Office Investment and RHQ Demand in Riyadh: A Worked Lease-Up Example

An illustrative office development in Riyadh showing yield on cost, the lease-up gap and rent sensitivity as RHQ-driven demand shapes the market.

Demand for quality office space in Riyadh has been lifted by the Regional Headquarters programme, the preference for companies with a Saudi RHQ in government contracting, and the growth of local and international firms. New supply is arriving too, so the rent and the time needed to lease a new building are the real questions. The worked example below shows how yield on cost, lease-up and rent assumptions interact for one illustrative Grade A building.

The situation

An investor plans a Grade A office building in a Riyadh business district, targeting multinational tenants establishing regional headquarters and growing Saudi companies.

Assumptions (illustrative)

• Net lettable area: 12,000 square metres; gross built area 18,000 square metres.
• Assumed land cost: SAR 30,000,000.
• Assumed construction: SAR 4,500 per square metre of gross area.
• Assumed soft costs: 10 per cent of construction.
• Assumed rent: SAR 1,400 per square metre per year; stabilised occupancy 90 per cent.
• Assumed non-recoverable costs: SAR 1,200,000 per year; occupancy 40 per cent in year one and 75 per cent in year two.

Step 1: Total cost

18,000 multiplied by SAR 4,500 equals SAR 81,000,000; soft costs of 10 per cent add SAR 8,100,000; land adds SAR 30,000,000, giving SAR 119,100,000.

Soft costs and land are part of the capital base and must sit in the denominator of any yield.

Step 2: Stabilised income

12,000 multiplied by SAR 1,400 multiplied by 90 per cent equals SAR 15,120,000; minus SAR 1,200,000 gives SAR 13,920,000.

This is the income once the building is fully leased, before any rent-free periods.

Step 3: Yield on cost

SAR 13,920,000 divided by SAR 119,100,000 equals about 11.7 per cent.

An attractive figure, but only if rent and occupancy hold at the assumed levels.

Step 4: Lease-up gap

Year one: 12,000 multiplied by SAR 1,400 multiplied by 40 per cent equals SAR 6,720,000, minus SAR 1,200,000 equals SAR 5,520,000. Year two at 75 per cent: SAR 12,600,000 minus SAR 1,200,000 equals SAR 11,400,000. Shortfall against stabilised income: SAR 8,400,000 plus SAR 2,520,000 equals SAR 10,920,000.

Lease-up takes time and the lost income must be funded as part of the investment.

Step 5: Rent sensitivity

At SAR 1,200 per square metre: 12,000 multiplied by 1,200 multiplied by 90 per cent equals SAR 12,960,000, minus SAR 1,200,000 gives SAR 11,760,000, a yield of about 9.9 per cent.

A rent about 14 per cent lower cuts the yield by nearly two percentage points.

What changes the answer

• Competing supply in the same district and in newer business districts nearby.
• Tenant incentives such as rent-free months and fit-out contributions, which reduce effective rent.
• The pace of RHQ relocations and of growth among Saudi companies.
• Construction cost at tender, which moves with steel, concrete and facade prices.
• Transport access, including walking distance to Riyadh Metro stations, and parking provision.

What the numbers tell you

• Fund the lease-up period as part of the capital plan.
• Pre-let space to one or two anchor tenants before construction where possible.
• Test rent assumptions against competing supply delivered in the same years.
• Track RHQ programme updates from MISA, since demand is partly policy-driven.

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.