From Plot to Net Rent: A Worked Example for a Saudi Apartment Block

An illustrative calculation that takes a 900 square metre plot through buildable area, build cost, effective rent and operating cost to a yield on total capital.

The gap between a gross rent roll and the money that reaches an owner abroad is wider than most first-time developers expect. This worked example walks one small apartment block from plot area to net operating income and then to a yield on everything invested, so you can see which line hurts most when it moves. Every number below is an illustrative assumption chosen to show the method, not a market rate.

The situation

An overseas owner holds a 900 square metre residential plot in a mid-market district of a large Saudi city. They intend to build a small apartment block, hold it, and let it on annual leases through a managing agent. They want to know what the building has to earn to justify the capital, and which assumption they should test hardest before committing.

Assumptions (illustrative)

• Plot area 900 square metres, with a permitted gross floor area of 1,800 square metres over four floors.
• Net lettable area assumed at 85 per cent of gross floor area, giving 1,530 square metres.
• Sixteen apartments averaging 95 square metres, totalling 1,520 square metres of lettable space.
• Construction assumption of SAR 2,300 per square metre of gross floor area for structure, services and finishes.
• Design, supervision and project management at 6 per cent of construction, permits and connections at SAR 120,000, contingency at 7 per cent of construction.
• Land already owned and valued at SAR 2,700,000; annual rent assumption of SAR 42,000 per apartment.

Step 1: Turn the plot into lettable area

Gross floor area is 1,800 square metres. At 85 per cent efficiency the net lettable area is 1,800 multiplied by 0.85, which is 1,530 square metres. Sixteen apartments at an average of 95 square metres occupy 1,520 square metres, which fits inside that figure with 10 square metres to spare.

Efficiency is the first place a scheme leaks value. Cores, corridors, risers and a generous entrance lobby all come out of the same 1,800 square metres, and each percentage point of efficiency lost is roughly 18 square metres you paid to build but cannot let.

Step 2: Build the construction cost stack

Construction is 1,800 multiplied by SAR 2,300, which is SAR 4,140,000. Design and supervision at 6 per cent adds SAR 248,400. Permits and utility connections add SAR 120,000. Contingency at 7 per cent of construction adds SAR 289,800. The total development cost excluding land is SAR 4,798,200.

The soft costs and the contingency add SAR 658,200 to a SAR 4,140,000 build, which is close to 16 per cent. Owners who budget the construction figure alone and treat everything else as an afterthought start the project already short.

Step 3: Add the land to get total capital

Total capital employed is SAR 4,798,200 of development cost plus SAR 2,700,000 of land value, giving SAR 7,498,200.

Land that you already own is still capital. Measuring return only against the money you are about to spend flatters the project and hides the fact that the plot could be sold instead of built on.

Step 4: Move from gross rent to effective rent

Sixteen apartments at SAR 42,000 gives a gross potential rent of SAR 672,000. Applying 8 per cent for vacancy and collection loss removes SAR 53,760, leaving an effective rent of SAR 618,240.

Vacancy is not an accident to be excluded from the model. Tenants leave, units need repainting between leases, and some rent arrives late or never. A block modelled at full occupancy has no room to absorb a single bad year.

Step 5: Deduct operating costs to reach net operating income

Management at 6 per cent of collected rent is SAR 37,094. Maintenance and a sinking fund allowance is SAR 45,000. Electricity and water for common areas is SAR 18,000. Insurance is SAR 12,000. Total operating cost is SAR 112,094, so net operating income is SAR 618,240 less SAR 112,094, which is SAR 506,146.

Operating cost here is 18 per cent of effective rent. That ratio is the number to argue about with your managing agent, because it is the part of the model you can still influence after the building is finished.

Step 6: Express the result as two different yields

Yield on development cost is SAR 506,146 divided by SAR 4,798,200, which is 10.5 per cent. Yield on total capital including land is SAR 506,146 divided by SAR 7,498,200, which is 6.8 per cent.

Both numbers are true and they answer different questions. Yield on cost tells you whether building was better than buying finished. Yield on total capital tells you whether owning this asset beats the alternatives available to the same money.

What changes the answer

• Rents 5 per cent below assumption: gross rent falls to SAR 638,400, effective rent to SAR 587,328, operating cost to SAR 110,240 and net operating income to SAR 477,088, giving 6.4 per cent on total capital.
• Construction 10 per cent above assumption: development cost rises to SAR 5,266,020 and total capital to SAR 7,966,020, pulling the yield on total capital to 6.4 per cent even with rents unchanged.
• Efficiency falling from 85 to 80 per cent: lettable area drops to 1,440 square metres, which costs you roughly one apartment of rent while the construction cost stays the same.
• Vacancy at 15 per cent rather than 8 per cent: effective rent falls to SAR 571,200 and net operating income to about SAR 493,000 after the lower management fee, a reminder that letting speed matters as much as rent level.

What the numbers tell you

• Model the yield on total capital including land, then use yield on cost only to decide between building and buying.
• Efficiency and vacancy move the answer as hard as rent level, and both are decided during design and letting rather than during construction.
• Soft costs and contingency are a predictable sixth of the build, so budget them as line items instead of hoping they disappear.
• A single operating cost ratio agreed with your manager gives you a monthly test of whether the asset is behaving as modelled.
• Test the two assumptions you control least, rent level and construction price, before you commit to the mix.

Limits of this example

Every figure above is an illustrative assumption used to show the method, not a quote, valuation or market rate. Costs, rates, fees and regulations change and must be confirmed with the relevant authority, lender or supplier before you commit.

Domira designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.