Logistics and Warehousing Investment in Saudi Arabia: A Worked Return Example

An illustrative calculation of a leased warehouse built for logistics tenants, showing how rent, vacancy and costs turn into a yield on the real capital invested.

Warehousing in Saudi Arabia draws demand from e-commerce, third-party logistics, retail distribution and the National Industrial Development and Logistics Program, but the return still comes down to rent, occupancy, land cost and operating expense. The worked example below uses invented but plausible inputs to show how an investor should test a build-to-lease warehouse before trusting a broker's headline yield.

The situation

An investor plans to build a single warehouse on leased industrial land near a major city and lease it to a logistics operator. They want the net yield on everything they will actually spend.

Assumptions (illustrative)

• Warehouse gross area: 10,000 square metres.
• Assumed construction and services cost: SAR 1,200 per square metre.
• Assumed design, permits and supervision: SAR 600,000.
• Assumed annual ground rent: SAR 300,000.
• Assumed achievable rent: SAR 180 per square metre per year.
• Assumed vacancy and incentives: 10 per cent of rent; assumed landlord costs of SAR 150,000 per year.

Step 1: Capital invested

10,000 multiplied by SAR 1,200 equals SAR 12,000,000; adding SAR 600,000 gives SAR 12,600,000.

This is the base for the yield, not the construction contract value alone.

Step 2: Potential rent

10,000 multiplied by SAR 180 equals SAR 1,800,000 per year.

This assumes the full area is leasable at the quoted rate, which a real tenant will negotiate.

Step 3: Rent after vacancy and incentives

SAR 1,800,000 minus 10 per cent (SAR 180,000) equals SAR 1,620,000.

Rent-free periods, fit-out contributions and gaps between tenants all sit in this allowance.

Step 4: Net operating income

SAR 1,620,000 minus ground rent of SAR 300,000 minus landlord costs of SAR 150,000 equals SAR 1,170,000.

Ground rent is a fixed claim on the income, so it bites harder when occupancy falls.

Step 5: Net yield on capital

SAR 1,170,000 divided by SAR 12,600,000 equals about 9.3 per cent.

The gross figure of SAR 1,800,000 over SAR 12,000,000 would have shown 15 per cent, which is misleading.

Step 6: Downside test

At a rent of SAR 150 and 20 per cent vacancy: 1,500,000 minus 300,000 equals 1,200,000; minus 300,000 and 150,000 gives SAR 750,000, or about 6.0 per cent.

A modest rent cut and a longer void remove about a third of the net income.

What changes the answer

• Tenant specification: cold storage, high racking or heavy floor loads add cost that the rent must repay.
• Location: proximity to ports, highways, airports and population centres drives both rent and demand depth.
• Lease length and tenant covenant: a long lease with a strong operator reduces vacancy risk more than any rent increase.
• Construction pricing at tender, which moves with steel and cement costs.
• Ground lease terms, including escalation and the remaining term relative to the building life.

What the numbers tell you

• Measure yield on total capital, including soft costs, never on construction alone.
• Ground rent and fixed costs magnify the effect of vacancy.
• Pre-letting to a named tenant before construction changes the risk more than design savings do.
• Check whether industrial land is available from MODON, a special zone or private owners, since tenure affects financing.

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.