Borrowing half the price and borrowing two thirds produce different businesses on the same asset. A comparison of what each gearing level changes in the numbers and the risk.
The loan amount is usually treated as a function of what a lender will advance, when it should be a decision about how much risk you are buying with the return. A moderate facility and a large one on the same building produce different cover, different break points, different exposure to a weak year and different options at maturity. This compares them on those terms rather than on return alone.
Moderate gearing at a glance
A facility covering around half the price leaves substantial equity in the asset. Cover is comfortable in the base case and remains above the covenant through a meaningful income decline, the break point sits well outside the building's historic experience, and a refinance at maturity is unlikely to produce a funding gap unless value falls materially. The return on equity is lower, and the margin for error is wider.
Higher gearing at a glance
A facility covering around two thirds of the price produces a higher return on equity while income holds, and a materially thinner buffer. Cover is tighter at the outset, the break point moves closer to occupancy levels the building could plausibly reach, and a refinance at maturity is more likely to require fresh equity if value has not risen. The return is better and the range of survivable outcomes is narrower.
Return on equity in a normal year
Moderate gearing: Lower, because less of the asset return is being earned on borrowed money.
Higher gearing: Higher, by the spread between the asset yield and the cost of debt applied to the extra borrowing.
Cover ratio at the outset
Moderate gearing: Comfortable, with headroom that absorbs an ordinary bad year without any conversation.
Higher gearing: Tighter, with less room between the base case and the covenant.
Break point
Moderate gearing: Sits well outside the income decline the building has experienced historically.
Higher gearing: Sits closer to levels the building could plausibly reach in a weak letting year.
Exposure to a capital event
Moderate gearing: A plant replacement can be funded from cash flow or reserve without threatening cover.
Higher gearing: A capital item in a weak year can consume the entire cash return and require funding.
Position at refinance
Moderate gearing: A new advance is likely to cover the maturing balance even if value has softened.
Higher gearing: A funding gap is likely if value has not risen, requiring equity at an inconvenient moment.
Effect of a value fall
Moderate gearing: Equity absorbs a substantial fall in value before it is materially impaired.
Higher gearing: A moderate fall in value removes a large proportion of the equity.
Flexibility during the hold
Moderate gearing: Greater. Distributions, capital spending and timing decisions are not constrained by covenants.
Higher gearing: Less. Covenants, reserves and lender consent can shape decisions that should be commercial.
When moderate gearing wins
- An asset with shorter leases or a tenant base that turns over regularly.
- A building with a heavy capital schedule in the early years of the hold.
- An investor with no appetite to fund an equity call during the holding period.
- A hold that extends beyond the facility maturity, where refinancing risk matters.
When higher gearing wins
- An asset with long leases to established tenants and a stable collection record.
- An investor with other liquidity available to meet an equity call without distress.
- A hold comfortably shorter than the facility maturity.
- A building whose capital schedule is light in the years of the hold.
- A case where the return at moderate gearing genuinely fails the investor's requirement.
How to decide
Choose the gearing level from the break point rather than from the return. Calculate the income decline at which cover fails under each option, compare it against the worst year the building has actually had, and require a clear margin between the two. If a deal only meets your return requirement at the higher gearing, the honest reading is that the asset is priced for a lower return and you are proposing to buy the difference with risk rather than with analysis.
The evidence needed is the building's own history rather than a market view: the letting record, void durations, collection performance and the condition schedule that tells you when capital is required. Add the facility terms in detail, including covenant levels, cure mechanisms, reserve requirements and any restriction on distributions. Terms vary between lenders and borrowers and change over time, so confirm what is actually available rather than assuming, and have the documents reviewed by a licensed legal adviser before signing.
Domira builds the numbers on a Saudi property with you before you commit: rent and cost evidence, condition and capital expenditure, the appraisal and the sensitivities that decide whether the deal survives a bad year. The investment decision stays yours, and so does the advice of your licensed tax and legal advisers.
Frequently Asked Questions
What loan to value is sensible on an investment property?
The sensible amount is the one whose break point sits comfortably outside the income decline the asset could realistically experience, which depends on the building rather than on a general ratio. Work backwards: establish the income at which cover fails for each candidate amount, compare it against the asset's own worst year, and choose the level that leaves a clear margin.
Does borrowing more always increase the return on a property?
Only while the asset earns more than the debt costs, and only while income holds. If the cost of debt rises above the asset yield, additional borrowing reduces the return on equity rather than increasing it. In any year where income falls, the extra borrowing magnifies the shortfall. The return benefit is conditional and the risk is not.
How does gearing affect a property refinance?
The higher the facility, the more likely the maturing balance exceeds what a lender will advance at that future date, particularly if value has not risen. That gap must be funded with equity at a moment you did not choose. Moderate gearing makes a refinance largely administrative, while high gearing turns it into a financing event with its own risk.
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