Reinvesting the Proceeds of a Saudi Property Sale: A Worked Plan

A worked allocation in SAR of what to do with sale proceeds: one replacement asset, two smaller ones, or holding part back, compared on income, risk and the cost of redeployment.

Proceeds sitting in an account are the most expensive form of capital an investor holds, which is why reinvestment decisions get rushed. This example takes an illustrative sale, nets it down properly, and compares three redeployment options on income, concentration and the cost of getting the money back to work.

The situation

An owner has sold a let building and is deciding what to do with the proceeds. Three options are on the table: buy one larger replacement asset, buy two smaller ones in different districts, or buy one asset and hold part of the proceeds as liquidity. They want to see the arithmetic including acquisition costs before choosing.

Assumptions (illustrative)

• Illustrative gross sale price: SAR 12,000,000.
• Illustrative costs of sale at 4% including agency, transaction tax allocation and professional fees: SAR 480,000.
• An outstanding charge to be released on completion: SAR 3,000,000.
• Illustrative acquisition costs on any purchase at 6% of price, covering transaction tax, agency, professional fees and documentation.
• Illustrative achievable net yield on a single larger asset: 6.2%. On each of two smaller assets: 6.8%.
• Target liquidity the owner would like to retain if holding part back: SAR 1,000,000.

Step 1: Establish the capital actually available

SAR 12,000,000 less costs of SAR 480,000 less the charge of SAR 3,000,000 leaves SAR 8,520,000 available to redeploy.

The reinvestment conversation should start from this figure, not from the sale price. Investors who plan around the headline number consistently overcommit by the amount of the costs and the debt release.

Step 2: Option one: a single larger replacement asset

With acquisition costs at 6%, the price affordable is SAR 8,520,000 divided by 1.06, which equals SAR 8,037,736. Net income at 6.2% of that price is SAR 498,340.

Acquisition costs absorb SAR 482,264 of the proceeds before the asset earns anything. Dividing by 1.06 rather than taking 6% of the full amount is the correct way to find the affordable price.

Step 3: Option two: two smaller assets

The same SAR 8,520,000 divided by 1.06 gives SAR 8,037,736 of purchase price, split into two assets of SAR 4,018,868 each. Net income at 6.8% is SAR 546,566 in total.

The higher yield on smaller assets adds SAR 48,226 of annual income, about 9.7% more than option one, in exchange for two sets of tenants, two managers to supervise and two exits to arrange.

Step 4: Option three: one asset plus retained liquidity

Holding back SAR 1,000,000 leaves SAR 7,520,000 to deploy, so the affordable price is SAR 7,520,000 divided by 1.06, which equals SAR 7,094,340. Net income at 6.2% is SAR 439,849, which is SAR 58,491 less than option one.

The liquidity costs SAR 58,491 a year in foregone income, which is the real price of the flexibility. Whether that is worth paying depends on what the liquidity is for.

Step 5: Price what the retained liquidity protects against

A capital item of SAR 400,000 funded from liquidity avoids disruption, whereas funding it from income would absorb SAR 400,000 divided by SAR 498,340, or about ten months of the entire net income of option one.

Stated that way, SAR 58,491 a year to avoid ever having to find SAR 400,000 at short notice looks reasonable on an older asset and unnecessary on a new one with warranties in place.

Step 6: Compare the three on income and on concentration

Option one: SAR 498,340 of income, one tenant base, one exit. Option two: SAR 546,566, two tenant bases, two exits, double the supervision. Option three: SAR 439,849 plus SAR 1,000,000 of liquidity. The spread between the highest and lowest income is SAR 106,717 a year.

The income differences are modest relative to the operational differences. On these numbers the decision should turn on how much supervision the owner can provide and how much flexibility they want, not on the yield.

What changes the answer

• If acquisition costs are higher than 6% on these facts, every option shrinks proportionately and the affordable price falls further than investors expect.
• If the two smaller assets each need their own manager at a minimum fee, the yield advantage of option two narrows or disappears.
• If the smaller assets prove harder to let, their higher yield is compensation for a risk that shows up as voids rather than as income.
• If any part of the proceeds is to be remitted abroad, transfer and conversion costs and the bank's documentation requirements apply and should be confirmed in advance.
• If the tax treatment of the sale or of the reinvestment differs on these facts, the available capital changes, so the position must come from a licensed tax adviser and from ZATCA rather than from an assumption.

What the numbers tell you

• Start every reinvestment plan from net proceeds after costs and debt release, never from the sale price.
• Divide by one plus the cost percentage to find the affordable price, rather than deducting the percentage from the proceeds.
• Express retained liquidity as the annual income it costs, so the trade-off is explicit.
• Compare options on supervision burden and exit count, not only on yield, when the income difference is small.
• Decide the redeployment plan before the sale completes, because idle proceeds create pressure to buy badly.

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.