Is the Site Worth More Than the Building? An Investor's Check

A method for testing whether a standing Saudi building is worth more as income or as a site, so an income purchase is not quietly a land purchase at the wrong price.

A building is worth the greater of what it earns and what its site is worth to someone who would replace it. Investors buying income rarely run the second test, which means they can pay an income price for an asset whose value is actually in its plot, or sell an asset cheaply because they never asked what the site could support. This is a check, not a development exercise, and it takes a day.

Before stage one

This test needs the planning position of the plot rather than an architect. You are establishing what the site could accommodate under the applicable requirements, roughly what that would be worth complete, and roughly what it would cost to produce. Precision is not the objective; the objective is to find out whether the two answers are close enough to matter.

• The plot area, dimensions, frontage and access as recorded, not as described.
• The applicable planning and building requirements for the plot, confirmed with the relevant municipal authority.
• The current income position of the standing building and the remaining lease commitments.
• An approximate value for completed product of the type the site could support.
• An approximate cost of construction for that product, sourced from someone who builds.

Stage 1: Establish the income value of the asset as it stands

Capitalise net operating income at a rate supported by transaction evidence for similar let assets, then deduct the capital schedule the building carries. This is the number you would pay as an income investor, and it is the benchmark the site value has to beat. Use the same figures you would use in an offer rather than a more generous version.

• Deliverable: An income value for the standing asset net of its capital requirement.
• Owner: Investor or analyst.
• Approval gate: The income value uses the same assumptions as the actual offer, not a separate set.

Stage 2: Establish what the plot could accommodate

Work out, from the applicable requirements for that plot, roughly what quantum of built area could be produced and of what type. This is a planning question rather than a design question at this stage, and it should be confirmed with the relevant municipal authority, since requirements differ by location and are updated from time to time.

• Deliverable: An indicative developable quantum and use, with the source of the requirement recorded.
• Owner: Investor with municipal confirmation.
• Approval gate: The quantum rests on confirmed requirements rather than on what neighbouring plots appear to have built.

Stage 3: Value the completed scheme approximately

Apply transaction evidence for finished product of that type to the indicative quantum. The objective is a range rather than a figure, and the range should be built from sales or lettings of comparable completed buildings rather than from asking prices or from the appraisal you are about to construct.

• Deliverable: A value range for the notional completed scheme, with its evidence.
• Owner: Investor or analyst.
• Approval gate: The value rests on completed product evidence, not on the scheme's own appraisal.

Stage 4: Estimate the cost of producing it

Obtain an approximate construction cost from someone who builds that product, and add professional fees, approvals, finance over the construction period, marketing and a contingency. Add also the cost of clearing the site and of ending the existing occupation, which is specific to this test and frequently forgotten.

• Deliverable: An all-in cost estimate including demolition, fees, finance and contingency.
• Owner: Investor with contractor input.
• Approval gate: The cost estimate includes demolition and the cost of vacant possession.

Stage 5: Deduct a developer's required return

A site is worth to a developer what remains after they have taken the profit their risk requires. Deduct that profit from the completed value along with the costs, because a residual calculated without it describes a developer willing to work for nothing. This single deduction is what separates a site value from a value fantasy.

• Deliverable: A residual site value net of cost and of a stated required profit.
• Owner: Investor.
• Approval gate: The required profit is stated explicitly rather than omitted.

Stage 6: Compare the two values honestly

Set the income value and the residual site value side by side. If income is clearly higher, the asset is an income asset and the test is complete. If the site value is clearly higher, you are looking at a redevelopment opportunity priced as income, which changes both the price and the skills required. If they are close, the residual is too unstable to rely on and the income case should govern.

• Deliverable: A one-page comparison with a stated conclusion and the margin between the two.
• Owner: Investor.
• Approval gate: A close result is treated as inconclusive rather than as evidence for redevelopment.

Stage 7: Test the sensitivity of the residual

Move completed value down and construction cost up by modest amounts and recalculate. Because the site value is a remainder, small movements in the larger figures produce large movements in it. If a plausible variation flips the conclusion, the honest answer is that the site value is not established and the income case should drive the decision.

• Deliverable: A sensitivity on the residual showing how quickly the conclusion changes.
• Owner: Investor.
• Approval gate: The conclusion survives a modest adverse movement in both value and cost.

Stage 8: Record the conclusion in the file

Whatever the answer, record it with its date, its assumptions and its sources. A site value test is worth repeating at exit, when planning requirements, market values and construction costs will all have moved, and the earlier version is the baseline against which you measure the change.

• Deliverable: A dated note recording the test, its inputs and its conclusion.
• Owner: Investor.
• Approval gate: The note is filed with the acquisition papers so it can be found at exit.

Handovers between stages

The two inputs that need outside help are the planning position and the construction cost, and both are frequently taken from the wrong source. Planning capacity should be confirmed with the relevant municipal authority rather than inferred from neighbouring buildings, which may have been approved under different requirements. Construction cost should come from someone who prices work rather than from a rate quoted in conversation, because the gap between the two is usually the whole margin.

How you know it is finished

The check is complete when you can state which of the two values is higher, by what margin, and whether a modest adverse movement would change the answer. Treat it as a screen rather than a development appraisal: it tells you whether to look further, not what to build. Planning requirements, construction costs and market values all change, so repeat the test before any decision taken significantly later, and take specialist advice before acting on a redevelopment conclusion.

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.