Is a business better off leasing or buying the premises from which it operates?

There’s no single correct answer, so let’s look at some of the pros and cons of each option.

The pros of leasing

• Provides the flexibility to expand as your business grows
• Keeps more capital available for growing your business. If your business can generate a return on investment of, say, 15% per annum, that may be a better use of funds than investing in a property that may only return 7% pa
• Usually provides more choice regarding business location.

The cons of leasing

• Property modifications require landlord approval. And if you do make improvements the ultimate benefit of increased property value will go to the owner, not you
• Less security of tenure. Your landlord may sell the property or decline to renew a lease
• Lack of equity. The landlord benefits from gains in the property market, whereas you face increasing rents as commercial property prices rise.

The pros of buying

• More predictable costs, particularly when the building is owned outright
• Equity in a material asset. You benefit from the growth in the value of the property, including any increase resulting from improvements you make. The property can also be sold, if necessary
• Allows for additional income. You can rent out surplus space, or the entire premises if you do need to move to a bigger property
• You can undertake specific improvements to the building that suit your business (either by investing in the site to improve business performance or by making unique improvements that would otherwise be detrimental to a landlord).

The cons of buying

• Takes significant cash up front. Banks may require a deposit as high as 50% before lending on commercial property. That money is then unavailable for investment in the core business
• Less flexibility. If your business is growing, you may need larger premises in the short term
• Exposure to downturns in the property market. As an investment, commercial property performs quite differently to residential property. It can decrease significantly in value and if the need to sell coincides with a market downturn, large losses may be realised
• Slow to sell. It can take 12 months or more to sell a commercial property.

Need property advice?

For many businesses the choice will be obvious, and the ‘lease or buy’ decision doesn’t need to be all or nothing.

A business could, for instance, buy its head office but maintain flexibility by leasing warehouse and factory space.

However, if you’re still not sure which option is right for your business, we can help. Our business advisory team can look at your business situation and help you identify if leasing or buying business premises is likely to deliver the greatest benefit. Then, whichever option you pursue, our real estate advisory experts can assist with either the purchase or leasing of commercial property.

To find out more, call us on (03) 9875 2900, or fill in the contact form below and we’ll be in touch.