Commercial Property - buy or rent?
The question whether a company should buy or rent their premises is not a new one, so what should you consider before making your decision?
Factors for specific companies need to include plans for growth as well as the current and foreseeable economic climate, which influences the decision-making process.
Jorge da Costa, CEO of Improvon notes that the expenses involved in industrial and commercial property development indicates that buying or leasing can be costly. Property is seen as an asset to your business, but can also be viewed as a massive expense. Thus property decisions should never be made without comprehensive insight into your company’s future.
In the current economic cycle, companies are watching their finances closely and credit is tight. A business may need anything up to half of the purchase price as a deposit, and in the commercial and industrial property industry this could amount to millions of rands.
South Africa’s current economic climate is creating an impact on the commercial and industrial property industry as people are buying due to lower interest rates. This might prove short-sighted as in two to three years, when the economy begins to recover interest rates will rise, and businesses that are tied to bonds are more likely to find themselves in a cash squeeze and could be forced to sell.
A good way to decide on buying versus renting is to compare the returns that property offers your company versus regular operating yields. The benchmark number for industrial property is around a 15% to 18% return. If your business's internal rate of return is higher than that return from a property, your business should rent and not buy.
The flexibility of renting is another key advantage for businesses. Owning a property makes it difficult for a company to relocate to new premises as their needs change. Facilitating the buying and selling of property can result in a substantial amount of time and costs that companies should take into consideration.
In contrast, tenants can determine the length of their lease agreements, and once the lease expires, the business can review its future needs. If they have grown rapidly and need to find a bigger premise or if they have a need to downscale, they are able to move on without having to go through the time consuming and costly process of selling.
Another advantage of renting is that the maintenance and management of the property is handled by an external property manager and property owner. The money saved on these property costs can be used to invest in and add value to your business in other areas rather.
The decision to buy or rent is a highly individual one, based on a company’s specific needs. Any long term agreement can be designed to include a rental and deposit payment plan that results in the tenant owning the premises at lease end. Companies should make sure they take all the above factors into consideration before making a decision that could potentially affect the success of their business.