Commercial Property: Is It Better To Rent Or Buy?

By Author: david bryan
Total Articles: 18
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There is an ongoing debate concerning residential property: whether it is better to rent or buy. In the area of commercial property – offices, warehouses, shops, and industrial units etc – the debate is no less controversial and those involved in commercial property management will say there are often many more than two sides to this story.

Part of the problem concerns the word ‘better’; it covers a multitude of definitions. From a commercial property point of view ‘better’ can mean cheaper, but may also include areas such as business stability, tax-efficiency, investment potential, and affordability etc. The decision is very rarely static but an ongoing process: what is ‘better’ in the long term may not be so in the short or medium term.

When thinking of buying or renting commercial property consider the following:

Start-up businesses – it’s often difficult to raise finance when you have just set up a business, and even if it is available it may be better spent on capital, staff, marketing and stock. Even if you can obtain a mortgage it may be better to wait and see: if the business ...
... is unsuccessful you have been tied in to a long loan; if successful, you may be looking for larger premises sooner rather than later.

Price – as with most things in life, price or cost will be a determining factor. In a market of declining values, now – or soon – may the best time to invest in commercial property as prices are at their lowest for several years. The story is not a ‘one-size’ fits all though, and some sectors of commercial property market have declined faster than others. There is a great deal of regional variation too. So potential investors need to do their homework and talk to those involved in commercial property management. It could however be that a decision to buy today will reap benefits for the business in the future – reducing overall costs and offering an asset for future borrowing.

Rental value – unlike the residential sector, commercial property rents have not seen dramatic rise in recent years. Indeed in many areas the opposite is true. But as with residential property, the difference between rental values and purchase prices varies from location to location for lots of reasons that experts in local commercial property management will be happy to try to explain. These variations will be an important factor when decided to buy or not.

Market Sector – the actual sector the business operates in will also determine whether to rent or buy commercial property. Plenty of service-based business will operate out of smaller offices within office buildings that are only available for rent. Businesses that require intensive re-investment in capital may also find this re-investment is a better use of available finance. Other businesses, however, will benefit from the long-term cost savings that purchasing commercial property can bring and the purchase can become a valuable business asset.

Location, location, location – a cliché in commercial property management but also very true. Not only does the availability and price differ greatly between locations, but the value of that location will also differ enormously according to your business. For some businesses, being in the heart of a business district is essential – retail shops is an obvious example but other industries will often form in clusters and being in the ‘supply chain’ still often means being in the same geographical area - and that may come at a premium. With increasing technology, other business can be located anywhere – and this often means they can choose to locate where rental or purchase costs are low, or where there are localised incentives [for example business rates holidays, rent-free periods] to locate.

Finance – the ability to finance a purchase of commercial property, and the cost of that finance will, of course, be an important factor especially in today’s business climate where lending is restricted and cautious. Those working in commercial property management will offer advice on other aspects of buying – any tax advantages, Personal Pension benefits, etc. Many businesses put the commercial property into a Holding Company to maximise its tax benefits. Make sure you seek professional advice.

These are just some of the factor to consider when facing the age old question of whether to rent or buy commercial property .