Should a Foreign Company Buy or Lease Its Office in Saudi Arabia? A Worked Example

A worked comparison of buying versus leasing an office for a foreign company in Riyadh, showing why the expected holding period decides the answer.

A foreign company setting up in Saudi Arabia usually leases its office, but some consider buying once they commit to the market. The worked example below compares the two with illustrative figures. It shows that the annual cost of owning can be lower than rent, but the transaction costs on entry and exit mean buying only wins if the company stays long enough.

The situation

A foreign company with a Saudi entity needs 800 square metres of office space in Riyadh. It can lease a floor or buy an equivalent floor in a building within a permitted zone. The fit-out cost is the same either way, so it is excluded.

Assumptions (illustrative)

• Lease: SAR 1,200 per square metre per year plus SAR 120 service charge per square metre.
• Purchase price SAR 12,000,000; Real Estate Transaction Tax at the published headline rate of 5%; other costs SAR 120,000.
• Owning costs: service charges SAR 96,000 and maintenance and insurance SAR 60,000 per year.
• Return on capital elsewhere in the business: 6% per year.
• Resale at the purchase price with selling costs of SAR 180,000, buyer bearing tax on resale.
• VAT on commercial rent assumed recoverable by the company, so excluded.

Step 1: Annual cost of leasing

Rent: 800 multiplied by SAR 1,200 equals SAR 960,000. Service charge: 800 multiplied by SAR 120 equals SAR 96,000. Total: SAR 1,056,000.

This is the cash the company pays each year, with rent changes subject to the lease and city rules.

Step 2: Capital needed to buy

Tax: SAR 12,000,000 multiplied by 5% equals SAR 600,000. Total: SAR 12,000,000 plus SAR 600,000 plus SAR 120,000 equals SAR 12,720,000.

This capital leaves the business, which is the main cost of owning.

Step 3: Annual cost of owning

Opportunity cost: SAR 12,720,000 multiplied by 6% equals SAR 763,200. Plus SAR 96,000 and SAR 60,000: SAR 919,200.

Owning is SAR 136,800 a year cheaper than leasing on these assumptions.

Step 4: Exit loss

Net sale: SAR 12,000,000 minus SAR 180,000 equals SAR 11,820,000. Loss against SAR 12,720,000: SAR 900,000.

Entry and exit costs must be recovered from the annual saving.

Step 5: Seven-year horizon

Saving: 7 multiplied by SAR 136,800 equals SAR 957,600. Minus the exit loss of SAR 900,000: buying is ahead by SAR 57,600.

After seven years buying only just wins, with no price growth.

Step 6: Five-year horizon

Saving: 5 multiplied by SAR 136,800 equals SAR 684,000. Minus SAR 900,000: leasing is ahead by SAR 216,000.

If the company might move or downsize within five years, leasing is the better choice.

What changes the answer

• Price growth on the office shortens the break-even period; a price fall lengthens it.
• A higher return on capital in the business raises the opportunity cost of owning.
• Rent restraint measures in Riyadh can keep lease costs flatter, favouring leasing.
• Tax treatment of rent, depreciation and gains differs and must be confirmed with a licensed tax adviser.
• Headcount changes that require more or less space are easier to absorb when leasing.

What the numbers tell you

• Compare over the realistic period you will occupy the space.
• Count the return capital would earn in the business.
• Include entry and exit costs, especially transaction tax.
• Value the flexibility to move or resize.

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.