Rent vs buy for business premises | Fin24

Rent vs buy for business premises

Apr 08 2015 07:11
Carin Smith

Cape Town - Although business confidence in South Africa is currently at a low point, it is still a good time for businesses to buy the premises they are renting, Attie Anderson, FNB head of business lending, told Fin24 on Tuesday.

Purchasing commercial property is one of the biggest and potentially most rewarding investment decisions that a business owner can make, in his view.

"On the one hand, business owners are a bit cautious about whether to buy commercial property at the moment, because business confidence is a bit low and because they have the Eskom energy crisis on their minds. So in general, there is a bit of a slowdown in the commercial market," said Anderson.

"On the other hand, interest rates are still low, so it is still a good time for a business to buy the premises they occupy at a fair price."

According to Anderson a business owner creates a lot of security for the business if he owns his own premises. It also enables owners to ensure the facility is a tailor-made fit for the business. The other plus is, of course, that one does not need to pay rent.

However, many business owners predominantly prefer to operate from rented premises, because of the assumption that it is cheaper and less risky to do so.

“Even though running a business from rented premises seems like an effective cost-saving, the reality is that you are paying towards someone else’s investment or bond. More importantly, renting exposes your business to some level of uncertainty, because when the lease agreement expires, your fate partly depends on the property owner," explained Anderson.

"Should they decide to sell or stop leasing, you may need to relocate to new premises at a significant cost.”

If one looks at the business case for buying commercial property, there are more advantages for business owners who decide to undertake such an investment.

READ: Commercial property tips

He outlines the following benefits:

You create business certainty

Certainty is essential to business success. Owning the premises from which your business operates is one way for a business owner to create such certainty.

The same cannot be said about a business that operates from rented premises, because they usually need cash reserves to potentially fund the cost of relocating to new premises and they are exposed to rental escalations, which will impact the business’ cash flow.

Paying towards own investment

Business owners need to remember that the principle of paying off someone else’s bond does not only apply to residential rentals. It equally applies to commercial property rentals.

Buying commercial property is a sound investment strategy which will assist in creating sustainability.

You can tailor the property to suit your business needs

Operating from rented premises is often very restrictive as the owner of the premises will have limitations on what a business can and cannot do.

This is different for owner-occupied premises, because if there is more space than currently required, you can always lease to non-competing businesses to supplement income.

Commercial property can provide annuity income during retirement

One of the major pursuits in life is being able to retire with sufficient income. A commercial property investment is one of the effective ways to achieve such a goal, because should you retire, the property will ensure annuity income, in addition to the capital growth of the asset.

“I encounter a lot of business owners who are interested in buying commercial property from which they can operate a business. However, many are under the impression that this is a complex process," said Anderson.

"In reality, the process is not drastically different to that of acquiring residential property, except that it will require business credentials to support the business case, as opposed to personal information in the case of a residential acquisition.”

Investments in commercial property

As for investors in commercial property, Anderson points out they usually try to build a portfolio of properties and to create synergies among their properties.

"Investors in commercial property are currently looking for good opportunities to add to their portfolios," said Anderson.

"We saw a good uptake by investors from Gauteng and the Cape into rural areas, for instance in the larger towns in the North West Province, the northwestern parts of Limpopo and the Free State."

Anderson said in terms of investment properties, the industrial sector is doing better than retail at the moment, especially in Gauteng.

Another niche market where there is currently "a bit of action" in his view, is in motor dealerships, especially in the Cape, KwaZulu-Natal and Gauteng, either investing in upgrading their existing showrooms or investing in new premises.

"The bottom line is that those who own their properties can plan for the electricity crisis by installing generators, for instance. I also think we will see more and more business owners going for sustainable energy solutions," said Anderson.

ALSO READ: Commercial property rates nightmares

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fnb  |  money  |  small business  |  investments  |  property


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