How Much Is Your Leasehold Really Worth as the Lease Gets Shorter?

PW Developments — A villa in Uluwatu can look like an attractive investment on paper.

How to Calculate ROI Over the Remaining Lease Term

The location is desirable. In addition, the property is beautifully designed. Tourism demand is strong. The projected nightly rate looks impressive.

Then the investment proposal presents a number:

“12% yield.”

At first glance, that sounds compelling.

But yield alone does not tell you enough.

In fact, a serious investor needs to ask:

• 12% of what?
• Is that gross or net?
• In other words, what costs have already been deducted?
• How many years remain on the lease?
• Importantly, what happens to the investment when the lease approaches expiry?

These questions are particularly important in Bali because many property investment opportunities are structured around leasehold interests rather than permanent land ownership.

In other words, a leasehold asset has a finite economic life.

In this case, the investor is not simply buying a villa.

Instead, the investor is acquiring the right to use, operate and benefit from that asset for a defined period.

Put simply, that means the remaining lease term needs to be built directly into the investment model.

…

Why Leasehold ROI Is Different From a Simple Property Yield

For example, imagine two villas with almost identical characteristics.

Both are located in Uluwatu.

Both generate approximately:

Rp1 billion in net operating income per year.

But:

Villa A: 25 years remaining on the lease

Villa B: 8 years remaining on the lease

At first glance, both appear to generate the same annual return.

However, they do not necessarily represent the same investment.

Villa A has a much longer period over which the investor can potentially generate income before the lease expires.

In contrast, Villa B has a much shorter remaining economic period.

Moreover, the difference becomes even more important when considering resale, extension negotiations and the capital required to acquire the property in the first place.

This is therefore why a leasehold investment should be analyzed as a finite cash-flow asset.

…

What Does “Leasehold Decay” Actually Mean?

That said, leasehold decay does not necessarily mean that the physical villa is becoming worse every year.

In fact, a well-maintained villa can remain attractive for many years.

Instead, the concept refers primarily to the declining amount of contractual time remaining on the lease.

For example:

30-year lease

→ 30 years remaining at acquisition

After 5 years

→ 25 years remaining

After 10 years

→ 20 years remaining

After 20 years

→ 10 years remaining

After 25 years

→ 5 years remaining

Even so, the physical building may still exist.

Similarly, the location may still be attractive.

Likewise, tourism demand may still exist.

But the remaining contractual right has become shorter.

In turn, that can affect both the property’s economic value and the price another investor may be willing to pay for the remaining lease.

…

The First Calculation: How Much Income Can the Remaining Lease Generate?

First, let’s use a simplified example.

Suppose a villa produces:

Rp1 billion net operating income per year.

If there are 8 years remaining:

Rp1 billion × 8 years = Rp8 billion

If there are 25 years remaining:

Rp1 billion × 25 years = Rp25 billion

Overall, this is not a complete investment-return calculation.

It assumes the income remains constant and ignores discounting, capital expenditure, taxes, changes in operating performance, renovation, extension costs and exit value.

But it illustrates an important principle:

The same annual income does not create the same investment value when the remaining lease term is different.

…

Why Simply Multiplying NOI by Years Is Still Not Enough

The Rp8 billion versus Rp25 billion example is useful for understanding the concept, but sophisticated investors should go further.

In fact, money received today is not economically identical to money received many years from now.

In short, this is the principle behind time value of money.

An investor can therefore use discounted cash flow analysis to estimate the present value of future leasehold income.

A simplified formula is:

Present Value = Future Cash Flow ÷ (1 + Discount Rate)ⁿ

where n represents the year in which the cash flow is received.

For example, using a purely illustrative 10% discount rate and assuming Rp1 billion of annual NOI:

8-year lease

Present value of the annual NOI stream ≈ Rp5.33 billion

25-year lease

Present value of the annual NOI stream ≈ Rp9.08 billion

However, these figures are not predictions or market valuations. They simply demonstrate how the value of a finite stream of cash flows can be analyzed.

And they show why:

“Rp1 billion NOI per year” is not enough information to value a leasehold investment.

Notably, the timing of those cash flows matters.

…

Gross Yield Can Be Misleading

Suppose a villa costs:

Rp8 billion

and generates:

Rp960 million gross rental revenue per year.

An investor might calculate:

Rp960 million ÷ Rp8 billion = 12%

and conclude:

“The villa produces a 12% yield.”

But that is a gross revenue yield, not necessarily a net investment return.

Before reaching actual net operating income, the property may have expenses such as:

• property management;
• booking/distribution costs;
• platform or OTA commissions;
• marketing;
• staff;
• utilities;
• pool maintenance;
• garden maintenance;
• repairs;
• replacement of furniture and equipment;
• insurance;
• accounting;
• taxes;
• licensing and compliance costs;
• periods without guests;
• major renovation or capital expenditure.

The Indonesian tax framework also contains specific rules for income from leasing land and/or buildings.

For example, the Directorate General of Taxes explains that certain rental income is subject to final income tax, with the relevant gross rental value defined in the applicable regulation.

The exact tax treatment depends on the transaction and operating structure, so investors should have the model reviewed by an Indonesian tax professional.

…

Gross Revenue, NOI and Investor Return Are Different Numbers

First, it is useful to separate three concepts.

Gross Revenue

Specifically, the total revenue generated by the property.

For example:

Rp1.2 billion per year

Net Operating Income

In short, revenue after relevant operating expenses.

For example:

Rp750 million per year

Investor Return

The return after considering the investor’s total capital investment, financing if applicable, taxes, capital expenditure and eventual exit.

In short, these are not interchangeable.

A property advertised with a “12% yield” may therefore have a substantially lower net return after operating expenses and other costs are accounted for.

…

Bali’s Tourism Market Does Not Eliminate Operating Risk

Bali has a large international tourism market, which supports demand for accommodation, but investors should not confuse strong tourism demand with guaranteed villa performance.

According to BPS-Statistics Indonesia, Bali recorded 6,948,754 direct international tourist arrivals during January – December 2025, an increase of 9.72% from 2024.

However, accommodation performance varies over time.

For example, BPS reported a 60.88% room occupancy rate for star-rated hotels in December 2025, while non-star accommodation recorded 39.61%.

BPS’s annual 2025 accommodation publication also provides data on room occupancy and length of stay across Bali’s accommodation sector.

Overall, these statistics are useful for understanding the broader market.

But they should not be interpreted as a guaranteed occupancy rate for an individual Uluwatu villa.

A particular property’s performance can differ because of:

• location;
• design;
• property size;
• view;
• accessibility;
• guest profile;
• management;
• pricing;
• seasonality;
• reviews;
• competition;
• marketing;
• booking channel.

Ultimately, this is why a villa’s financial model needs property-specific assumptions.

…

The Correct Leasehold ROI Formula Is More Comprehensive

For example, a simplified investment framework can be represented as:

Total Investment

= Acquisition Cost

• Renovation
• Construction
• Furnishing
• Legal & Transaction Costs
• Initial Setup
• Other Capital Expenditure

Then compare that with:

Total Economic Benefit

= Net Operating Income During Remaining Lease

• Potential Exit Value
  − Extension Cost/Risk
  − Additional Capital Expenditure

Overall, this is still a simplified model.

In practice, a proper investment analysis would normally incorporate annual cash flows, discount rates, taxes, financing, depreciation where relevant, capital expenditure and an explicit exit scenario.

But it is already much more informative than simply looking at:

“Yield: 12%”

…

Example: An 8-Year Leasehold Villa

For instance, let’s consider a simplified hypothetical property.

Acquisition: Rp6 billion

Remaining lease: 8 years

Net Operating Income: Rp800 million per year

Ignoring discounting and assuming NOI remains constant:

Rp800 million × 8 = Rp6.4 billion

At first glance, the investor appears to recover approximately the acquisition cost through operating income.

But there are still important questions.

In particular, what happens at the end of year eight?

Is the lease extendable?

Additionally, how much will the extension cost?

Who controls the extension?

In practice, can the property be sold in year five?

Specifically, what will a buyer pay for a property with only three years remaining?

Will the property require a major renovation before exit?

The apparent yield therefore does not tell the whole investment story.

…

Example: A 25-Year Leasehold Villa

For comparison, now consider another hypothetical property.

Acquisition: Rp10 billion

Remaining lease: 25 years

Net Operating Income: Rp1 billion per year

Ignoring discounting:

Rp1 billion × 25 = Rp25 billion

However, this does not mean the investor will necessarily make Rp15 billion in profit.

There are still:

• future operating costs;
• capital expenditure;
• taxes;
• renovation;
• changing occupancy;
• changing nightly rates;
• inflation;
• management costs;
• potential resale value;
• potential extension costs.

But the longer remaining term provides a substantially different cash-flow horizon.

As a result, that difference needs to be reflected in the valuation.

…

The Exit Value Cannot Be Ignored

In practice, a leasehold investment does not necessarily end with the investor operating the property until the final day of the lease.

However, an investor may intend to sell or assign the remaining lease earlier.

Consequently, this introduces another important variable:

Exit Value.

Imagine an investor buys a villa with 25 years remaining.

After operating it for 10 years, there are approximately 15 years remaining.

At that point, the investor may attempt to sell the remaining interest.

In particular, the potential buyer will likely consider:

• location;
• property condition;
• current revenue;
• operating history;
• remaining lease;
• extension terms;
• market demand;
• acquisition price;
• expected future return.

Therefore, the exit value cannot simply be assumed to equal the original purchase price.

…

Remaining Lease Term Can Affect the Future Buyer Pool

Specifically, this is particularly important for investors planning to exit before lease expiry.

As an illustration, imagine two otherwise similar properties:

Property A

25 years remaining

Property B

7 years remaining

As a result, a future buyer may analyze them very differently.

Meanwhile, property A provides a longer period to recover the acquisition cost through operations.

In contrast, Property B may require a much shorter investment horizon and may depend more heavily on an extension.

Therefore, as the remaining lease becomes shorter, the investor should consider whether the potential buyer pool could also change.

In short, this is one reason why exit planning should begin at acquisition, not several years before the lease expires.

…

Extension Risk Must Be Included in the Financial Model

Therefore, an extension can materially affect a leasehold investment.

But it should not simply be treated as free additional time.

Suppose a property has:

8 years remaining

and the investor assumes:

“I’ll just extend it later.”

The investor needs to know:

• whether extension is contractually provided for;
• when it can be exercised;
• who controls the extension;
• how the extension price is determined;
• whether the price is fixed or negotiated;
• whether there are conditions;
• whether regulatory requirements may change;
• whether the property remains economically viable after extension costs.

Overall, if the future extension cost is unknown, it should be treated as an investment risk rather than simply ignored.

…

Why Lease Extension Risk Can Change ROI

To illustrate, consider two hypothetical investments.

Investment A

Initial investment: Rp7 billion
Lease remaining: 8 years
NOI: Rp1 billion/year
Extension cost: uncertain

Investment B

Initial investment: Rp9 billion
Lease remaining: 25 years
NOI: Rp1 billion/year
Extension not immediately required

By contrast, investment A has a lower entry price.

But the investor faces a much shorter operating horizon and potentially significant extension uncertainty.

Investment B requires more initial capital but provides a longer period over which the property can generate operating income.

In short, neither structure is automatically better.

The point is that the investment should be compared using the entire cash-flow profile rather than the headline acquisition price or yield.

…

Operating Costs Can Change the Investment Story

In reality, a villa is an operating business as much as it is a physical asset when the investment strategy depends on short-term rental income.

For instance, a simplified annual model might look like:

Gross Rental Revenue

Rp1,500,000,000

minus:

Management
− Rp150,000,000

Booking/distribution
− Rp150,000,000

Utilities
− Rp100,000,000

Maintenance
− Rp75,000,000

Pool & garden
− Rp50,000,000

Staff
− Rp100,000,000

Insurance, administration and other costs
− Rp50,000,000

Potential taxes and other applicable costs
− RpX

= Net Operating Income

Of course, the actual numbers will vary considerably from property to property.

In short, the important point is that investors should model the real operating economics, rather than treating gross booking revenue as profit.

…

Occupancy Is One of the Most Important Variables

A villa with a Rp3 million average nightly rate does not automatically generate:

Rp3 million × 365 = Rp1.095 billion

However, that assumes 100% occupancy.

If the property achieves 60% occupancy:

Rp3 million × 365 × 60% = Rp657 million

If it achieves 40%:

Rp3 million × 365 × 40% = Rp438 million

Ultimately, the difference is substantial.

And these figures are still gross room revenue, not net income.

This is therefore why a credible investment model should use realistic occupancy assumptions based on:

• location;
• comparable properties;
• seasonality;
• historical performance where available;
• property quality;
• guest segment;
• pricing strategy;
• distribution channels.

Bali’s official accommodation statistics can provide useful market context, but they should not be substituted for property-level underwriting.

…

Seasonality Needs to Be Included

However, Bali’s tourism market is not perfectly uniform throughout the year.

A villa may experience:

High season

Higher rates and stronger demand.

Shoulder season

More moderate demand and pricing.

Low season

Potentially lower occupancy and greater pressure on rates.

A financial model that uses one nightly rate and one occupancy percentage for every month may therefore overstate or understate actual cash flow.

Alternatively, a more detailed model could look like:

Overall, this is much more useful for an investor than a single headline yield.

…

Maintenance Is Not Optional

A villa is a physical asset.

Physical assets deteriorate.

Over time, investors may need to budget for:

• repainting;
• waterproofing;
• roof maintenance;
• air-conditioning replacement;
• pool equipment;
• pumps;
• plumbing;
• electrical systems;
• appliances;
• furniture;
• mattresses;
• landscaping;
• kitchen equipment;
• bathrooms;
• structural repairs.

Instead, these costs should not be treated as unexpected surprises.

Instead, they should be incorporated into the long-term investment model.

A property that produces high NOI for several years but requires a major capital expenditure later may have a very different actual return than its initial yield suggests.

…

The Difference Between NOI and Cash Flow

Overall, this distinction is important.

Net Operating Income (NOI) generally describes the income generated after operating expenses, before certain financing and capital-structure items.

But the investor’s actual cash flow may also be affected by:

• debt service;
• capital expenditure;
• taxes;
• acquisition costs;
• renovation;
• major replacement;
• one-off legal expenses.

Therefore:

NOI is an important metric, but it is not the same thing as investor cash flow.

For a serious investment analysis, both should be considered.

…

Don’t Forget Acquisition Costs

However, investors sometimes calculate ROI using only the advertised property price.

For example:

Villa price: Rp8 billion

and then:

NOI: Rp960 million

leading to:

12% yield

But the actual invested capital may be higher after accounting for:

• legal fees;
• due diligence;
• transaction costs;
• taxes;
• furnishing;
• renovation;
• construction;
• setup;
• working capital.

If total initial capital becomes Rp9 billion rather than Rp8 billion, the same Rp960 million NOI produces a different return.

Therefore, investors should distinguish between:

Headline Acquisition Price and Total Invested Capital.

…

A Better Metric: Return on Total Invested Capital

Suppose:

Property/lease acquisition: Rp8 billion

Renovation: Rp500 million

Furniture: Rp300 million

Legal and transaction costs: Rp200 million

Initial setup: Rp100 million

Total invested capital:

Rp9.1 billion

If annual NOI is:

Rp900 million

then a simplified unlevered yield on total invested capital would be:

Rp900 million ÷ Rp9.1 billion = approximately 9.9%

In other words, that is materially different from:

Rp900 million ÷ Rp8 billion = 11.25%

The exact treatment of costs depends on the investment structure, but the principle is important:

Calculate the return against the capital you actually invested.

…

A Leasehold Investment Should Have an Explicit End-of-Lease Scenario

Notably, one of the strongest ways to improve a leasehold investment model is to explicitly model what happens at expiry.

Specifically, there are several possible scenarios.

Scenario 1: Exit Before Expiry

First, the investor sells or assigns the remaining lease.

Then, the model estimates the potential exit proceeds.

Scenario 2: Extension

Alternatively, the investor negotiates an extension.

The model includes:

• extension price;
• transaction costs;
• renovation requirements;
• revised revenue assumptions.

Scenario 3: Operate Until Expiry

Finally, the investor continues operating until the contractual end.

The model then accounts for the treatment of the property and improvements under the applicable agreement.

Scenario 4: No Economically Viable Extension

The investment is operated for the remaining term and eventually winds down.

In fact, this scenario can be particularly important for conservative underwriting.

Importantly, the purpose is not to predict exactly what will happen.

Specifically, it is to ensure that the investor understands how sensitive the investment is to the end-of-lease outcome.

…

Build a Sensitivity Analysis, Not Just One Forecast

Therefore, a single ROI forecast can create a false sense of precision.

Instead, investors can model multiple scenarios.

For example:

The exact assumptions should be based on the individual property and market evidence.

The purpose is to understand:

What happens if reality is different from the original forecast?

Overall, that is much more useful than presenting one optimistic yield number.

…

What Should Investors Ask When Someone Says “12% Yield”?

Instead of immediately focusing on the percentage, ask:

12% of what?

Then ask:

1. Specifically, gross revenue or net operating income?
2. Before or after management fees?
3. Does it include taxes?
4. Also, does it account for maintenance costs?
5. Additionally, what occupancy assumption is being used?
6. Also, what average nightly rate is being used?
7. How many years remain on the lease?
8. Also, what is the total invested capital?
9. Also, how much value remains at exit?
10. Importantly, what happens if the lease cannot be extended?
11. Finally, are future capital expenditures included?

Ultimately, these questions turn a marketing headline into an investment analysis.

…

A Simple Framework for Evaluating Bali Leasehold ROI

A useful framework is:

1. Calculate Total Invested Capital

Acquisition + Renovation + Furnishing + Legal + Setup + Other Initial Costs

2. Estimate Gross Revenue

ADR × Occupancy × Available Nights

3. Deduct Operating Expenses

Management + Distribution + Utilities + Maintenance + Staff + Other Costs

4. Calculate NOI

Gross Revenue − Operating Expenses

5. Model the Remaining Lease

NOI × Remaining Years, with appropriate discounting and changing assumptions

6. Estimate Exit Value

Potential Assignment/ Sale Value

7. Model Extension Risk

Potential Extension Cost + Timing + Conditions

8. Calculate Investor-Level Returns

Consider:

IRR + NPV + Cash-on-Cash Return + Payback + Exit Value

Ultimately, this framework provides a much clearer picture than headline yield alone.

…

IRR Can Be More Informative Than a Simple Yield

For investors comparing multiple projects, Internal Rate of Return (IRR) can be useful because it considers the timing of cash flows.

For example, receiving:

Rp1 billion today

is not equivalent to receiving:

Rp1 billion ten years from now.

Therefore, IRR attempts to account for this timing.

However, IRR should not be used in isolation.

Investors should also examine:

• total capital invested;
• total distributions;
• cash-flow timing;
• holding period;
• exit assumptions;
• reinvestment assumptions;
• sensitivity to changes in occupancy and pricing.

In other words, an apparently high IRR can sometimes be driven by a small number of optimistic assumptions.

…

NPV Can Help Answer a Different Question

Net Present Value (NPV) asks:

“What are the future cash flows worth in today’s money, given a chosen discount rate?”

This can be particularly useful for leasehold investments because the asset has a finite life.

The model can incorporate:

• annual NOI;
• renovation;
• capital expenditure;
• extension cost;
• exit value;
• discount rate.

In short, the result helps investors compare the economic value of different cash-flow structures.

Again, the discount rate is an assumption and should be selected appropriately for the investor and risk profile.

…

Why a 25-Year Lease Can Have a Different Investment Profile From an 8-Year Lease

Next, let’s return to the original example.

Both properties generate:

Rp1 billion NOI per year.

But:

Property A: 25 years remaining

Property B: 8 years remaining

The difference is not simply:

25 > 8

As a result, the entire investment profile changes.

Property A has:

• a longer income-generating period;
• more time for the investor to recover initial capital;
• potentially more flexibility around exit timing;
• more time before an extension becomes critical.

Property B has:

• a shorter income horizon;
• greater sensitivity to exit timing;
• potentially greater dependence on extension terms;
• In short, less remaining contractual value.

The appropriate acquisition price should therefore reflect those differences.

…

Leasehold Value Is Time-Sensitive

In fact, this is the central concept of this article.

Specifically, a leasehold property has an economic relationship that can be represented as:

Value = Cash Flow + Remaining Term + Exit Potential − Costs − Risks

In fact, the remaining term is not a minor detail.

Indeed, it is one of the fundamental variables.

A 30-year lease acquired today is a different asset from a 10-year lease over the same physical villa.

However, the building might look almost identical.

The investment is not.

…

How PW Developments Approaches Leasehold Investment

At PW Developments, we believe investors should look beyond headline property prices and advertised yields.

In practice, a property investment should be understood through its entire economic structure.

That means considering:

1. Location
2. Land and contractual rights
3. Remaining lease term
4. Development
5. Revenue potential
6. Operating expenses
7. Capital expenditure
8. Extension strategy
9. Exit strategy
10. Investor returns

This approach is particularly important in Uluwatu, where property values and tourism demand can vary significantly between micro-locations.

In short, the objective is not simply to find a property with an attractive headline yield.

Specifically, it is to understand whether the entire investment structure makes economic sense over the period in which the investor actually holds the asset.

…

Final Thoughts

Therefore, a leasehold property should never be evaluated solely by asking:

“What is the annual yield?”

Instead, the more important question is:

“What return can this asset realistically generate over the remaining lease term, after all relevant costs and risks are considered?”

That requires looking at:

• Total Invested Capital
• Net Operating Income
• Remaining Lease Term
• Exit Value
• Capital Expenditure
• Extension Risk
• Other Relevant Costs

In other words, a villa producing Rp1 billion of NOI with eight years remaining is not the same investment as a villa producing Rp1 billion of NOI with 25 years remaining.

And a property advertised at a 12% yield may have a very different actual return once management, distribution, maintenance, vacancy, taxes, capital expenditure and other costs are included.

For investors considering Bali property investment, especially leasehold villas in markets such as Uluwatu, understanding this distinction is fundamental.

Do not invest based on yield alone. Model the entire life of the asset.

In short, that is how a property headline becomes an investment analysis.

Published by Marketing Team of Pillai Ward

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Thank you.