Demolish and Rebuild: A Worked Value Test in SAR

Whether to clear an older building comes down to whether the new envelope plus the new income justify the lost years. Here is the arithmetic.

Owners usually decide between refurbishing and rebuilding on instinct and then look for numbers to support it. The honest test is simpler than it looks: compare the value of the refurbished asset against the value of the new asset less the cost of building it and the income lost while it is built. This example works that comparison with illustrative figures for a small residential building.

The situation

An owner holds a thirty year old building on a 1,000 square metre plot, currently providing eight apartments producing modest rent. The structure is sound but tired and the layout is dated. The current planning envelope would permit a materially larger building. The owner wants to know whether to refurbish or to rebuild.

Assumptions (illustrative)

• Plot: 1,000 square metres, with a current building of 1,600 square metres across eight units.
• Assumed current rent: SAR 480,000 a year gross across the eight units.
• Assumed refurbishment cost: SAR 1,800,000, taking one year with no income in that year.
• Assumed post refurbishment rent: SAR 660,000 a year gross.
• Assumed new build envelope: 2,600 square metres across fourteen units, at an assumed build cost of SAR 2,400 per square metre.
• Assumed new build rent: SAR 1,260,000 a year gross, with a three year programme from design to completion.

Step 1: Cost each route

Refurbishment: SAR 1,800,000. Rebuild: 2,600 square metres at SAR 2,400 gives SAR 6,240,000, plus an assumed SAR 350,000 for demolition and an assumed SAR 600,000 for design and professional fees, totalling SAR 7,190,000.

The rebuild costs about SAR 5,390,000 more. That gap has to be justified by the additional income and the additional asset value, not by the condition of the building.

Step 2: Calculate the income lost during each programme

Refurbishment: one year at SAR 480,000 lost. Rebuild: three years at SAR 480,000, which is SAR 1,440,000 lost.

The rebuild loses SAR 960,000 more income. Added to the cost gap, the rebuild has to overcome roughly SAR 6,350,000 before it starts winning.

Step 3: Compare the stabilised income from each route

Refurbished: SAR 660,000 a year. Rebuilt: SAR 1,260,000 a year. The annual difference is SAR 600,000.

The rebuild produces SAR 600,000 a year more. Against a combined gap of about SAR 6,350,000, simple payback on the additional investment is roughly 10.6 years.

Step 4: Capitalise each income stream into an asset value

At an assumed capitalisation rate of 7 per cent, the refurbished building is worth SAR 660,000 divided by 0.07, which is about SAR 9,430,000. The new building is worth SAR 1,260,000 divided by 0.07, which is about SAR 18,000,000.

The rebuilt asset is worth roughly SAR 8,570,000 more. This is the figure that matters to an owner who will eventually sell, and it exceeds the combined gap of SAR 6,350,000.

Step 5: Net the value uplift against the cost and the lost income

Value uplift of SAR 8,570,000 less the additional cost of SAR 5,390,000 and the additional lost income of SAR 960,000 leaves a net advantage of about SAR 2,220,000 for the rebuild.

On these assumptions the rebuild wins by roughly SAR 2,220,000. It wins because the envelope is materially larger, not because the old building was tired.

Step 6: Test the decision against a smaller envelope

If the permitted envelope were 1,900 square metres rather than 2,600, build cost falls to about SAR 4,560,000 plus SAR 950,000 of demolition and fees, and assumed rent falls to about SAR 920,000. Capitalised at 7 per cent the new building is worth about SAR 13,140,000, an uplift of SAR 3,710,000 against additional costs of about SAR 3,710,000 and lost income of SAR 960,000.

With the smaller envelope the rebuild is marginally negative. The envelope, not the condition of the existing building, is what decides this question.

What changes the answer

• If the capitalisation rate were 8 per cent rather than 7, both values fall and the rebuild advantage narrows to roughly SAR 1,300,000.
• If build costs were 15 per cent higher than assumed, the additional cost rises by about SAR 936,000 and the advantage falls accordingly.
• If the rebuild programme ran four years rather than three, another SAR 480,000 of income is lost.
• If refurbished rent were SAR 780,000 rather than SAR 660,000, the refurbishment case strengthens substantially and may overtake the rebuild.
• If the owner intends to hold indefinitely rather than sell, the capitalised value matters less and the payback period of 10.6 years becomes the governing number.

What the numbers tell you

• The permitted envelope decides this question; the condition of the existing building rarely does.
• Lost income during a long programme is a real cost and belongs in the comparison explicitly.
• Compare capitalised asset values, not just annual rents, where a sale is contemplated.
• Run the test again at a smaller envelope to see how sensitive the answer is.
• An owner holding indefinitely should judge on payback; an owner selling should judge on value uplift.

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 on the ownership side of a Saudi property for owners based abroad: verifying title and boundaries, assessing the building, handling registration and handover, and managing the asset afterwards. For legal and tax questions, work with a licensed adviser; Domira will tell you plainly what the property itself supports.