EPISODE 15:
The ROI Property Cycle in Bali No One Talks About!

00:00
Welcome back, Omri It’s been a little while, but not that long. What do you talk about… You say welcome back every time I know! And it’s like I live here You just keep revolving Yeah I’m coming from time to time to record the podcasts But we did the last one on, leasing long term letting and between short term letting Yeah! Very popular podcast I recommend check it out! Yeah, absolutely. And today we are discussing ROI. I’m sure anybody who’ve seen a property deck or has considered buying a property in Bali

00:29
has seen the ROI line. And either wondered what it was, wondered how legitimate it is or you know, seen it and just thought about how it works really Yeah So we’re gonna dive into that Yeah. We’re going to talk about ROI today Thanks Gawain! Hi, everyone. Happy to be back! It’s been a month, yeah? Since the last one, yeah! Yeah! I think a month or something like that So, yeah, there’s a lot of misconception, and wrong information about ROI and what we’re going to do today is try to dig a little bit

01:03
into how it works, what are the market cycles, why you are promised an ROI, of whatever, and then when you, when you start operating your property, it’s not at all what What it should be Yeah, what it should be So, there’s a reason for that We’ve identified some patterns There are, you know like, very well known market cycles So, that most people are unaware of So we’re going to dive into that And I’ll try to make people understand Cool! What this is about Let’s go. Alrighty! So we unpacking this ROI, debacle.

01:45
First of all, just what it is really? And then, how it’s manipulated and changed and, you know, there’s a lot of very proactive salespeople, let’s just say in the property market in Bali So they, you know, trying to make, their project looks specifically high ROI Yeah. What factors are included, and how they got to those numbers, when those numbers were calculated, and how the market is now So many variables, so many moving parts But let’s just start off maybe with, What is it? Yeah So ROI is basically,

02:15
how much money you make Yeah, to Return On Investment To summarize, yeah, Return On Investment And it’s basically, how much money you make To not confused with IRR, which is Internal Rate of Return, which is how fast you make that money, Yeah. And IRR would actually be a better, metrics to use, for anyone investing in Bali, but it’s a very, It’s a little bit more It’s more technical, people not understanding, they understand ROI, the term ROI is very well adopted, in, you know, everyone’s mind So,

02:49
it’s basically, how much, so if you invest, I don’t know, you invest $100,000 that’s into a business. That business is, generating $15,000 profits every year. your ROI is 15%. That’s basically what it is The formula which we are going to, put here Definition and the, The definition of the ROI So I don’t have the definition. I don’t know it by heart, but it’s written here, you can read it, and you can see the formula. So you take your returns, you divide them by, your investments, and you multiply by 100,

03:26
and you have your ROI To get the percentage There’s another formula as well, that’s, a little more complicated, but this one was quite simple, yeah So what does it actually include? Like, how do you get to that net amount, and then, after there’s things like cost you got to take into account, appreciation It depends if you talk about gross ROI or a net ROI So that’s the interesting part, because in Bali, when you see an ROI on, you know, a developer pamphlet or a website, everyone think it’s, net ROI, because historically,

03:59
it has been like that, and it should be net ROI However, when you dig a little bit and you go into, you ask the developer, and you go into, you go on the website and look what is a breakdown, what is being included or not That’s if it’s even there I mean usually it’s, sometimes it’s not even there. They don’t even give you the breakdown Yeah, yeah. But when it is, okay, you realize that in many, not always some are very, very, transparent and and truthful and accurate, but in many instances, for example, taxes are not included

04:28
So it’s pretax Yeah, exactly. So it’s not net ROI or property operating expenses are not you know, very, very optimistic. Yeah, or some of them, yeah Like running on a skeleton staff Yeah. Exactly. Yeah. What would one like, One maid for like ten villas? Yeah So, I mean, you really have to, to dissect, how that ROI that’s you’re promised, is actually made Or actually do it yourself, especially if you’re going to buy something, you got to do it yourself Like what is realistic, what are the cost,

05:07
Yeah, but it can be very hard for someone who doesn’t know the market, who doesn’t, I mean, we live here, so we know what costs what, but someone that, an investor that lives abroad, and trusts And some of those management costs are tough to figure out. So yeah, it’s very important. That, you know, when you look, when you’re going to a developer and you invest your money into a developer, just don’t trust blindly what they tell you Because in many cases, I mean, these are salespeople Used car salesman

05:38
Yeah, exactly Used second hand car salesman, yeah So they will embelish everything They will make everything formidable and beautiful, and you’re going to make so much money and so on and so forth. So It’s important to address that situation As an investor, you must be aware that, you need to look, into things and dissect things as much as you can maybe get that breakdown from your developer, and run it by someone else, like a trusted, you know, advisor, or or Gawain, or whoever Just message Omri,

06:16
all of you, at the same time, he will get back to everyone. Yeah, exactly. So, no, it’s very important because, in a lot of instances, people trust what developers tell them it looks legit on the paper and there’s a bunch of drawings and, you know, graphs and whatnot, and sources and data But actually, in reality, it’s not the same And there’s this one thing, that no one takes into account, but really no one in Bali, and probably other places as well, is cycles So ROIs are never the same year on year

06:59
It’s cyclical So So it goes like this and like this It’s like a, like a DNA thing, you know, it’s up and down. So it’s never, you know, stuck in one number. So when someone tells you when developer tells you Okay, ROI 15% That’s not true It means sometimes it’s 17, and sometimes it’s 10 or 12 You know, it’s rarely 15 actually, because it goes up and down and up and down and up and down And those are cycles that any market in the world has But, it seems like it’s been, you know, completely forgotten here

07:40
We’re gonna talk about that In new market especially, so if it’s an immature market like Bali, that swing will be a lot more But if you’re looking in London or New York, that swing will be so slack, Of course, Yeah, absolutely But Bali is like Yeah, yeah Because there’s a supply, demand, supply, demand I mean yeah, like you say, it exists everywhere, but it’s, you know, much weaker in many mature market The bigger the market, the more mature, the weaker the swing will be The more liquid the market is,

08:09
the more, the stronger it is basically Okay. So we have the iPad here, and I’m going to show you in a second, what’s on it So the slide is going to appear. You guys, you can see the slide in your screen, I’ll be writing little things on it But before I do that, the one thing we need to make people understand is, the ROI doesn’t change on its own, yeah There’s a correlation, there’s direct correlation, between many factors, But one of the biggest factor, is the supply, of properties, of available properties,

08:41
available vacancy, and the ROI, the Return On Investment Supply and demand Yeah, it’s supply and demand thing, yeah So the more supply there is, the smaller the ROI will be basically too and the least supply there is, the bigger the ROI, because the demand is, different, ratio to the offer, yeah just like anything in the world, yeah, basically So, we gonna show this slide, and basically that slide shows how one full cycle is made So here we have, a couple of lines. The blue line is the ROI, the pink line is the supply.

09:23
So the property supplies, when it’s low, there’s not so much supply, and when the line is high, there’s obviously an oversupply. Okay. So those line what we found out, is those lines are intertwined Basically whenever, the supply is high, like here, the ROI is low. it’s a mechanism that’s pretty logical It’s offer and demand basically. So when you have too many villas, on the market then there’s a lot of vacancy, because there isn’t enough, tourists to rent them, and so the price goes down, and the ROI of everyone,

10:05
is going down, obviously. So if you look at that graph here, you can see four quadrants, four phases. Phase one, recovery, phase two, expansion, phase three, oversupply, and phase four, correction Let me explain before, we go into each one of those, what happens before and after basically. So, this is just one segment, the graph, keeps repeating itself. so here it goes back up again, And this is going down. And here it goes down, and then it goes up again, and it’s like a DNA shape. So the recovery phase is basically,

10:47
after the full cycle, that we have here. So after phase four, after the correction, when there’s an oversupply of villas, the ROI is low It does correct at some points. And when it goes, down in phase four, after phase four, there’s the recovery phase, which is here, and here as well. So we could have started somewhere else, but it was prettier this way. So phase two expansion. So this is after the recovery, when we reached this point here, the market is pretty healthy, everyone is making a, decent amount of money.

11:22
The market is sustainable, the business is sustainable, and this is where things can get bad, And the way to get bad, is because everyone, is making money. So all the developers are building, and there’s new construction happening. So new construction happening, declining vacancy here. And the building building, building and then it reach at the point where, there is an oversupply of villas. So what happened at that point here, and before that point is as, new villas are being delivered, so there is always a lag,

11:54
of course, because it takes, you know, 10 months to 12 months to build a villa 10 months to 12 months to build a villa as the villas are being, put on the market, the ROI is declining. Okay. Then it reached that peak, and when you reach that peak, this is when the ROI is at its lowest, which is, in our opinion, what we experiencing right now in Bali. So there’s, too many villas, there are too many villas, and the ROI are just not what, you know, developer promise. So you will see, ike, 17%, 18%, 20%, 25%, whatever.

12:29
This doesn’t happen right now, it’s impossible. So, it’s more like, 12 to 15, alright, and you know, in some cases even lower than that, but it will come back, and all the way it goes back as soon as we reach that peak here, what happened is like, everybody’s like, why he is not making, as much money as I expected. And my ROI is not great, and developers are starting to stop, lowering their building rates, so less villas being built, and as these less villas being builds, the ROI is getting higher,

13:05
to reach that point, where we here, and then it goes again the other way, and it never ends. It’s the same thing everywhere, it’s not just Bali, it’s the same thing everywhere, but in mature markets, this point and this point are much closer So it would be more like this, you know, where this point and this point are here Okay, how did we get there What’s interesting to understand is, the little bit of, what happens in the past few years. So after Covid ended, there were, the Russia-Ukraine war and revenge traveling

13:43
So a bunch of tourists, a bunch of people, So a bunch of tourists, a bunch of people, came to Bali, a lot of Russians, which increased mechanically the prices, on everything real estate, and anything else well but especially real estate, and so, what happens is at that time, we’re on here, and then, because so many people, were looking for villas, I mean Russians some of them, you know, if they didn’t, find a place to live here, they had to go back to Russia, and to the war So that’s why it was a matter,

14:13
of surviving for them, which I totally understand. So a lot of people were looking for villas. And as the demand, for villa increased, the offer obviously decreased. And as the offer decreased and the demand increased, a lot of new developers came in, and some Russians was as well, Russian ones as well, and a lot of, new construction started to being built So this is basically the genesis of the post Covid cycle started with, the end of Covid and the Russia-Ukraine war was, a very, very, important point,

14:51
And that’s how that cycle, put itself in place. Yeah. So we don’t have yet, we don’t have enough historical data to, we don’t know yet, how long that cycle is, I cannot say today. Okay, So from here, from here to here, it takes, you know, so many years, I would think, it would take something like, around, for a full cycle, So full cycle would be, from here to here. Yeah. A full cycle, I would say around five years, But this is a, very, very “guesstimate” I don’t know, the future will tell us. because we don’t have enough,

15:31
there hasn’t been enough time, to have you know, actual data, on how that pattern is happening, yeah But, I would think a few years and my guess would be around five, something like that. Educated guess Educated guess, exactly I like that word What’s important here, is to understand the pattern, to understand how, ROI line is going, and how it’s going against the supply line So right now, I’m a developer as well, so I know it’s, I have the same problem, you know Right now on the villas that I sell,

16:08
I put 12% ROI, done, you know, because I don’t want people to have false hope And I handed over some villas you know, recently, the buyer was disappointed, and started to operate them But, But when they bought the villa, it was a year before, so my data was accurate a year before, but when they bought the villa, back then we didn’t realize that, yeah, when they started to operate the villa then the ROI weren’t as, high as what I say it would be So I’m the first one, that made the mistake and this is,

16:42
I mean you learn from your mistakes. Yeah. And this is how, I understood that, and I came up with this thing, you know So there’s an opportunity here, and I’m going to take the green color. So obviously the best time to buy a property, is when the supply is high, and the ROI is low, because this is when you can negotiate it, negotiate good prices, because you can say Bro, I mean your properties are empty, and you’re trying to sell me, something very expensive, that’s not gonna fly. Okay. If you make a negotiation,

17:21
when the ROI is high, So here, and the supply is low, you’re in a situation where, there’s a lot of buyers, but not many offers, So the prices are high. So we could make another, line here. That is the property prices, which is completely, correlated to those two existing lines. I also just think, like using, these are extreme, these are a lot more flattening than that, and like the terminology bubble, is a bit extreme I think it’s a slight correction. Just noting that Bali, Bubble is just after the Covid, yeah

17:56
Bubble is a bit of a strong term, like It’s a slight correction, you know, But places like Bali, there’s such an influx of tourists, influx of people, that the general trend line, is still in that direction. Like there’s not a, abortion of all developments, all of a sudden It’s not mature, it’s growing, and as government is, you know, supporting the fact that, there’s the need to be more, and more tourists, It’s growing, of course. So it’s not as, but again, again, back to the disclaimer before,

18:26
this is not 100% accurate, What we’re trying to show here, is not accurate data, on 2027, or 28, or whatever, 28 or whatever or number or why you like here, or number or ROI like here, but more trends and patterns so people understand why, what is happening today, is happening to them, and why they are making, what they are making, money wise So, So the lesson we can take from this, is that, whatever the moment in time, you are purchasing your assets, your property, you should not think of the ROI

19:07
at one specific time ROI its, its an average If it’s an average, if your developer say, oh, this is an average of a period of like five years for instance, or four years, which might be, I think it’s more or less the cycle, But again, no promises. Yeah. If it’s an average, they tell you it’s an average. then yeah, okay. If they tell you, okay, you’re going to make 15% average ROI over the course of, the next cycle for instance, yeah Then. Okay. Sure. No problem. If they have data to support that,

19:39
that thesis, yeah But if they tell you, look, last year we made, 25% ROI because we had 95% occupancy. Well, I’m calling BS, because it was accurate last year, Very slow, small time frame. Yeah, it was actually last year, but not next year. So what you’re saying is zoom out. Completely zoom out, We are being reassuring now, If you’ve purchased, a property, in the last one two years, and you are disappointed with your agent, you’re disappointed with the return on investment, that you’re getting now,

20:14
don’t worry, it’s coming back, It’s coming back. It’s just that we are in the dip now. We are in the lowest points. It’s not going to go lower than that, in my opinion But you never know You never know, yeah Supply and demand But, I think now that everyone is complaining, about the returns, they are getting from, villa rental, there’s a correction, that’s going to be made, in the construction, and we have here. so we didn’t talk about this, but I put this on the graph construction phase, Yeah. So as there is a correction in the,

20:47
number of developments, ROIs going to go back, to maybe not what it was, but at least a higher position So what does that mean exactly, so that just means less developments, Or if you going to built 20 units, you now, build ten, But that less developments Yeah. Exactly. But that’s like what is, what kind of start looking like, we just be a little bit of a scaling back. Somebody who might not build a villa, or would build a villa but might not now, you know, that kind of thing, so the market gets a little bit more

21:14
more competitive and smaller Well, what it means again is zoom out Whether you’re a developer, or whether you’re an investor, what’s happening right now, does not matter, It will happen again in 4-5 years, and then again in 4-5 years You got to zoom out, and, have an understand how this works So, you don’t base your purchase, or whatever decision or your sale, whatever decision you make, on what’s happening right now, you should base, a sale or purchase on a cycle okay and cycles averages. That’s it.

21:50
Yeah. I think it’s, covers everything. Well, I hope so, I mean, there’s lot more to talk about here, I think just the construction lag, I think that just pushes everything back, so you can’t be immediate on your decisions, That’s probably something worth touching on, but it’s quite self-explanatory otherwise, but yeah, I think we covered everything else. But if you’re thinking long term, I mean, if you rent a villa for five years. Yeah, you better choose your timing right, yeah. Or for three years or whatever.

22:16
if you’re doing arbitrage, you really need to check where you are in time you really need to check where you are in time So arbitrage, for people who don’t know, is like basically renting a villa, to one person on a let’s say, yearly basis, and then, subleasing it, subletting it, to tourists on a nightly basis, monthly basis, or whatever And that’s a rampant in Bali Can you imagine, yeah, I mean, you’re sitting with ten villas, you just signed up, and then doing arbitrage, and then all of a sudden you have to,

22:41
you rented for less, then you got your first big problem, I mean, you can lose money, by not having your timing correct. Yeah. We put the line, with our graphic designer say, okay, move a little bit on the left a little bit on the right. It’s not 100% accurate. Again, because we don’t have enough, data to make it accurate. But the trend is true, and the cycle is true, it’s a market cycle, It happens here, it happens in other places in the world. And you make a lot of money if you get it right If you get it right,

23:09
if you understand that correctly, you can, you can If you don’t, then you won’t, you know Exactly, yeah And also it will, enable you to not make mistakes, whoever selling at the wrong time, or buying at the wrong time, or, you know, or panicking Yeah, exactly yeah So, yeah, I mean, any questions you have, put them in the comments. We’ll try to be, faster to answer than, the last podcast I was very, very slow on this one. I’m sorry, apologies, but yeah, I love the engagement that you guys have. We are getting a lot of comments.

23:42
I get a lot of people, those who have, our WhatsApp or email, they write to us a lot and, we get a lot of engagement from everyone. So thank you for that. It’s great, to see that there is a community of people, following us, and engaging with us. Yeah, getting, getting value out of Yeah. I mean, there’s a lot of subscribers, I’m surprised myself, about 3000 something, 2500 I think I’m amazed. So thank you for that guys! And, feel free to reach out to us directly. We are always happy to, you know,

24:15
grab a cup of coffee, with anyone. We are in Pererenan, Gawain and I, our office is here So. Yeah. I hope that, that was helpful, for you guys. Well certainly helpful for him. He didn’t know about it yesterday. Yeah, not so sure about that, I’ve been in crypto for ten years, I know exactly about supply and demand. Liquidity. I’m joking, I’m joking. Don’t forget to subscribe, comment, share And any ideas, any ideas, give us some ideas for podcasts. Yeah. We have to rack our brains sometimes, to come up with things.

24:56
Exactly. This is a great idea, it was a good one. Omri’s idea for this week. So yeah. Well done. Thank you. See you soon. Ciao! Bye! Subscribe, yeah. Bye bye. that supply line and ROI line, So supply is pink, ROI is orange, and okay, let’s go back to, 2022 Covid ends. People start traveling. So you have revenge traveling, then you have the Russia and Ukraine war, And then, you have a bunch of people coming to Bali. Okay. With a lot of money. A lot of money They want to move out of where they’re living,

36:43
they sick of the Covid restrictions, and they’re making a new life Absolutely Some of them want to make a new life, some of them don’t have a choice, I’m thinking Russian and Ukrainians, and if they don’t find something here fast, they will have to go back, to their country, and that means maybe go to the front So what happens after 2022, and everyone have seen that, prices have soared, like crazy, Okay. So we were, in that situation where, the supply was low, and the ROIs were high, a lot of people were buying houses,

37:19
a lot of people were renting houses, and there were not enough supply. Okay. So, the problem with that, is that, it was a bubble, and like every bubble, it bursts, at some point in time. However, a lot of developers today, have based their, their ROIs, Return On Investments, on data they get from here, from that period, from the 2022 to 2024 period, where everyone was making money, I mean, you could, you couldn’t not make money in Bali in real estate. You could build a shack and it would be rented

37:58
And, of course, yeah, I mean, I’ve seen people, selling houses for crazy price, when the house was worth only half the price, you know One not far from here, from friends of mine, actually This is the situation, so, small disclaimer here, That graph is, not 100% accurate, because we do not have enough historical data to be able to identify, how many years exactly each phase takes, each quadrant Maybe each quadrant is different Each quadrant is different. So it might be four year quadrant, and might be a one year quadrant

38:33
Yeah and actually I’m going to write here, so people can see, it’s not actually an exact, parabola like this. It’s more like this. The wiggly all over the show So this is longer, and this is shorter But for, to make it clearer. we decided not to, not to do this, and make it like a parabola, So it’s clearer for everyone So it would be like this actually. So, yeah We do not have enough data, to be able to say, in 20…whatever date, The quadrant number one is, going to start, and quadrant number two,

39:09
is going to start that date, and three at that date, and four at that date Because the data was, we probably in like, four years, 4 or 5 years would probably have, that data But today that data was, it’s not accurate, because mainly also, because of Covid and, Russia-Ukraine war, basically because of what happened, like, just at the exit of Covid, yeah So it was an extreme scenario It was an extreme scenario, and the bubble was, I mean, that period here, was not, is not the same as what this period will be

39:42
This was extreme, it was too much The next period where the ROI is high, and the supply is low, which is in our opinion, around 2028, But again, huge disclaimer here, We don’t know, we have no clue, because we don’t have a crystal ball, this is just like projections, But a little bit of guessing Yeah. So now that we’ve seen that, I’m going to show the other graph, which is the general graph, which is the general graph, that explains, the historical graph, with the years before and years after. So this is what it looks like,

42:00
over the years, and you can see, you know, construction phase. ROI, Supply, the years on the timeline at the bottom and the percentages of ROI on the left axis I’m not saying those percentages, are accurate 100%, but they are more or less, what’s we think they are from, what we’ve seen so far And again, big disclaimer here. We don’t know, how long that cycle lasts exactly and okay, let’s go back to, to 2022