Paying a Premium Near King Salman Park: Does the Rent Justify It?

An illustrative calculation comparing an apartment near Riyadh's King Salman Park with a cheaper one further away, to show what the premium must earn.

King Salman Park is a very large urban park being developed in central Riyadh, with green spaces, cultural venues, sports facilities and residential and commercial areas. Homes close to it are often priced at a premium on the expectation of higher rents and values. The worked example below, using illustrative figures, shows how to test whether that premium is earning its keep.

The situation

An investor is choosing between two similar apartments in Riyadh: one close to the park at a higher price, and one in a comparable district further away. The investor needs a total return of 7% a year on any extra capital committed.

Assumptions (illustrative)

• Assumed price near the park: SAR 1,300,000, with annual rent of SAR 78,000.
• Assumed price further away: SAR 1,000,000, with annual rent of SAR 62,000.
• Assumed annual costs (vacancy, maintenance, management, service charges): 12% of rent for both.
• Assumed required return on extra capital: 7% per year.
• Transaction costs, financing and tax are ignored to keep the comparison simple.

Step 1: Gross yields

Near: SAR 78,000 divided by SAR 1,300,000 equals 6.0%. Further away: SAR 62,000 divided by SAR 1,000,000 equals 6.2%.

The dearer apartment earns more rent but a slightly lower yield on its price.

Step 2: Net rents

Near: SAR 78,000 multiplied by 0.88 equals SAR 68,640. Further away: SAR 62,000 multiplied by 0.88 equals SAR 54,560.

After costs, the difference in income is SAR 68,640 minus SAR 54,560, or SAR 14,080 per year.

Step 3: Net yields

Near: SAR 68,640 divided by SAR 1,300,000 equals 5.28%. Further away: SAR 54,560 divided by SAR 1,000,000 equals about 5.46%.

On income alone, the cheaper apartment is marginally better.

Step 4: Return on the premium

SAR 1,300,000 minus SAR 1,000,000 equals a premium of SAR 300,000; SAR 14,080 divided by SAR 300,000 equals about 4.69%.

The extra SAR 300,000 earns 4.69% in rent, below the 7% the investor needs.

Step 5: Gap the premium must close through value growth

7% of SAR 300,000 equals SAR 21,000; SAR 21,000 minus SAR 14,080 equals SAR 6,920; SAR 6,920 divided by SAR 300,000 equals about 2.31%.

The premium only pays if the park-side apartment gains about SAR 6,920 more value each year than the other one.

What changes the answer

• If the park-side rent is SAR 84,000 instead of SAR 78,000, net income becomes SAR 73,920 and the premium earns about 6.45% from rent alone.
• If the premium is SAR 200,000 instead of SAR 300,000, the same SAR 14,080 extra income earns about 7.04% and meets the target without value growth.
• If park phases near the apartment open later than expected, the rent premium may be smaller in the early years.
• Service charges in newer park-side buildings may be higher than 12% of rent, which narrows the gap.

What the numbers tell you

• A location premium must be tested on the extra capital, not on the whole price.
• Most of the premium near a landmark project is a bet on value growth, not income.
• Rents near a park depend on which parts of it are open and accessible, not the park's total plan.
• Negotiating the premium down is often worth more than finding a higher rent.

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.

If a Vision 2030 programme or market trend is shaping your investment case, Domira can test it against real land, construction costs and local demand in the city you are considering before you commit capital.