Yorkshire Bank

Even in a knowledge economy, intellectual property isn't the only kind that matters for a business. Every company needs premises from which to trade and finding the right premises on the right terms is a key decision.

To rent or buy? That, says John Mair, Head of Property Risk Management UK for the National Australia Bank Group, depends on several factors, notably the maturity of your business and the state of the property market. Within these variables, both arrangements have pluses and minuses.

Renting, says Mair, can be advantageous for a newer business with unpredictable growth prospects, since it can be more flexible than purchasing. Most leases allow sub-lets or assignment and many have break points at which the agreement can be terminated.
But the ability to obtain advantageous lease terms depends too on whether it's a tenant's or a landlord's market at the time of negotiations. Adverse market conditions can also make it hard later to assign the lease or sub-let if you need to reduce outgoings or relocate. Broadly, the longer the lease the better the incentives and flexibility likely to be available to the tenant under current market conditions.
In many circumstances, Mair sees some strategic advantage to purchasing. It makes property an asset rather than a liability, often affords more predictable financial planning, allows greater flexibility to adapt the premises and can enable you to reclaim capital allowances where these are available. This is perhaps one of the main reasons why in many cities and towns currently, owner-occupier activity is greater than tenant demand.
Disadvantages include higher up-front expenses -- deposits, stamp duty, adapting to need -- and having to bear the full costs of fixtures and fittings, whereas some of these costs can often be met by a landlord when a tenant signs for a reasonable lease length.
Over time, though, costs for purchasing are generally lower than for a rental, not least because better borrowing terms are currently available on the secured asset of a property, and you can shop around for finance. The costs of annual repairs and maintenance of the property are generally the same between each option due to the full repairing and insuring obligations of most modern leases. End of lease dilapidations payments are only due however on the leasing option.
Either way, Mair advises, you should look before you leap: 'People often don't spend enough time thinking through what either their potential growth requirements or their downsizing requirements might be in the future.'

Buying
Pros

  • Tradable asset, not liability
  • Better financial planning
  • More adaptable to market conditions
  • Can reclaim capital allowances
  • Finance usually on better terms

Cons

  • Higher up-front costs
  • Longer, less flexible investment
  • Prone to fluctuating interest rates

Renting
Pros

  • Flexible, if terms include lease breaks
  • May be inducements on longer leases
  • May be able to sub-let or assign

Cons

  • Dependent on (a) negotiated terms (b) market
  • Repair obligations and end of lease dilapidations
  • Rent reviews mean costs & uncertainty
  • Balance sheet liability, not asset

Life after the lease?
Funding Solutions Tailored to your needs
Yorkshire Bank PLC offers a range of innovative products that we believe will ideally suit the commercial property purchaser. For example we are able to provide a Flexible Business Loan which is tailored to your specific circumstances. The loans include daily interest calculation and offer normal repayment terms up to 15 years. You can choose to repay weekly, monthly, quarterly and half-yearly and take advantage of seasonal repayments, low starts and capital repayment holidays.
In addition to delivering a funding solution to match your needs, we can provide a number of related benefits to make the buying process even smoother.
You can take advantage of:
Personal and core banking facilities
Commercial insurance available through AXA
An interest rate hedging solution for added peace of mind through our specialist partners, Treasury Solutions.
We have a broad knowledge of lending to clients in the commercial property sector and would be only too happy to discuss your requirements and provide you with a competitive quote. As you will appreciate this does not constitute an offer of finance. All proposals will be subject to a full credit assessment by the Bank and must be to its entire satisfaction before an offer of finance can be made.
To discuss any of these services, please do not hesitate to Steve Tweedle on 0114 228 2202 or 07802 919664.

Example
A 2,250 sq ft property, with a market price of £180,000 (£80 per sq ft) Buying: Borrowing £126,000 at 2% over base, annual repayments: 10 Years: £17, 173 15 Yrs: £13,176 20 Yrs: £11,278 25 Yrs: £10,214 Leasing: 20 years, starting rent of £13,500pa, 2%pa rises at five-yearly rent reviews: Year 1: £13,500 Year 5: £14,900 Year 10: £16,450 Year 15: £18,200