Businesses Must Look to Office Ownership
- 07 Sep 2011
If your business is established, then buying office space as opposed to renting is a sound business decision.This is according to Charlie Bentel, Managing Director of Bentel Property Consultants, owners of Benvista Office Park based on the East Rand. “The invested equity, debt service and tax benefits do make owning more advantageous than leasing. Aside from the investment benefits aspect of buying, if you have specialised equipment, machinery and IT infrastructure requirements which will require expensive outfitting, you are generally better off buying your office space,” explains Charlie.“At the moment there is generally an oversupply of A-grade office space rentals which has driven down prices considerably. However, this is a temporary situation, and rentals will increase as market conditions improve. Average rentals start at around R85/sqm and go anywhere up to R180/sqm and are also subject to an average 10% escalation per annum. The current low interest rates make buying a very appealing option,” explains Charlie. “The current oversupply of offices has created a very favorable buyers’ market as prices are considerably lower.”Business owners and entrepreneurs opting to acquire their own business premises stand to benefit from the following:
In doing a ‘rent versus buy’ financial analysis on a commercial property of 110m², over a ten year period, comparing a rental of R85/sqm subject to a 10% annual escalation versus a bond repayment over a ten year period on a loan of R1million, at an interest rate of 9% with a 10% deposit given, the following applies:
- Buying the property gives you full time ownership, which means you have an asset capable of rendering a return in the form of a pension for retirement planning or future rental income should you need to relocate.
- Any capital expenditure you invest in your property such as upgrading fixtures, carpeting, tiles and lighting all serve to enhance the value of your property.
- Ownership enables long term planning and better utilisation of your capital.
- Some banks are now offering businesses very low deposit requirements based on the strength of the business, which means you don’t have to dig into your cash flow for a deposit.
- “Given these considerations, it makes business sense to buy and own your property – and an asset - at the end of the day,” says Charlie.
- Granted there are important considerations to make when buying office space such as:
- Location is a crucially important consideration when it comes to appreciation, resale or renting the space out to other tenants.
- Defining and understanding your needs. Make sure the decision to buy a building fits in with your business plan.
- Allow flexibility for growth or contraction.
- Evaluate the opportunity as an investment as well as how the property fits your needs. Do a rent versus buy analysis as a part of your financial analysis.
- Do space planning and costing as part of your cost exercise.
- Assess the opportunity of buying the property into your own structured property company and renting it to yourself or another tenant.
“Given these figures, it makes good financial sense for owners of small and medium sized-businesses to look at buying their office space as an alternative to renting. Renting is usually a good option for large businesses that have considerable expansion and contraction issues or where long term planning is not possible. However, it’s in the interests of the smaller business owner to buy and ensure better utilisation of their capital expenditure by building up an asset base which also adds to the value of the business at the end of the day,” concludes Charlie.
- By the end of the third year, the monthly rental amount of R12 384 will exceed your bond repayments of R11 400 per month.
- By year eight, your monthly rental will exceed your bond repayments by almost R7000 per month.
- By year ten, you will have paid just short of R1.8 million in rental for a property you do not own or have any rights on.
- If you bought, by year ten your bond will be fully paid off, you will own an asset that has appreciated in value over the years, and you would have paid over R400 000 less than you would have paid on rent over the same period.