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Leasing & Ownership

21 September 2007

In recent times owning the property you occupy seems to have taken over from leasing as the preferred choice for most businesses. What's driving this and is it the best long term choice?

Over the last five or so years there has been significant growth in all types of property value, not just residential but also commercial and industrial. This has been well publicised and most of us have a desire to share in the benefits of this growth. In simple terms this is causing an increase in demand for property and where demand exceeds supply, prices go up. However, history shows that property values move in cycles and that this last upward trend has been somewhat unusual; both in terms of its size and the duration it has run. Does this mean that when the slow down does occur (as it must), the market will then remain flat for a longer period?

A further factor in the market is that most of us simply dislike paying rent. It's part of the Kiwi psyche to own rather than lease. When discussing the reasons for purchase with a new ‘owner/occupier', usually one of the first reasons quoted is that it's better to use the rent money to pay the mortgage. This reasoning cannot be faulted when the level of rental equals or exceeds the amount of interest payable on the full purchase price of the property. However, yields (or returns on property investment) have come back considerably and, in the current market, more often than not the level of rent is lower than the sum of interest payable on the purchase price. This means capital gain is needed to balance the ledger as, in a flat market, an investor would be going backward. Like a lot of financial decisions, timing the key.

Greater control of future direction is another reason often quoted in favour of ownership. Along with property values, rents too are rising and this is causing concern to some businesses. By owning the property instead of leasing there will no longer be uncertainty over future rental levels. An owner can also develop a property as he thinks fit. Control does, however, have its potential downside if the business changes and the property purchased no longer meets requirements. A lessee, once the lease runs out, can elect not to renew, but shift to new premises more in keeping with current business needs. Certainly, a building owner can also shift and possibly with more flexibility in terms of timing but would either have to sell the existing premises or attract a tenant. Although probably not an issue in a buoyant market there would be a potential problem if the market is flat.

With a greater awareness about the possible need to provide for retirement, buying a building and letting the business pay it off over our working life is a popular option. If it involves a general purpose (rather than special purpose) building over a reasonable time frame inflation should almost guarantee you success. However, the same would apply to a well chosen investment property or a managed superannuation policy; although this means you are relying on a third party to pay the rent or manage your investment. Being your own tenant gives you a great insight into the reliability of the rental flow.

Property ownership or leasing - there are for's and against for both options. In the recent buoyant market, the buying option should have produced some healthy capital gain but under slow market conditions leasing may prove the better bet. As stated earlier, timing plays a major part.

If you are one of the new ‘owner/occupiers' remember the principal reason for acquiring the property in the first place; to operate your business to the best advantage. Do not let managing your property distract you from managing your business.

Ian Baker

This monthly paper reflects the views of the writer and may not represent the views of all TelferYoung staff.