Pricing Investments

As with all markets the pricing of property is dictated by the laws of supply and demand. The simplest way for people to value property is to establish relevant comparables and set a price drawn from this set of data.
Investment professionals take a slightly different approach. They understand that while the prices paid for property will be based on these factors, they will need to set certain criteria that need to be met in order to invest.

• The yields need to be greater than the cost of capital. The principle determinant of the cost of capital is the rate at which banks lend money or the amount that could be gained in a similar investment of equal risk.
• Certainty of cash flow. Investors need to ensure that all of their costs including their costs of capital will be met on a monthly basis. Investors will protect themselves from a certain loss of cash flow by using conservative assumptions. A key assessment of the risk is the degree of certainty of cash flow. Thua the property rentability evaluation is paramount at the due diligence stage.
• Capital Growth potential. Investments need to demonstrate a strong potential for capital growth. Generally speaking investors will look at the market outlook and attempt to quantify how much growth will be achieved in the local area. This is dependent on overall economic factors as well as localised factors such as the establishment and strength of the local economy.
• Exit potential. Investors will need to know that they have an investment that retains a certain level of liquidity (i.e. they will not be locked in for excessive periods of time) and that their investment is attractive to buyers at the end of their investment period. These factors are somewhat more important to investors with short investment periods and high leverage.