Serviced Apartments: A Worked Example From Occupancy to Return on Capital

An illustrative calculation for a 24-key serviced apartment building: room revenue, channel commission, operating cost and gross operating profit against the capital it took to build.

Serviced apartments sit between property and hospitality, and the arithmetic explains why so many first-time owners are surprised. Nightly rates look high next to monthly rents, and then staffing, commission, utilities and consumables take a large share before anything reaches the owner. This worked example follows one small building from occupancy to gross operating profit, using illustrative assumptions to show the method rather than to state market rates.

The situation

An overseas owner is building a 24-key serviced apartment building on land they already hold in a Saudi city with both business and leisure demand. The building will be run by a third-party operator on a management fee. They want to understand what the operation must achieve to justify the capital, and which assumption deserves the most scrutiny.

Assumptions (illustrative)

• Twenty-four keys, each 55 square metres gross, plus 300 square metres of common and back-of-house area, giving 1,620 square metres.
• Construction assumption of SAR 2,600 per square metre, design and supervision at 7 per cent of construction, contingency at 8 per cent of construction.
• Furniture, fittings and equipment assumed at SAR 55,000 per key; pre-opening costs assumed at SAR 220,000.
• Average daily rate assumed at SAR 480 and annual occupancy at 62 per cent.
• Other revenue, including laundry and parking, assumed at 6 per cent of room revenue.
• Channel commission at 12 per cent of room revenue, management fee at 5 per cent of total revenue, replacement reserve at 4 per cent of total revenue.

Step 1: Establish the capital cost

Construction is 1,620 multiplied by SAR 2,600, which is SAR 4,212,000. Design and supervision at 7 per cent adds SAR 294,840. Contingency at 8 per cent adds SAR 336,960. Furniture, fittings and equipment at 24 multiplied by SAR 55,000 adds SAR 1,320,000. Pre-opening adds SAR 220,000. Total capital excluding land is SAR 6,383,800.

The furniture and pre-opening lines together are SAR 1,540,000, close to a quarter of the total. An owner who budgets construction plus fees has funded only three quarters of the project and will be raising money during the least convenient month.

Step 2: Calculate room revenue from occupancy

Available room nights are 24 multiplied by 365, which is 8,760. At 62 per cent occupancy, sold nights are 5,431. Room revenue is 5,431 multiplied by SAR 480, which is SAR 2,606,880.

Occupancy and rate are the only two revenue levers, and they trade against each other. Pushing rate to protect an average usually costs occupancy, and the operator who can defend both in a soft month is worth their fee.

Step 3: Add other revenue to reach total revenue

Other revenue at 6 per cent of room revenue is SAR 156,413. Total revenue is SAR 2,606,880 plus SAR 156,413, which is SAR 2,763,293.

Ancillary revenue in a serviced building is modest, unlike a hotel with food and beverage. That makes the room line almost the whole story and leaves little to cushion a weak season.

Step 4: Apply the variable operating costs

Channel commission at 12 per cent of room revenue is SAR 312,826. The management fee at 5 per cent of total revenue is SAR 138,165. The replacement reserve at 4 per cent of total revenue is SAR 110,532. These three variable lines total SAR 561,523.

One fifth of total revenue leaves before a single wage is paid. Direct bookings reduce the commission line, which is why an operator who builds repeat and corporate business is worth more than one who fills rooms only through third-party channels.

Step 5: Add the fixed and semi-fixed operating costs

Assume staffing at SAR 720,000, utilities at SAR 260,000, housekeeping consumables and linen at SAR 165,000, insurance and licences at SAR 60,000 and marketing at SAR 70,000. These total SAR 1,275,000. Adding the variable lines of SAR 561,523 gives total operating costs of SAR 1,836,523.

Most of the cost base does not fall when occupancy does. That asymmetry is the defining financial feature of serviced accommodation and the reason the model has to be tested at a low occupancy rather than at plan.

Step 6: Reach gross operating profit and the return on capital

Gross operating profit is SAR 2,763,293 less SAR 1,836,523, which is SAR 926,770. Against capital excluding land of SAR 6,383,800, that is a return of 14.5 per cent before land, finance and tax.

The headline looks strong precisely because land is excluded. Add the land value, any finance cost and the tax treatment of your structure, and the comparison against a simple rental block narrows considerably.

What changes the answer

• Occupancy at 52 per cent rather than 62 per cent: sold nights fall to 4,555, room revenue to SAR 2,186,400 and total revenue to about SAR 2,317,600, while costs only fall to roughly SAR 1,721,000, leaving gross operating profit near SAR 596,600 and a return of 9.3 per cent.
• Rate 10 per cent lower at the same occupancy: room revenue falls by about SAR 260,700, and because commission and fees fall with it, gross operating profit drops by roughly SAR 230,000.
• Commission cut from 12 to 8 per cent through direct booking: around SAR 104,000 returns to gross operating profit without any change in occupancy.
• Furniture replacement arriving in year four rather than year six: the reserve has to rise, which reduces the profit available for distribution in every earlier year.

What the numbers tell you

• Budget furniture, fittings, equipment and pre-opening as a quarter of the capital rather than as an allowance.
• Test the model at an occupancy you would be disappointed by, because most of the cost base does not move.
• Channel commission is the largest controllable line, so measure your operator on direct booking share.
• Compare the result against a straightforward rental block on the same plot, including your own management effort.
• Return excluding land flatters every hospitality model, so always restate it on total capital.

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 designs, builds and manages projects across Saudi Arabia for owners who are based abroad: land appraisal, feasibility, design, construction, handover and asset management under one accountable contract. Send us the plot or the brief and Domira will put the numbers in front of you before you commit.