Is it time to buy?
When it comes to your own business premises, should you consider buying your own commercial property? Gayle Bryant investigates.
As a business owner, you may have started out renting the place from where you operate your business. But perhaps you are now thinking it's time to buy your own commercial premises. At what point should you be considering this – and is it always a good idea?
Peter Bobbin, a tax partner with Sydney-based The Argyle Partnership, advises businesses on buying property and how to structure such acquisitions. He says the first thing a business owner should consider before buying is what type of business structure they want to use to make the purchase. Typical structures include a partnership, company or trust. Each has its own pros and cons.
"Working out what structure to operate under is usually decided back when someone first sets up in business, but the structure they decide upon then can have ramifications for the eventual purchase of commercial property," he says. "This is important, especially from an asset protection and future capital gains tax point of view."
Bobbin says there are a number of things to consider before deciding to buy, with size being one of them. "If your business is growing then you may need to move to new premises to accommodate this growth," he says. "When people first start out they should be aware of how their business will proceed – which they should know through their business plan – and if they know that they are likely to need more space, then they should choose premises that can expand with their business."
Rent first to reduce your risk
Bobbin says renting is usually a good idea when you first set out if you are unsure how your business is going to perform. "If you buy and then quickly find that you need bigger premises and need to sell and buy again then you will be up for stamp duty, capital gains tax on the sale, and agent's fees," he says.
He adds that buying isn't always the ideal solution. "When business partners are involved it is easier to rent than trying to cope with owning premises," he says. "For example, if you are an accountancy firm and there are a number of partners within the firm, then if the partnership is dissolved it is easier to split the business if you are only renting."
Bobbin says what tends to be common is that small independent businesses own their premises, but where there is joint ownership of a business, renting is more common.
"Of course there are exceptions to all rules," he says. "However, you would find that any medium-to-large business in a partnership would probably not own their premises outright."
While space may be a consideration in whether you buy or not, growth indicators such as the amount of turnover you are making is not usually an issue. "It would only really impact the size of the premises you could buy," Bobbin says. "For example, if your turnover was low you might only be able to afford a smaller property in a location that was probably not as nice as if you were making more money. And again, just because you have a high turnover, this isn't necessarily a reason to buy. The structure of the business may make it more attractive to rent."
Consider your cashflow
Rob Elliot, Head of Business Lending with NAB says the decision to purchase commercial property hinges on a company's cashflow position. "If loan repayments are similar to the rent being charged by landlords, then the decision to purchase would have minimal impact on the cashflow of the business," he says.
"However, if the loan repayments are significantly more than the existing rent, then the business owners would need to be more cautious to ensure that the property purchase does not adversely impact the business."
Some business owners may be seeking the right time in the market before they commit to purchasing. Christian Schilling, senior project manager with BIS Shrapnel, says two or three years ago would have been a good time to buy but now it is not as attractive. "Back then you could have acquired premises for a reasonable cost," he says. "Also interest rates were lower."
Now, however, he says prices for commercial properties have risen. "Business owners need to do their numbers and see whether it would be more beneficial for them to buy than rent," he says.
Commercial property outlook
Schilling says the outlook across Australia is for commercial rents to rise, especially in Brisbane and Perth, which are being driven by the resources boom. "Brisbane has a very low vacancy rate," he says. "If business owners have a lease agreement coming up and they are not interested in buying, they should try and sign up for a long-term – preferably 10 years. Not many cities are offering the incentives they were several years ago for tenants to lease commercial premises because of the lack of supply."
He adds buying your own premises has some advantages. "If you own then your occupancy costs are fixed," he says. "If you are viewing buying your premises as an investment then be aware that values go up and down. Our view is that the market will be strong for the next two to three years and then experience a downturn over the next seven to eight years before it starts a gradual recovery."
While Schilling says there are no figures for how many business owners tend to buy versus renting, he says for people involved in the industrial sector, it is more common to buy premises while finance costs are low. "The industrial sector often requires very large premises such as warehouses so if financing costs, such as interest rates, are low, then they tend to take advantage of the situation and purchase."
He adds that buying business premises tends to be a cultural thing. "People in the office market rarely own their own premises from which they operate – the trend has been towards leasing."