Hold or Sell? A Worked Comparison on a Saudi Asset You Own

A step-by-step calculation of what holding a Saudi asset for five more years must deliver to beat selling it today, expressed as a hurdle the sale proceeds must clear.

The hold or sell question is usually argued with sentiment and settled with arithmetic. The correct method is to value the proceeds you could have today, project what holding would deliver, and convert the comparison into a single hurdle: the annual return your sale proceeds would have to earn elsewhere to match the hold. The illustrative example below does that in six steps.

The situation

An investor owns a let Saudi building acquired some years ago. Net operating income is SAR 480,000, there is SAR 2,800,000 of debt outstanding, and they are deciding whether to sell now or hold for a further five years. They want the comparison expressed as a rate the sale proceeds must beat.

Assumptions (illustrative)

• Current net operating income SAR 480,000, assumed to grow 2.5 per cent a year.
• Current market capitalisation rate assumed at 7.25 per cent; exit rate in five years assumed at 7.75 per cent.
• Selling costs assumed at 3 per cent of the gross sale price, on either date.
• Debt outstanding SAR 2,800,000 with assumed annual service of SAR 182,000, interest only.
• Capital expenditure of SAR 400,000 assumed across the five-year hold.
• No further equity is assumed to be injected during the hold.

Step 1: Value the asset as if sold today

SAR 480,000 divided by 0.0725 equals SAR 6,620,690.

This is the gross figure a sale today would be based on, before costs and before repaying the facility. It is the opportunity being given up by holding, which is the number the hold has to beat.

Step 2: Net proceeds available today

3 per cent selling costs of SAR 198,621 leaves SAR 6,422,069. Deducting SAR 2,800,000 of debt leaves SAR 3,622,069.

This is the capital actually released by selling now, and therefore the amount that would be available to deploy elsewhere. Any applicable tax on the disposal is a separate matter to confirm with ZATCA for the specific structure.

Step 3: Project the cash from holding

Income of SAR 480,000, SAR 492,000, SAR 504,300, SAR 516,908 and SAR 529,830 totals SAR 2,523,038. Less five years of debt service at SAR 182,000, which is SAR 910,000, and less SAR 400,000 of capital expenditure, leaves SAR 1,213,038.

Five years of ownership produce about SAR 1.21 million of cash after debt and capital spending. That is the income half of the hold case, and on its own it is well short of the capital released by selling today.

Step 4: Project the exit in five years

Year six income of SAR 543,076 divided by 0.0775 equals SAR 7,007,432. Less 3 per cent selling costs of SAR 210,223 gives SAR 6,797,209, and less SAR 2,800,000 of debt leaves SAR 3,997,209.

Note the exit rate was widened from 7.25 to 7.75 per cent to reflect the asset being five years older. Holding it constant would have added roughly SAR 450,000 to this figure on an assumption nothing supports.

Step 5: Total the hold and express it as a multiple

SAR 1,213,038 of cash plus SAR 3,997,209 at exit equals SAR 5,210,247, against SAR 3,622,069 available today, a multiple of about 1.44 over five years.

Holding turns the SAR 3.62 million you could have today into about SAR 5.21 million in five years, on these assumptions. The comparison is now between that outcome and anything else the SAR 3.62 million could do.

Step 6: Convert it into a hurdle

A multiple of 1.44 over five years is an annual rate of about 7.5 per cent.

That is the clean answer: sell only if you can deploy SAR 3,622,069 at more than about 7.5 per cent a year at comparable risk, after costs and tax. If you cannot name that alternative, the arithmetic says hold.

What changes the answer

• An exit rate of 8.5 per cent rather than 7.75 per cent reduces net exit proceeds to about SAR 3,398,000 and the hurdle to about 6.3 per cent.
• Income growth of 1 per cent rather than 2.5 per cent reduces the hold total to about SAR 4,885,000 and the hurdle to about 6.2 per cent.
• Capital expenditure of SAR 900,000 rather than SAR 400,000 reduces the hold total by SAR 500,000 and the hurdle to about 5.0 per cent.
• A refinance that raises debt service by SAR 40,000 a year removes SAR 200,000 from the hold case.
• If the asset could be re-let at a materially higher rent after a planned refurbishment, the hold case should be modelled with that work rather than as a passive hold.

What the numbers tell you

• The hold or sell question becomes answerable once it is expressed as a hurdle the sale proceeds must beat.
• Selling costs and debt repayment mean the capital released is well below the headline value.
• Widening the exit rate for the asset being older is the single most honest adjustment in the calculation.
• A heavy capital schedule lowers the hurdle, which is the arithmetic reason that assets are often sold before major works.
• If you cannot name a specific alternative use of the proceeds at a better risk-adjusted return, the comparison is incomplete.

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 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.