A First Saudi Project: Comparing Three Asset Types on the Same Budget

An illustrative comparison of apartments, a small warehouse terrace and serviced apartments at the same capital, adjusted for how much attention each demands from abroad.

An overseas owner making a first commitment in the Kingdom usually has a budget rather than a building in mind. This worked example puts the same capital into three different asset types, calculates what each returns, and then adjusts for the operating attention each demands from someone in another time zone. All figures are illustrative assumptions used to show the method.

The situation

An overseas investor has SAR 8,000,000 to commit to a first project in a Saudi city, including land. They will not relocate and intend to appoint local management. They want to compare a small apartment block, a small warehouse terrace and a serviced apartment building on the same budget, and to weigh the operating burden of each.

Assumptions (illustrative)

• A total budget of SAR 8,000,000 including land, with no debt assumed.
• Apartment option: 1,600 square metres of gross floor area at SAR 2,400 per square metre, fees and contingency at 15 per cent, 14 apartments at SAR 40,000 annual rent each.
• Warehouse option: 2,400 square metres at SAR 1,450 per square metre plus SAR 400,000 of yard works, fees and contingency at 15 per cent, rent at SAR 320 per square metre.
• Serviced option: 1,350 square metres at SAR 2,600 per square metre, furniture and equipment at SAR 50,000 per key for 20 keys, fees and contingency at 15 per cent of construction, pre-opening at SAR 180,000.
• Apartment collection at 92 per cent of gross rent with operating costs at 20 per cent of collections; warehouse collection at 90 per cent with operating costs at 8 per cent.
• Serviced option at 58 per cent occupancy and SAR 430 average daily rate, other revenue at 5 per cent, operating costs at 62 per cent of total revenue.

Step 1: Set the budget boundary for all three options

Each option must fit within SAR 8,000,000 in total, with the land taking whatever is left after construction, fees, contingency and any equipment or pre-opening cost. That makes the comparison a like-for-like test of what the same money can earn.

Comparing assets by yield alone hides the fact that each uses land differently. Fixing total capital instead of build cost is what makes the comparison honest.

Step 2: Work out the apartment option

Construction is 1,600 multiplied by SAR 2,400, which is SAR 3,840,000, plus fees and contingency at 15 per cent of SAR 576,000, giving SAR 4,416,000 and leaving SAR 3,584,000 for land. Gross rent is 14 multiplied by SAR 40,000, or SAR 560,000. Collections at 92 per cent are SAR 515,200, operating costs at 20 per cent are SAR 103,040, and net operating income is SAR 412,160, which is 5.2 per cent on SAR 8,000,000.

Residential is the most predictable of the three and the lowest yielding. It also has the widest buyer pool at exit and the least operational complexity.

Step 3: Work out the warehouse option

Construction is 2,400 multiplied by SAR 1,450, which is SAR 3,480,000, plus yard works of SAR 400,000, plus fees and contingency at 15 per cent of SAR 582,000, giving SAR 4,462,000 and leaving SAR 3,538,000 for land. Gross rent is 2,400 multiplied by SAR 320, or SAR 768,000. Collections at 90 per cent are SAR 691,200, operating costs at 8 per cent are SAR 55,296, and net operating income is SAR 635,904, which is 7.9 per cent on SAR 8,000,000.

Industrial produces the highest net yield here mainly because the operating cost ratio is low: a warehouse tenant maintains their own space and pays their own utilities.

Step 4: Work out the serviced apartment option

Construction is 1,350 multiplied by SAR 2,600, which is SAR 3,510,000, plus fees and contingency of SAR 526,500, furniture and equipment of SAR 1,000,000 and pre-opening of SAR 180,000, giving SAR 5,216,500 and leaving SAR 2,783,500 for land. Room nights are 20 multiplied by 365, or 7,300; at 58 per cent occupancy that is 4,234 sold nights, and at SAR 430 the room revenue is SAR 1,820,620. Other revenue at 5 per cent adds SAR 91,031 for total revenue of SAR 1,911,651. Operating costs at 62 per cent are SAR 1,185,224, leaving SAR 726,427, which is 9.1 per cent on SAR 8,000,000.

The hospitality option shows the highest return and consumes the most capital in things that wear out, leaving the least for land, which matters at exit.

Step 5: Adjust for the attention each asset demands

Apply an operating risk adjustment reflecting the effort and volatility each asset carries for an absent owner: 5 per cent for the apartments, giving SAR 391,552 or 4.9 per cent; 5 per cent for the warehouse, giving SAR 604,109 or 7.6 per cent; and 25 per cent for the serviced building, giving SAR 544,820 or 6.8 per cent.

The adjustment is a judgement, not a market figure, and applying one explicitly is better than pretending a hospitality asset carries the same risk as a warehouse lease.

Step 6: Rank the options for this specific investor

After adjustment, the warehouse leads at 7.6 per cent, the serviced building follows at 6.8 per cent and the apartments come last at 4.9 per cent. Before adjustment the order was serviced, warehouse, apartments.

The adjustment changed the ranking. For an owner who cannot be present, the least operationally demanding asset with a solid tenant is often the right first project even though it is not the highest gross performer.

What changes the answer

• Warehouse rent 15 per cent lower at SAR 272 per square metre: net operating income falls to about SAR 540,500 and the unadjusted yield to 6.8 per cent, level with the serviced option.
• Serviced occupancy at 50 per cent rather than 58 per cent: total revenue falls to roughly SAR 1,648,300 and, with costs not falling proportionally, the return drops to around 7.0 per cent before adjustment.
• Apartment rents 10 per cent higher: net operating income rises to about SAR 453,400 and the yield to 5.7 per cent, still the lowest of the three.
• Land 20 per cent cheaper in each case, with the saving returned rather than spent: every option improves, but the serviced building gains least because its capital is in equipment rather than land.

What the numbers tell you

• Fix total capital including land when comparing asset types, or the comparison rewards whichever asset uses the least land.
• Industrial lets often produce the best net yield because the tenant carries the operating cost.
• Hospitality shows the highest gross return and the highest operating burden, which matters most for an absent owner.
• Apply an explicit adjustment for management effort and volatility instead of comparing raw yields.
• A first project should be chosen partly for how little it demands, because the second project is easier once the local relationships exist.

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.