Buying or renting commercial property
Category Commercial Properties
Many businesses are faced with the question of whether to own or rent commercial premises. These are typically enterprises that have grown to a point where they can explore their options more freely. Although Chas Everitt Property Rentals also has a fully fledged commercial sales division, we understand that clients’ needs differ as well as evolve over time. Our focus remains on personalised solutions that truly cater for individual clients. This approach has set us apart from the host of generic services that consumers are often inundated with in the marketplace.
The above dilemma of buying or renting is not new and various factors need to be considered in the decision-making process. A business needs to take into account its unique plans for growth as well as, analyse the current and foreseeable economic climate to arrive at a decision. The following article comprehensively examines the question of buying versus renting as we unpack this interesting topic further.
Why is commercial renting in some cases better than buying?
• Property prices have gone up in the last few years, with average listed property stocks increasing by 8.5% in the second half of 2014. This means, buying property is now more expensive as prices have escalated, making it comparatively cheaper to rent than to buy in many cases. While this is the case generally each client’s needs will need to be handled on its merits. Client Service Manager at CEPR, Paula Rowntree highlighted, “It is also advisable to enlist an experienced commercial real estate agent to help source and negotiate a suitable rental offer.”
• It is cheaper versus taking on the added financial responsibilities of owning a property. Greg Harris, CEO of CEPR added that "As a commercial property tenant, you'll have fewer property related expenses. Unless otherwise agreed with the tenant, the property owner and the respective insurance in place will cater for maintenance and repair costs. This offers peace of mind and makes more sense for a number of growing businesses, including some well established enterprises that prefer to rent due to this and other valid reasons."
• Renting provides flexibility because a business owner has the option to either scale up, down, or relocate to a new premises with greater ease. This is still possible if you own a commercial unit or building, however, the logistics and admin involved in relocating will normally be much more.
• Small businesses that choose to rent will need less money to pay a deposit as opposed to a down payment for a property purchase. Greg Harris commented further that “The latter is usually between 10% and 30% of the property value and can represent quite a substantial cash outflow for a business. Furthermore, if the working capital is limited or depleted beyond a minimum threshold level, then the ability to operate at all is compromised.”
• Since the monthly rental cost on average will be less than the combined financing and property related costs of owning and managing the property, the leasing route leaves more profits or disposable income in hand. This makes for greater liquidity which goes a long way towards paying for critical operating expenses such as, utilities, stock and salaries to name a few.
• Financial planning in terms of budgeting and forecasting becomes much easier when renting as rental expenses are predictable and clearly outlined within the lease. As an owner the liberties are not the same, since additional costs can crop up at any stage. Of course commercial property acquisition comes with its own perks too.
• Renting is tax deductible as an expense. This means that rent is seen as a profit deflator in essence, which results in less tax payable. However, a bond is characterised as a liability, as such it does not affect profit, and thus tax remains the same.
Should you opt for a long or a short lease?
This is a question that should be scrutinised carefully before properties are scouted and any lease is signed. Keith Chetty, CEPRs Commercial Property Manager for greater Durban region advised that “It is recommended that if you are a start-up, a short term lease is a more viable option considering that most credible sources agree that about 8 out of 10 businesses fail within 18 months of opening. However, a long term lease of up to 5 years is a wise choice for established businesses that will be able to comfortably operate from the current premises into the medium term at least.”
Long-term leases offer stability, predictability and generally cater more conveniently to tenant improvements, especially where specialisation is needed, for instance a workshop. As a business owner in this position such a lease ensures longevity even in the event of the building changing hands. Greg Harris further emphasised that “The fine print should be explained and looked at carefully by your commercial property specialist. If you are shopping around privately, you may want to consider the added value an experienced agent will bring into the process, from lease interpretation to negotiation and property-scouting based on your unique requirements.”
Dennis Davidson, CEPRs Commercial Property Manager for greater Umhlanga and North Coast region spoke about the risk of signing a lease term that may be too short. “Short term tenants run the risk of being forced out of their premises unexpectedly and this could jeopardise the future of their business. Signing a long term commercial lease provides certainty on the premises as well as rental annual escalations, irrespective of market volatility. In contrast, businesses that sign a short term lease are vulnerable to the ever-changing market and could see their rent soar considerably every year, thus impeding growth,” added Dennis.
CEPR | Tailored solutions with our commercial property specialists
Our commercial and industrial rental and sales divisions can accommodate your immediate and future requirements. Speak with one of our experienced agents about your needs by simply contacting us today. Whether you are looking for retail space, warehousing, offices or even vacant land, you can expect personalised, friendly and efficient help.
Author: Paula Harding