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Business premises – is it better to buy or to rent?

Any SME looking to acquire new premises will have the debate over whether it is better to buy or rent property. The answer to this is far from straightforward, given the range of issues involved, and individual characteristics of each company. And because today’s tough economic market makes both renting and buying favourable, depending on your specific circumstances, you can certainly get a good deal now that will tide you over until the next stage of your company’s growth.

Steve Rennie, managing director of Rennie Property, the leading commercial property specialists, takes a look at some of the pros and cons of buying and renting, and poses some of the questions you should consider before making a decision.

BUYING PROPERTY

The clear advantage to buying a property outright is that you gain a tangible asset on your balance sheet that indicates significant financial strength. As an example, banks like tangible assets! In addition, the right commercial property is generally a good investment that shows good returns. Also, commercial property is typically financed over 10 years, so you are paying off the asset over time.

A significant con to buying commercial property, however, is that it will hurt your initial cash flow. You will have monthly mortgage payments that at the outset will be larger than the rental rate for equivalent space.

You should also consider to what extent investing in property would tie up your working capital that could otherwise be used to grow your business. If investing this working capital in your business gives you better returns than you would receive from commercial property, why even consider buying?

Also think about how much space you need to buy? It makes sense to buy enough to cater for your current and future requirements, but in the meantime, you will need to rent out the excess space you do not immediately need.

Finally, all costs incurred in acquiring property, such as commissions, transfers and bond raising costs, must be considered into your overall financial analysis when deciding whether to buy or rent.

The bottom line is that no sizeable investment should be treated passively and commercial property is not an insignificant investment. Don’t simply buy for the sake of it. Analyse the financial commitment you are about to embark on properly.

RENTING PROPERTY

While you don’t end up with a tangible asset, as you would if you bought property, there are several important advantages to renting property that should be considered, with your individual requirements in mind.

Financially, rent is an expense that can be set off against income; however, the capital portion of a bond repayment cannot be treated this same way. Also, in the short term, it is more affordable to rent than to buy from a cash flow point of view.

Average lease periods for commercial premises are three years, which in business terms is a short to medium term commitment. This gives you the ability to make property decisions as they occur, rather than needing to predict the future. This gives you much more flexibility and limits your risk exposure.

If you rent, building-related issues, such as leasing excess space, tenant issues like non-payment of rent, maintenance, repairs, security and so on, are someone else’s problem, leaving you to concentrate on growing your business.
 

10 tips for choosing your property:

Irrespective of whether you opt to buy or rent your next premises, and subject to the type of commercial property you need, here are a few questions you should ask yourself. Not all of these questions will relate to all types of property.

1.    Location, location, location: consider where your employees currently live, and what sort of future staff you want to attract. Where are your clients? Do you need to visit them often? Do they come to you? Similarly with partners, resellers and agents. Finally do you need a prestige address to impress customers and investors?

2.    What type of business do you run? Do you need to wow visitors with a trendy office space? Do you need to attract employees from rival companies with an on-site gym and Playstation corner? Keep this in mind during your decision making process.

3.    Future growth plans. Is your business going to grow rapidly in the next few years? Make sure you have the option to grow your premises easily in the same location. The last thing you want to do is spread your staff or equipment over more than one floor, or have to relocate because the tenant in the next-door office to you has a just signed a five-year lease and won’t move.

4.    As well as the office space, how much parking is included in the deal? If there is not enough on-site parking, is there convenient and safe parking nearby? If you need to subsidise your staff’s parking costs, factor this into the overall cost of the premises.

5.    Similarly, does a lot of your staff rely on public transport to get to work? When you move, will you be near taxi, bus and train routes? Will your staff have to suddenly pay more to get to work? 


6.    Do you have staff that work shifts or stay after hours often? Do you run a 24/7-support centre on your premises? Make sure that your employees have a good level of safety when arriving and leaving the workplace, at all hours.

7.    Do you have specific technical requirements to run your business? Especially high-energy requirements or bandwidth needs? Make sure your chosen location can cope with your current and future technical requirements.

8.    With the recent 31.1% electricity price hike from Eskom, it is becoming even more important to choose buildings built using principles of energy efficiency and sustainability. Remember you have to foot the bill for your energy consumption, so choose an efficient building and encourage your team to conserve power.

9.    What about your fellow tenants? Consider the benefits of choosing an office space with like-minded companies already in place. For instance, if you are in the creative space you might have the opportunity to collaborate with neighbours who are also creatives. If you are an accountant, you will probably prefer to be situated with fellow professionals rather than an incompatible business.

10.    Find out about your future landlord and the track record of the property manager appointed to look after the property. Does the landlord give the property manager the scope to look after the tenants’ requirements? Are issues within the property manager’s control resolved promptly and is money being spent on maintenance and improvement of the property? Are the other tenants happy?



About Rennie Property

Rennie Property is South Africa’s top-performing specialist commercial property management company. It was established in 1997, and for the past 12 years has looked after some of South Africa’s most prestigious buildings including Melrose Arch in Johannesburg, and the ABSA Centre in Cape Town. Its present portfolio of properties under management is valued at over R6 billion. In 2008 it launched its property broking arm, to help match tenants with the right properties.
For more information please visit: http://www.rennieproperty.co.za/


Released on behalf of Rennie Property by:

Vanessa Clark
Twokats Communications
Ph: +27 82 335 1117
Email: Vanessa.clark@twokats.com