UK: To buy or not to buy?

UK: To buy or not to buy? - Many companies still rent rather than buy their premises.

Last Updated: 31 Aug 2010

Many companies still rent rather than buy their premises.

With property prices climbing again, some businesses are looking at buying, rather than leasing, their work premises. But how good an option is buying commercial property compared with renting?

Buying could be worthwhile, according to Richard Lambert of the British Property Federation. He points to 'a shortage of good rental sites in some areas and increasing restrictions on new development, particularly on greenfield sites'. Martin Meech, group property director at Dixons, agrees, up to a point. He believes that buying is a good bet only because rental costs are rising too rapidly. 'They are moving up in a way that is not supported by retailers' profits,' he says.

He stops short of advising buying in all cases, however. Dixons has a mixed policy. 'We both own and lease,' he says. 'But on balance we prefer leasing purely because we can get a better return from retailing than from property - that is, after all, what we're best at.'

Elsewhere, there seems to be little support for buying. Mike Warburton, senior tax partner at Grant Thornton, suggests that companies think very carefully before jumping on the property bandwagon.

'I would be very worried about advising a client to buy unless they already had the funding organised,' he says. 'Remember, a lot of people caught a cold in the 1980s because they thought property could only go up in value.'

Steve Lekki, manager of Arthur Andersen's real estate services, agrees leasing is generally the better option. 'Most companies are better off focusing on growing their core business,' he says. BT certainly tries do this, according to Ray Jenkins, head of portfolio management at its property arm. 'Often when we do have to buy a site, we will subsequently sell it off and lease it back, therefore freeing up funds to invest in equipment and new technology,' he says.

Warburton emphasises the importance of concentrating on what one does best. 'I'm pleased to say Grant Thornton doesn't really want to own much property because we're in business to provide financial services,' he says.

One reason for the general enthusiasm for renting is due to the shift towards short-term leases. Until recently, most contracts used to be for 25 years. 'In 25 years from now, things are going to be totally different,' argues Lekki. 'Voice-activated and wireless computers will probably be standard. Each innovation could revolutionise space requirements.' He thinks shorter leases which place more responsibility for routine up-keep on the owner are the answer for many. 'If you do decide to buy, you need to make sure you have a coherent exit plan before taking the plunge,' he suggests.

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