A worked example tracing every point at which an investor reporting in another currency converts money, and how using one average rate hides the real outcome.
An investor who reports in a currency other than the riyal converts money at least three times: when equity goes in, each time a distribution comes out, and when the exit proceeds are repatriated. Each conversion happens at a different rate on a different date, and collapsing them into one average rate produces a result that never occurred. The illustrative example below traces each one.
The situation
An investor whose reporting currency is not the riyal commits equity to a Saudi income building, receives annual distributions for five years, then repatriates the net proceeds of sale. They want to see the difference between the return measured in riyals and the return actually received in their own currency, including the cost of moving money.
Assumptions (illustrative)
- Equity committed: SAR 4,700,000, converted at an assumed rate of SAR 4.00 per unit of home currency.
- Annual distribution of SAR 360,000 in each of five years.
- Assumed conversion rates in years one to five: 4.00, 4.10, 4.20, 4.15 and 4.30.
- Net proceeds to equity at exit: SAR 5,400,000, converted at the year five rate of 4.30.
- Assumed transfer and conversion cost of 0.5 per cent on each conversion.
- The riyal has a long-standing peg to the US dollar, a policy matter for SAMA, so the relevant movement here is between the home currency and the dollar.
Step 1: Convert the equity at entry
SAR 4,700,000 divided by 4.00 equals 1,175,000 in home currency.
This is the amount actually committed from the investor's own balance sheet. Every later measurement should be made against this figure rather than against the riyal amount, because this is the money that left.
Step 2: Convert each distribution at its own rate
Year one 90,000. Year two 87,805. Year three 85,714. Year four 86,747. Year five 83,721. Total 433,987 in home currency.
The riyal amount was identical every year, yet the amount received varied by more than six thousand between the best and worst years. The variation is invisible in any statement prepared in riyals.
Step 3: Compare against a single average rate
At a flat 4.00 throughout, five distributions of SAR 360,000 would convert to 450,000. The actual total is 433,987, a shortfall of 16,013.
Modelling at the entry rate overstates distributions by about 3.6 per cent in this case. A model using one rate is not simplifying, it is assuming away an effect that runs in only one direction once the trend is set.
Step 4: Convert the exit proceeds
SAR 5,400,000 divided by 4.30 equals 1,255,814 in home currency, against 1,350,000 at a flat 4.00.
The exit carries most of the money and therefore most of the currency effect. A shortfall of 94,186 on the exit alone is almost six times the cumulative effect across five years of distributions.
Step 5: Add the cost of moving the money
At 0.5 per cent: entry 5,875, distributions 2,170, exit 6,279, giving about 14,324 in total.
Conversion and transfer costs are small individually and persistent, and they apply in both directions. They are routinely omitted from models because no single one is large enough to notice.
Step 6: Compare the two multiples
In riyals: SAR 1,800,000 of distributions plus SAR 5,400,000 at exit, over SAR 4,700,000 of equity, is a multiple of about 1.53. In home currency: 1,681,352 received net of transfer cost over 1,180,875 committed, a multiple of about 1.42.
The asset performed identically in both cases. The investor received about seven per cent less than the riyal figures suggest, entirely because of conversion rates and transfer costs that no property decision influenced.
What changes the answer
- If the home currency weakened instead, so the year five rate were 3.80, the exit would convert to about 1,421,053 and the multiple would rise rather than fall.
- A transfer cost of 1.0 per cent rather than 0.5 per cent roughly doubles the cumulative conversion cost to about 28,600.
- Delaying repatriation of the exit proceeds by six months exposes the largest single amount to a further period of rate movement.
- Distributing quarterly rather than annually spreads conversions across more dates, which reduces the effect of any single rate.
- Borrowing in riyals against a riyal-earning asset removes the currency mismatch on the debt, leaving only the equity and distributions exposed.
What the numbers tell you
- Convert each cash flow at its own date rather than applying one rate to the whole model.
- The exit carries most of the currency exposure because it carries most of the money.
- Transfer and conversion costs are small, repeated and almost always omitted.
- Matching the currency of debt to the currency of income removes one exposure entirely.
- Report the return in both currencies, because the asset result and the investor result are different numbers.
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.
Frequently Asked Questions
How should a foreign investor model currency on a Saudi property?
Convert each cash flow at its own date rather than applying a single rate across the model: the equity at entry, each distribution when received, and the exit proceeds when repatriated. Add transfer and conversion costs on each movement. Then report the return twice, once in riyals so the asset can be judged and once in your reporting currency so the outcome can be.
Does the riyal peg remove currency risk for foreign investors?
It removes risk against the currency the riyal is pegged to, but an investor reporting in a third currency still carries the movement between their own currency and that one. The peg is a policy matter for SAMA rather than a guarantee to any investor. The practical consequence is that your exposure depends on your own reporting currency, not on the riyal alone.
Where does currency do the most damage to a property return?
At the exit, because that single conversion usually carries more money than all the distributions combined. A rate movement that costs a few per cent on five years of income can cost many times that on the sale proceeds. Any planning of conversion timing or hedging should therefore concentrate on the exit rather than on the annual flows.
Should I borrow in riyals or in my own currency for a Saudi property?
Borrowing in the currency the asset earns removes the mismatch between income and debt service, which is usually the larger consideration. Borrowing in another currency introduces an exposure on the debt itself, which can move independently of the asset entirely. Available structures vary by lender and borrower and should be confirmed directly, with the consequences reviewed by a licensed adviser.
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