Valuing a Part-Let Building: A Worked Example With Three Empty Floors

A step-by-step calculation showing how to value a building where part of the space is empty, separating the income you have from the income you hope for.

A part-let building has two kinds of income: the rent being paid today under existing leases, and the rent the empty space might produce once it is let. Those two streams carry very different risk, and valuing them at the same rate overstates the asset every time. The worked example below separates them, prices the cost of reaching full occupancy, and shows how sensitive the answer is to the letting assumption. All figures are illustrative.

The situation

An investor is assessing a six-floor office and showroom building. Three floors are let on continuing leases, one is let at a rent below the level the market now supports, and two floors have been empty for some months. The seller has valued the whole building as if it were fully let at market rent.

Assumptions (illustrative)

• Six floors of 400 square metres each, 2,400 square metres in total.
• Three floors let at an assumed SAR 850 per square metre per year on continuing leases.
• One floor let at an assumed SAR 650 per square metre per year with the lease ending shortly.
• Two floors empty, with assumed achievable market rent of SAR 850 per square metre per year.
• Assumed operating costs of SAR 310,000 per year at full occupancy, largely fixed.
• Assumed capitalisation rate for secure let income of 8 per cent, and 9.5 per cent for the empty space.

Step 1: Value the income that exists

Three floors at 400 square metres multiplied by SAR 850 equals SAR 1,020,000 per year. Capitalised at 8 per cent, that is SAR 12,750,000 before costs are considered.

This is the part of the building a buyer can see paying. It carries the lowest risk and therefore the tightest rate, and it is the only element the seller can evidence with contracts.

Step 2: Value the under-rented floor in two parts

The passing rent of 400 multiplied by SAR 650 equals SAR 260,000, capitalised at 8 per cent gives SAR 3,250,000. The uplift to market, 400 multiplied by SAR 200 equals SAR 80,000, capitalised at 9.5 per cent gives SAR 842,105, so SAR 4,092,105 in total.

The contracted rent is secure and the uplift is not, because it depends on the tenant renewing at a higher rent or on a new tenant being found. Splitting the floor keeps that distinction visible instead of assuming the uplift arrives automatically.

Step 3: Value the empty space before costs

Two floors at 400 square metres multiplied by SAR 850 equals SAR 680,000 per year. Capitalised at 9.5 per cent, that is SAR 7,157,895.

This is a gross figure for space nobody is paying for yet. On its own it is an aspiration, and it only becomes a value once the costs and the delay of reaching that income are deducted.

Step 4: Deduct the cost of letting the empty space

Assume nine months to let, during which the two floors carry their share of fixed costs. Two sixths of SAR 310,000 is SAR 103,333 per year, so nine months is SAR 77,500. Add assumed fit-out and marketing of SAR 400,000 and letting commission of SAR 60,000, giving SAR 537,500. Also deduct nine months of forgone rent, SAR 680,000 multiplied by 0.75, which is SAR 510,000.

Reaching full occupancy costs money and time, and both are real even though neither appears on a rent roll. These deductions are what a buyer will insist on and what the seller's full-occupancy valuation ignores entirely.

Step 5: Value of the empty space net of the cost of reaching it

SAR 7,157,895 less SAR 537,500 less SAR 510,000 equals SAR 6,110,395.

The empty floors are worth roughly 85 per cent of the headline capitalised figure once the path to income is priced. That difference of just over a million is the gap between the seller's view and a defensible one.

Step 6: Total gross value and the operating cost deduction

SAR 12,750,000 plus SAR 4,092,105 plus SAR 6,110,395 equals SAR 22,952,500 on gross rents. Capitalising the SAR 310,000 of operating costs at 8 per cent gives SAR 3,875,000 to deduct, leaving about SAR 19,077,500.

Capitalising rent gross and then deducting capitalised costs is one acceptable presentation. The alternative is to capitalise net rents directly, and the two must not be mixed, since doing so either double counts or omits the cost base.

Step 7: Compare with the full-occupancy valuation

Fully let at market rent, the building produces 2,400 multiplied by SAR 850 equals SAR 2,040,000, less SAR 310,000 of costs equals SAR 1,730,000, capitalised at 8 per cent giving SAR 21,625,000.

The seller's figure is about SAR 2,547,500 above the part-let analysis. That difference is not a negotiating gap to be split; it is the measurable price of risk, cost and time that the buyer carries and the seller does not.

What changes the answer

• If the empty floors take eighteen months rather than nine, the additional forgone rent and holding cost reduce value by roughly a further SAR 587,000.
• If achievable rent on the empty floors is SAR 750 rather than SAR 850, their capitalised gross value falls by about SAR 842,000 before costs.
• Capitalising the empty space at 11 per cent rather than 9.5 per cent reduces its gross value by about SAR 977,000.
• If the under-rented tenant renews at the passing rent rather than at market, the uplift element of SAR 842,105 disappears.
• A fit-out specification at double the assumed figure removes a further SAR 400,000 from value.

What the numbers tell you

• Income that exists and income that is hoped for must be valued at different rates, or the valuation is simply a wish with a yield attached.
• The cost of reaching full occupancy includes forgone rent, holding costs, fit-out and commission, and all four belong in the number.
• The gap between a part-let valuation and a full-occupancy valuation is the clearest negotiating evidence a buyer has.
• Splitting an under-rented lease into passing rent and uplift keeps the secure and speculative elements honest.
• Letting period is the most powerful single variable, which is why evidence on how long similar space takes to let is worth collecting carefully.

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.