To buy or lease business premises?

Commercial business premises have become a hot-cake in the property market in Nairobi and leading urban towns. The allure of ultra-modern offices in up-market business addresses like Nairobi’s

Upper-hill, Westlands, Kilimani, Ngong Road, Mombasa Road and some locations in the ever busy Central Business District has remained attractive to many businesses.

Increased growth and commercial might has also seen an increasing trend where businesses are not only buying, but established brands are building own premises with state-of-the art facilities and Wi-Fi connectivity.

This transformed best speaks of the executive nature that doing business is leaning towards in Kenya, as it has put local-owned businesses at a globally competitive platform.  

The reality is that choosing to buy or build own business premises is a big commitment for any business — big and small, but on the plus side, owned business premises is a good investment and a long-term asset that will potentially increase in value.

It pays dividends to first gauge on whether it might be better to operate from rented premises or to buy. There are benefits and drawbacks to both.

Some businesses operate in an industry that makes the ability to change location quickly and easily an important factor. To others, the line of business could be historically linked to a specific location that renders the ability to relocate unlikely.

AFFECTS PROFITABILITY

To buy premises, a business will need to sink some capital into the building, and probably take out a commercial mortgage.

This may affect the profitability of the business for some time, and restrict the ability to find or borrow capital for new projects.

On the flip side, the monthly mortgage repayment is likely to be less costly than a rental payment on the same property and it is not just going into anyone’s pockets.

When buying business premises it is advisable to ensure that the planning allows for any changes that may necessitate to be made.  It is also good to check if it has asbestos roofing — as it will be an expensive bill to remove it.

However, renting premises gives business organisations greater control over their cash flow. Rents tend to be fixed, whereas mortgage payments will be affected by interest rate rises.

Owners will have to pay for extra buildings insurance. For all businesses, there are other costs to consider, including utility bills, business rates and stamp duty (sometimes tenants have to pay this on commercial leases).

Leasing comes with minimal responsibilities. The owner bears responsibility for any damages or dysfunctional infrastructure, maintenance and repair works within the building. This can be time consuming and added responsibility to a young business.

Owning a premises may not give the flexibility that a small business requires as it grows. Renting therefore, may be the better option for smaller companies as they can move to bigger premises and eventually own premises.

The flip side is that owners can do virtually whatever they like within their own buildings, such as creating extra space. That may remove the need for a move. This is an option that may not be open to tenants.

Often lease agreements state the premises must be put back to the original state when they are vacated – that could mean thousands of pounds of improvement work you have done has to be ripped out.

BEFORE SIGNING THE DOTTED LINE...

Finally, here are some general tips from business owners with decades of experience in commercial property:

• Leases: Understand every term and condition in the offer including the total cost until the lease ends and ask the Landlord to confirm in writing that the offer meets the Lease Code.

• Negotiate lower rent and better terms: Do not accept the first rental figure without haggling.

• Opt for short-term leases: You never know what is around the corner, so in your first few years shorter leases are better. It may mean you pay a little more, but one day you may appreciate the ability to move quickly.

• Check how rent is reviewed: If you are going to be facing a possible increase each year, it is better to know about it from day one.

Buying

• Buy property in growth areas: If the government has announced a town to be a growth area, there is likely to be initiatives to attract new jobs. Which means more employers who will need business premises. That could have a positive effect on the price of modern business properties.

• View more property: Just as with home hunting, you should view a number of premises, and consider how their size, location and proximity to amenities will affect your business and its staff.