For many businesses, the question of owning their premises versus renting is not new since property for many is seen as both an asset and expense.
He says a good way to decide on buying versus renting is to compare the returns that property offers the company versus regular operating yields.
According to Jorge da Costa, chief executive officer of Improvon, 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.
The expenses involved in industrial and commercial property development indicate that buying or leasing can be costly.
Da Costa explains that property is seen as an asset, 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, he says.
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.
He says a good way to decide on buying versus renting is to compare the returns that property offers the company versus regular operating yields.
“The bench-mark number for industrial property is around a 15 to 18 percent return.”
If the business's internal rate of return is higher than that return from a property, the business should rent and not buy.
Another advantage of renting is that the maintenance and management of the property is handled by an external property manager and property owner.
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 the business has grown rapidly and needs to find bigger premises or 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.
The decision to buy or rent is a highly individual one, based on a company’s specific needs, he says.
Da Costa notes that 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, he adds.
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