Riyadh or a Secondary City? A Worked Development Return Comparison

An illustrative land-and-build calculation comparing a residential project in Riyadh with one in a smaller Saudi city, showing how sales speed and price risk change the answer.

Land is usually cheaper in a secondary Saudi city, but a development there can still earn less than one in Riyadh once slower sales and price risk are counted. The illustrative example below compares two residential projects with invented figures to show how margin, holding cost and a price drop change the ranking. It is a method, not a view on any real city or site.

The situation

An investor can develop a small residential project either on a plot in Riyadh or on a plot in a secondary city. Construction costs are similar, land is much cheaper in the secondary city, and sale prices are lower. Units in Riyadh are assumed to sell faster. All figures are illustrative assumptions.

Assumptions (illustrative)

• Riyadh: land SAR 8,000,000; construction SAR 12,000,000; fees and soft costs SAR 2,000,000; sales value SAR 27,500,000; sales period one year.
• Secondary city: land SAR 2,500,000; construction SAR 11,500,000; fees and soft costs SAR 1,700,000; sales value SAR 19,000,000; sales period two and a half years.
• Sales and marketing costs: 3 per cent of sales value in both cities.
• Holding cost during the sales period: 6 per cent a year on half the total cost, representing financing and carrying costs on unsold units.
• Price drop test: sales values 10 per cent lower.

Step 1: Total development cost

Riyadh: SAR 8,000,000 plus SAR 12,000,000 plus SAR 2,000,000 equals SAR 22,000,000. Secondary city: SAR 2,500,000 plus SAR 11,500,000 plus SAR 1,700,000 equals SAR 15,700,000.

The secondary city needs about SAR 6,300,000 less capital, almost all of it from cheaper land.

Step 2: Gross profit before holding costs

Riyadh: SAR 27,500,000 minus 3 per cent sales costs of SAR 825,000 minus SAR 22,000,000 equals SAR 4,675,000, or 21.25 per cent on cost. Secondary city: SAR 19,000,000 minus SAR 570,000 minus SAR 15,700,000 equals SAR 2,730,000, or about 17.4 per cent on cost.

Before time is counted, Riyadh already earns a higher margin because construction is a larger share of cost in the secondary city.

Step 3: Holding cost during sales

Riyadh: SAR 22,000,000 times 50 per cent times 6 per cent times 1 year equals SAR 660,000. Secondary city: SAR 15,700,000 times 50 per cent times 6 per cent times 2.5 years equals SAR 1,177,500.

Slower sales make the smaller project carry a larger holding cost.

Step 4: Net profit and margin

Riyadh: SAR 4,675,000 minus SAR 660,000 equals SAR 4,015,000, or 18.25 per cent on cost. Secondary city: SAR 2,730,000 minus SAR 1,177,500 equals SAR 1,552,500, or about 9.9 per cent on cost.

The margin gap widens sharply once the time to sell is included.

Step 5: Price drop in Riyadh

Sales value SAR 24,750,000 minus sales costs SAR 742,500 minus SAR 22,000,000 minus SAR 660,000 equals SAR 1,347,500.

A 10 per cent price fall cuts the profit by about two thirds, but the project still makes money.

Step 6: Price drop in the secondary city

Sales value SAR 17,100,000 minus sales costs SAR 513,000 minus SAR 15,700,000 minus SAR 1,177,500 equals a loss of SAR 290,500.

The same price fall turns the secondary city project into a loss.

What changes the answer

• Faster sales in the secondary city, for example from a major employer arriving, would reduce holding costs and improve its margin.
• Construction costs in remote locations can be higher because of logistics and labour, which would worsen the secondary city case.
• Pre-sales under the Wafi off-plan programme could reduce holding costs in either city, subject to approval and escrow rules.
• Land price growth in the secondary city could add value if the investor holds land longer, but that is a separate bet.
• Financing terms and equity share change the return on equity, which can differ from the margin on cost.

What the numbers tell you

• Cheaper land does not automatically mean a better return.
• Include the time to sell and its holding cost in every comparison between cities.
• Test a price fall in each location; thinner markets are more fragile.
• Secondary cities need a clear demand driver to justify the extra risk.
• Compare projects on net margin and risk, not on capital required.

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.