A step-by-step build-to-rent calculation for an apartment building: total cost, stabilised income, yield on cost, value at exit and the sensitivity that decides it.
Build-to-rent means developing a building to hold and let, rather than to sell unit by unit. For a foreign investor in Saudi Arabia, it avoids the off-plan sales process and builds a long-term income asset, but it depends on getting the yield on cost comfortably above the yield buyers would pay for the finished building. The example below shows the calculation step by step with illustrative figures.
The situation
A foreign company with an eligible Saudi entity is considering a 40-apartment building on a plot in a permitted zone, to be let on annual Ejar leases to working professionals and managed as a single asset. It wants to know whether the yield on cost justifies the development risk.
Assumptions (illustrative)
- Land including acquisition costs: SAR 8,000,000.
- Construction cost: SAR 20,000,000; soft costs including design, permits, supervision and finance: SAR 3,000,000.
- Rent: SAR 75,000 per apartment per year, 40 apartments.
- Stabilised occupancy: 92%.
- Operating costs: 22% of collected rent.
- Assumed exit yield (capitalisation rate) a buyer would apply: 6.0%.
Step 1: Total development cost
SAR 8,000,000 plus SAR 20,000,000 plus SAR 3,000,000 equals SAR 31,000,000.
This is the number the income must justify, and the figure that grows with any overrun or delay.
Step 2: Stabilised collected rent
Potential rent: 40 multiplied by SAR 75,000 equals SAR 3,000,000. Collected at 92%: SAR 3,000,000 multiplied by 0.92 equals SAR 2,760,000.
Stabilised means after lease-up, once the building has reached its normal occupancy.
Step 3: Net operating income
Operating costs: SAR 2,760,000 multiplied by 22% equals SAR 607,200. Net operating income: SAR 2,760,000 minus SAR 607,200 equals SAR 2,152,800.
This covers management, maintenance, service costs, insurance and leasing, but not finance or tax.
Step 4: Yield on cost
SAR 2,152,800 divided by SAR 31,000,000 equals about 6.94%.
This is what the investor earns on the money spent to create the asset.
Step 5: Value at the assumed exit yield
SAR 2,152,800 divided by 0.06 equals SAR 35,880,000. Margin over cost: SAR 35,880,000 minus SAR 31,000,000 equals SAR 4,880,000, about 15.7% of cost.
The spread between yield on cost and exit yield is what rewards the development risk.
Step 6: Exit yield rises to 7.0%
SAR 2,152,800 divided by 0.07 equals about SAR 30,754,286, which is about SAR 245,714 below cost.
A one-point change in what buyers will pay wipes out the whole development margin, even though the building performs exactly as planned.
What changes the answer
- A rent assumption above what comparable registered leases support overstates every figure after step one.
- Rent restraint measures in the city may slow income growth during the hold, which affects value if buyers price in future rent.
- Construction delay adds finance cost and pushes income later, lowering the yield on cost.
- Lease-up that takes longer than planned reduces income in the first years before stabilisation.
- Operating costs above 22%, for example with furnished units or extensive amenities, reduce net income directly.
What the numbers tell you
- Judge build-to-rent on the gap between yield on cost and a prudent exit yield.
- Test the result at a higher exit yield before committing to the land.
- Base rent on registered leases for comparable buildings, not asking rents.
- Plan the lease-up period and its cash needs separately from the stabilised year.
- Design the building for long-term operation, since you will pay its running costs.
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 works with foreign investors on the property side of entering Saudi Arabia: finding land or premises, due diligence, design, construction and asset management. For licensing, tax and legal steps, work with a licensed adviser; we coordinate with yours so the property decision fits the structure you choose.
Frequently Asked Questions
Is build-to-rent a viable model in Saudi Arabia?
It can be where rental demand is deep, such as major cities with growing working populations, and where land and construction costs allow a yield on cost comfortably above what buyers pay for income assets. It requires patient capital and strong operations. Viability must be tested project by project with local rent, cost and exit assumptions.
What yield on cost should a build-to-rent project in Riyadh target?
There is no fixed target. The yield on cost needs to exceed the exit yield investors apply to finished rental buildings by enough to reward development risk, delay and lease-up. Market exit yields change with interest rates and investor demand, so ask valuers and brokers for current evidence and test your project against a less favourable exit.
Should a build-to-rent building have a single owner or strata units?
Single ownership keeps management consistent and makes the asset attractive to institutional buyers, which suits build-to-rent. Registering separate unit titles adds flexibility to sell individual units later but can complicate management. The decision affects your financing and exit options, so make it at design stage with your advisers.
How long does lease-up take for a new rental building in Saudi Arabia?
Lease-up depends on location, pricing, unit mix, competing supply and how early marketing starts. A building priced in line with registered leases for comparable stock fills faster than one priced on hope. Plan a lease-up period in your cash flow with reduced income, and fund it, rather than assuming full occupancy at completion.
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