An illustrative calculation for a small Saudi retail parade, from lettable area and build cost through void allowance and unrecovered service cost to a yield on total capital.
Retail looks attractive on a rent per square metre basis and is judged on void risk. A parade where two units sit empty for a year behaves very differently from the same parade fully let, and the land under it is often the largest number in the calculation. This worked example follows one small scheme from area to yield on total capital, with illustrative assumptions used only to show the method.
The situation
An overseas owner is considering a single-storey retail parade on a 1,600 square metre corner plot on a district road in a Saudi city. The scheme is eight units let to local operators, held for income and managed by a local agent. The owner wants to see the return and to understand which assumption matters most.
Assumptions (illustrative)
- Plot area 1,600 square metres, with 900 square metres of gross lettable retail area in eight units averaging 112.5 square metres.
- Construction assumption of SAR 2,100 per square metre of lettable area for a serviced shell with shopfronts.
- External works, paving and parking assumed at SAR 260,000; utility connections at SAR 150,000.
- Design and supervision at 6 per cent of construction; contingency at 8 per cent of construction.
- Land value assumed at SAR 3,200,000; rent assumption of SAR 850 per square metre per year.
- Void and incentive allowance at 10 per cent of gross rent; management at 5 per cent of collected rent.
Step 1: Establish the development cost
Construction is 900 multiplied by SAR 2,100, which is SAR 1,890,000. External works add SAR 260,000 and connections add SAR 150,000. Design and supervision at 6 per cent of construction is SAR 113,400 and contingency at 8 per cent is SAR 151,200. Development cost is SAR 2,564,600.
External works and connections together are SAR 410,000, which is more than a fifth of the construction figure. In retail these lines are not extras, because paving, parking and drainage are what make the units usable.
Step 2: Add the land to reach total capital
Total capital is SAR 2,564,600 of development cost plus SAR 3,200,000 of land, which is SAR 5,764,600.
Land is 55 per cent of the total. Corner plots on district roads command a premium precisely because they suit retail, so the yield on cost will always look far better than the yield on total capital.
Step 3: Move from gross rent to collected rent
Gross rent is 900 multiplied by SAR 850, which is SAR 765,000. A void and incentive allowance of 10 per cent removes SAR 76,500, leaving SAR 688,500 collected.
Ten per cent represents roughly one unit empty for a year, or rent-free periods spread across the parade. For a new scheme with no trading history, that is a modest rather than a pessimistic assumption.
Step 4: Deduct the costs the landlord cannot recover
Management at 5 per cent of collected rent is SAR 34,425. Unrecovered common area maintenance is assumed at SAR 35,000, municipal and service charges at SAR 25,000 and insurance at SAR 14,000. Total landlord cost is SAR 108,425.
In a small parade there is rarely a full service charge mechanism, so cleaning, lighting, parking maintenance and security often sit with the owner. That is the difference between a headline rent and an income.
Step 5: Calculate net operating income and the two yields
Net operating income is SAR 688,500 less SAR 108,425, which is SAR 580,075. Against development cost of SAR 2,564,600 that is 22.6 per cent. Against total capital of SAR 5,764,600 it is 10.1 per cent.
The gap between the two figures is the land. Quoting the first number is how retail schemes are marketed; the second is the return your money actually earns.
Step 6: Test the scheme against a bad letting year
If voids and incentives run at 25 per cent rather than 10 per cent, collected rent falls to SAR 573,750, management to SAR 28,688 and total landlord cost to SAR 102,688, leaving net operating income of SAR 471,062 and a yield on total capital of 8.2 per cent.
A two-unit void costs roughly 1.9 percentage points of yield. That is the number to hold in mind when deciding whether to take a weaker tenant at full rent or a stronger one at a discount.
What changes the answer
- Rent at SAR 750 per square metre rather than SAR 850: gross rent falls to SAR 675,000 and net operating income to about SAR 503,100, giving 8.7 per cent on total capital.
- Land at SAR 2,600,000 on a slightly weaker frontage: total capital falls to SAR 5,164,600 and the same income yields 11.2 per cent, which is why frontage quality and land price have to be judged together.
- Construction 10 per cent higher: development cost rises to about SAR 2,777,000, taking the yield on total capital to roughly 9.7 per cent.
- A full service charge mechanism recovering SAR 45,000 of landlord cost: net operating income rises to SAR 625,075 and the yield to 10.8 per cent.
What the numbers tell you
- On a retail plot the land dominates, so compare yields on total capital and treat yield on cost as a design test only.
- Void allowance is the assumption that moves the answer most, and it is decided by unit design and tenant quality.
- Unrecovered landlord costs are the quiet difference between headline rent and income; write the recovery mechanism into the leases.
- External works and connections are core retail cost, not extras, because they make the units usable.
- Model a bad letting year before you commit, and use that number when negotiating with weaker tenants.
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.
Frequently Asked Questions
How do you calculate the return on a small retail development in Saudi Arabia?
Take lettable area multiplied by achievable rent, deduct a void and incentive allowance, then deduct the landlord costs you cannot recover: management, common area maintenance, municipal and service charges and insurance. Divide the result by total capital including land. Quoting a return on build cost alone overstates retail badly, because good retail land is expensive for a reason.
What void allowance should be used for a new retail parade?
Set it from local evidence about how long comparable units take to let and what incentives tenants expect, then stress it. For a scheme with no trading history, an allowance representing about one empty unit for a year is a reasonable starting point. Model a worse case too, because two long voids in a small parade can remove around two percentage points of yield.
Who pays for common area maintenance in a Saudi retail scheme?
It depends on what your leases say. In a small parade there is often no full recovery mechanism, so lighting, cleaning, parking maintenance and security sit with the owner and reduce net income directly. Decide the recovery approach before letting begins and have the lease drafting reviewed by a licensed adviser so the mechanism is enforceable.
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