Choosing business premises: To buy or not to buy?

Published 02nd Apr 2008

Premises are one of the biggest investments you are likely to make - get it right, and you have a growing asset and a good workplace; get it wrong, and you could be saddled with a lease you can't get out of, or a property that has tumbled in value. Jo Russell weighs up the pros and cons of buying, renting and licensing

Ownership of a commercial property is often seen by business owners as an asset that will provide for them in retirement - and with property prices falling, it is tempting to think you can capitalise on bargains. But an uncertain economic outlook, combined with the effects of business rate reform and capital gains tax increases, have made buying premises seem a very risky option.

Richard Kauntze, chief executive of the British Council for Offices, suggests you weigh up your priorities and don't overstretch yourself. "What is your primary concern?" he asks. "Is it selling clothes or insurance, or is it property speculation? Maybe you can do both, but it might be sensible to focus attention on your core business."

Pros and cons of buying
Buying a commercial property requires capital and security. Commercial mortgage lenders usually ask for a 20-30 per cent deposit, and they are tightening their lending criteria in the wake of the 'credit crunch'.

The removal of two commercial property tax breaks has also made ownership seem less attractive. Business rate relief has been scrapped on properties left empty for more than three months (six months for factories and warehouses); and the Government has abolished taper relief on capital gains tax, a discouraging move for business owners who viewed their premises as an investment.

Nevertheless, property is likely to increase in value over time and, for a stable business with modest growth plans, tailored premises are very appealing. This is particularly so for manufacturers, who may have to install equipment or make structural changes. Landlords are generally reluctant to authorise such alterations, and factories and workshops rarely come on to the rental market.

Renting - a better option?
"If you take a lease, you maximise your flexibility, as long as it's on sensible terms that suit your business," explains Kauntze. "If you want to expand, you can; you can surrender your lease, potentially sublet, do things to reflect the business as it evolves."

If you are a growing business, renting may be more attractive, as it involves less capital outlay and offers greater freedom to move should things go well - or badly. But commercial rents can be high and you are unlikely to be able to adapt the property significantly. Leases can also be difficult to get out of if you try to end them early.

Whether buying or leasing, you will have to cover utility bills, insurance and maintenance. Small or early-stage businesses are likely to be better off licensing serviced accommodation on short lets for a fixed payment. Although this is usually office space, a number of business incubation schemes offer engineering and manufacturing facilities as well.

Source: ' HSBC '

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