 15 per cent return on their investment in the Cook Islands, although this varies depending on the investor type and motive.

The Technicals
The value of leasehold land, houses, commercial property, and businesses generally follows a common theme. The value of future cash flows (e.g., rent, profit, or dividends) generated from the investment (discounted back to today’s value) determines what an investor might get as a return. Currently, investors
consider around a 15 per cent return on a business.
Over a five-year investment horizon, an investor needs to see the profit and end value of their purchase in today’s value and then divide this by 15 per cent.

The Answer
A simplified version is property yield, where profit is divided by 15 per cent to reach an indicative value. For example, if your business or property makes $50,000 in net profit before tax and interest cost considerations (EBITDA), this gives a value of $333,333 ($50,000/0.15 = $333,333). As an owner, you might feel your business or property is worth $1 million. However, potential purchasers might perceive its value closer to $333,333 and might not even make an inquiry. Over time, you may need to lower your expectations towards $333,333 until a point is reached where the business is purchased.
JT Elite Management offers specialised services catering to both buyers and sellers in the Cook
Islands property market. Their experienced team offers in-depth insights into market trends and
potential investment opportunities. This commentary on finance and investments is not professional
advice. It illustrates how investors and buyers see financial value in assets. The content has been oversimplified and may not be entirely accurate. https://jefftikitaurealestate.com/