Spend on the Asset or Sell It: A Worked Decision in SAR

A worked example comparing refurbishing a tired Saudi building against selling it as it stands, including the capital required, the rent uplift and the return on the money spent.

Refurbishment is usually argued for on how much better the building will be, which is not the question. The question is what return the refurbishment capital earns, and whether that beats taking the net proceeds and doing something else. This worked example puts both on the same basis for an illustrative tired building.

The situation

An owner holds a tired building let at below market rent, with dated common areas, ageing cooling plant and two vacant units. A refurbishment has been proposed. The alternative is to sell as it stands to a buyer who will do the work themselves. The owner wants to compare the two on the money, not on the renderings.

Assumptions (illustrative)

• Illustrative current value as it stands: SAR 9,000,000.
• Illustrative current net income after all costs: SAR 540,000 a year.
• Proposed refurbishment cost: SAR 1,800,000, including plant replacement, common areas and reletting the two vacant units.
• Illustrative post-refurbishment net income once stabilised: SAR 810,000 a year.
• Illustrative value after refurbishment, assuming the market applies the same yield to the higher income: SAR 13,000,000.
• Assumed works period of nine months, during which illustrative net income falls to SAR 300,000 for the year, plus illustrative professional fees on the project of SAR 150,000.

Step 1: Establish the net proceeds of selling as it stands

Sale at SAR 9,000,000 less illustrative costs of 4% for agency, transaction tax allocation and professional fees, which is SAR 360,000, leaves SAR 8,640,000.

This is the real alternative, and it is SAR 360,000 below the valuation. Comparing a refurbishment against the gross value rather than the net proceeds overstates the case for selling by that amount.

Step 2: Total the capital the refurbishment actually requires

Works of SAR 1,800,000 plus professional fees of SAR 150,000 plus the income foregone during works, which is SAR 540,000 less SAR 300,000, or SAR 240,000, gives total capital at risk of SAR 2,190,000.

The lost income during the works is a real part of the investment and is almost always left out of the proposal. Here it adds SAR 240,000, more than the professional fees.

Step 3: Measure the return on the refurbishment capital

Income uplift is SAR 810,000 less SAR 540,000, which equals SAR 270,000 a year. Against total capital of SAR 2,190,000 that is a return of 12.3%. Value uplift is SAR 13,000,000 less SAR 9,000,000, which equals SAR 4,000,000 against the same capital.

Both tests are strongly positive on these assumptions. An income return above 12% on the incremental capital is the kind of result that justifies the disruption, provided the rent uplift is real.

Step 4: Compare the two end positions after costs

Refurbish and then sell: SAR 13,000,000 less 4% costs of SAR 520,000 equals SAR 12,480,000, less the SAR 2,190,000 invested, leaves SAR 10,290,000. Sell now: SAR 8,640,000. Difference in favour of refurbishing: SAR 1,650,000.

On these assumptions the refurbishment adds about SAR 1,650,000 of value over selling as it stands, which is the figure worth stress testing rather than celebrating.

Step 5: Test the assumption that carries the result

If the stabilised rent delivers only half the assumed uplift, net income becomes SAR 675,000. Applying the same yield implied by SAR 9,000,000 on SAR 540,000, which is 6%, gives a value of SAR 675,000 divided by 6%, or SAR 11,250,000. After 4% costs that is SAR 10,800,000, less SAR 2,190,000 invested, leaves SAR 8,610,000, marginally below selling now.

The whole case rests on the rent uplift. Halve it and the refurbishment stops being worthwhile, which tells you exactly which number to verify with evidence before committing.

Step 6: Add the cost of the works running over

If the works cost 20% more, that is an additional SAR 360,000, and if they take fifteen months rather than nine, assume a further SAR 180,000 of income foregone. Total capital becomes SAR 2,730,000. On the full uplift, the end position is SAR 12,480,000 less SAR 2,730,000, which equals SAR 9,750,000, still ahead of SAR 8,640,000 but by SAR 1,110,000 rather than SAR 1,650,000.

A cost and time overrun of that size consumes a third of the benefit. The project needs a contingency and a fixed scope, not optimism about either.

What changes the answer

• If the market applies a lower yield to the improved building, the value uplift is larger than modelled, and if it applies a higher yield the case weakens sharply.
• If the two vacant units take longer to let than assumed, the stabilised income arrives later and the return on capital falls even if the final rent is achieved.
• If the works uncover structural or compliance issues, the contingency is consumed before the visible improvements begin.
• If the refurbishment is partly funded by borrowing, the finance cost during a period of reduced income has to be added, and the lender's terms come from the lender at the time.
• If the buyer pool for the improved asset differs from the current one, the exit assumption changes and should be tested with an accredited valuer rather than assumed.

What the numbers tell you

• Compare refurbishment against net sale proceeds, not against the valuation figure.
• Include income foregone during the works as part of the capital invested.
• Judge the project on the return on incremental capital, not on how much better the building looks.
• Identify the single assumption the result depends on, then verify it with signed rent evidence.
• Apply a contingency to both cost and programme, because an overrun on either consumes the benefit quickly.

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.