They say the British public has a love affair with home-ownership, but does the same apply to businesses? Actually, the merits of leasing and buying commercial property are much more finely balanced, and if you are lucky enough to be able to choose, there are plenty of things to consider.
A good starting point, according to Paul Bagust, UK commercial property director at the Royal Institute of Chartered Surveyors (RICS), is to have a thorough planning process and think about what is right for your particular business. “Often it is relatively common sense, but it’s worth asking yourself: ‘Where do we see ourselves in five years time?’ ‘What’s our business plan?’ ‘How is the property going to support that?’ ‘Is it big enough?’”
The benefits of buying are fairly straightforward. Your monthly payments will be going towards an asset that you can sell in the future, adding value and security to your business. Those repayments may also be cheaper than the rent you would otherwise have to pay. You also have the security of knowing you will not be forced to move against your wishes, and have the freedom to modify or repair the building pretty much as you wish.
However, the benefits are not all one way. Firstly, says Bagust, you should consider where your capital is best deployed. “If you feel you can afford to purchase a property, have managed to find the right one, and know that even with your capital tied up in real estate, you have enough left over to invest in your business, then that’s a nice position to be in.
“However, if you’re a relatively small startup and expect to need capital to develop and grow, then you might not want to tie it all up in your property.”
Buying your workspace can also lead to a lack of flexibility. If you expect your business to grow, you don’t want to be stuck with a building that is too small and which you cannot sell. Plus in the worst case scenario, property ownership can cause problems if your company becomes insolvent.
“It’s a tough market out there,” according to Andy Bolitho, who is energy, property and transport policy adviser at the British Retail Consortium, “and I think the danger of small businesses buying property is that they’re locked into a relationship with the mortgage provider. If they go out of business they’re not only facing mortgage repayments but empty property taxes, business rate costs, and various other bits and pieces.”
Innovative landlords
Leasing is popular in the retail sector, where this model can really come into its own. Businesses that are testing the marketplace find that it offers quick and easy access to particular markets and locations, which contrasts with the lengthy process involved with buying. Not only that, but the best landlords provide marketing and events activity in order to increase footfall and sales for all.
Bolitho cites the example of Brixton Village in South London, where the 1930s-built Granville Arcade was revitalised by an influx of small local producers, makers and entrepreneurs. “The landlord was in control of a property portfolio that was in decline, but now it is hugely successful, and that’s largely because the landlord said ‘ok, everyone that comes in gets three months free rent’. The landlord took it on himself to incentive business in the area, and that’s the relationship between business and landlord we’d like to see more of.”
The closest equivalent in the white collar office domain is probably serviced business centres, which offer workspace in close proximity to other like-minded entrepreneurs. Managers of these buildings may host networking events in order to maximise the opportunity to share skills and gain access to clients. Yet elsewhere there are plenty of landlords who barely manage their property at all, perhaps because it has been in their family for generations and they have no particular desire to cultivate it. In this scenario, even routine maintenance can become difficult to negotiate, let alone a significant modification.
Money matters
When it comes to the financial trade-offs of owning versus leasing, the relative merits are particularly finely balanced. As the RICS Small Business Property Guide points out, the decision partly depends on how you expect the property market to develop. If you think rents will increase rapidly, as a tenant you are risking a big hike in your next rent review. Meanwhile, if you own a property and it increases substantially in value, you may be able to borrow against the likelihood of further increases in the future, extending your financing options.
RICS warns that when costing out commercial mortgages, you mustn’t forget the various additional costs, interest payments and capital repayments you will have to make. “There will be valuation and legal costs at the outset, and if you go via a broker there is his or her fee to consider. The lender may charge an up-front fee for setting up the loan and there is the cost of any required insurance.”
Views from the ground
One organisation that is looking to buy is the children’s clothing outlet Pud. The company currently has three stores in the North of England, and co-founder Frances Bishop says that while these are all currently leased, her leadership team intends to move into the ownership market. “We’re primarily in town centres at the moment, and a lot of these areas are seeing regeneration work which is causing rents to rise quite quickly. Particularly in the Doncaster area, property tends to be quite cheap and we are lucky to have people on board who can deal with property for us quickly and at a small cost.”
In the opposite camp, however, is Jane Plan, a diet company which has grown to have thousands of clients. Founder and CEO Jane Michell says leasing has been essential to facilitating this growth. “We’ve actually moved premises three times now, each time to a bigger premises. Had we bought, this wouldn’t have been possible.”
She says that she enjoys the freedom and reduced responsibilities that renting brings. “If the bathrooms aren’t working, for example, the company we lease from will sort it out. We also benefit from 24-hour security. It’s true that we have less freedom to modify the property but we’ve been able to add bespoke shelving, and have the bonus that we can use the landlord’s forklift truck!”
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