For the past two years the commercial property market has been in turmoil. Changes in working practices due to Covid 19 saw demand for office space plummet as employees worked from home. Businesses, keen to cut costs, downsized. Many leases were not renewed on expiry. In common with most European economies, the UK is in recession with a shrinking GDP.
At the same time rampant inflation has driven-up interest rates, which has resulted in reduced yields for commercial landlords. Increased energy costs are putting pressure on many businesses and those operating on slim margins may well fold. As a result, commercial property values are dropping with many experts predicting we will not see the bottom of the market until 2024.
Why is this bad news an opportunity for entrepreneurs?
If your business suffered due to Covid, or is still suffering, you have our sympathies. But some businesses did well during the pandemic. Thousands of new businesses were started. It is a fact of economic nature that whilst some businesses are shrinking or failing, others are busy growing. Many entrepreneurs and SMEs will be looking at the coming year as a springboard for expansion.
Every cloud has a silver lining and, for those businesses looking to grow headcount and increase productivity, 2023 will offer a variety of options to expand into bigger premises. Due to the above market factors, these may offer excellent short to medium term value for money as well as longer-term capital growth prospects. This is particularly true of those businesses that may have started out in serviced office space, or an innovation centre, where running costs per square foot are high.
Rent, lease or buy – Which boxes do you tick?
If you’re looking to grow it’s important to consider the options, the ‘pros’ and the ‘cons’. Here is a quick check list:
Rented office accommodation – flexibility at a price
- Ultimately flexible – you can increase and decrease as you need
- Little commitment – you can get out quickly if you need to
- No maintenance commitments – the landlord covers your costs
- Renting offers access to locations you couldn’t afford to buy into
Leasing office accommodation – cheaper and customisable
- Cheaper than renting
- You can generally configure the space how you want
- Option of short-term sub-letting or licensing excess space you might then use for future expansion
- Easier for ‘hot-desking’ if you work with contractors or offer staff WFH options
Buying office accommodation – your place, your rules
- Your place, your rules – do what you want with it
- All the above benefits of leasing, without rent increases
- It is likely to be cheaper in the long run
- It is an asset on your balance sheet
- It should increase in value, particularly if you get into an upcoming area early
- You can use it in your pension plan
Buying commercial property and pension planning
It’s perfectly possible for commercial property to be held in a pension plan – also known in the financial services business as a ‘tax wrapper’. As this name implies it can give you significant tax advantages and will work in a SIPP (self-invested personal pension) or a SSaS (Small Self-administered Scheme).
A SSaS is often the preferred route as it can acquire the property and then lease it back to the business. SSaS pensions tend to have lower fees than a SIPP but are limited to no more than 11 people, who have to be company directors.
Things to consider before you decide to buy or lease office space
It’s important to estimate your expected growth path – if you’re expecting meteoric expansion short-term it may be better to stay flexible so you can move if you outgrow the space. Whilst owning property gives you an asset it is not always that liquid and values can go up or down. Balanced against that, if you buy a bigger space than you need, sub-letting (straightforward if you buy) can offset the costs and contribute useful revenue.
A more practical consideration is how the space you need is most likely to be available in the location you want. If the market is already in the hands of commercial landlords, buying might not be an option. This may call for more strategic business planning.
Do you have the funding to buy commercial property?
The pandemic has had a serious effect on two aspects of financial provenance. In the first place, credit ratings have been dialed-down, and ‘affordability’ criteria tightened. Secondly, lenders have generally become more risk-averse. The right finance package at the right rate always tends to be harder to find in a recession than it is in a period of growth.
If you’re thinking of making an investment in commercial property and buying your own office accommodation why not talk to us first. If your prospects look positive, we may be able to introduce you to ‘off high street’ lenders who are more accommodating for smaller businesses.