Should business owners buy or rent their own business space? Which one makes more financial sense?
Majority of companies and businesses have their offices on lease with few who actually own their office spaces. If we look at URA Master Plan, you will realize that commercial zoning area take up very little space as compare to residential and industrial zones. Most of commercial zone area is concentrated in the central core region, especially at Raffles Place, Marina Bay and Tanjong Pagar.
With such limited space in Singapore’s limited land area, it makes commercial properties rather valuable. This partly explain why commercial property prices are usually higher than any residential property prices.
Among the limited supply, Singapore Government allow very few office buildings on strata-titles basis ownership. Majority of office building are not allowed for strata sales. Such building can only be allowed to lease to tenants or sales of the entire development.
So does it mean buying a commercial property will be better? Let us see “To Rent or To Buy” which is a better option.
Show Me The Money
”Show me the Money!” The famous script from Jerry Maguire. Money or cash is always the life blood in any businesses. So let us see what are the differences in the cash outlay and what are the various costs involved as compare to the two options? I will run through the numbers in a case study at the later part. I will not be touching on costs that you have to pay no matter if you rent or you buy. Examples, renovation cost and utility bills.
To Rent – Upfront Cash Deposit
If you are renting office space, chances are, you will probably need to give the Landlord a 3 months deposit, not including GST. Sometimes, Landlord may ask for 6 months deposit if your company paid up capital is not ideal or due to other reasons. This deposit can be refunded to you after the lease ended, subject to terms and conditions in the lease agreement. For this, there could be some opportunity cost of the money deposit with the Landlord, considering inflation and profits you may earn with it. But then again, if the money is kept with you, not necessary it can turn into a profit. So this is something no one can quantify.
To Rent – Costs
The major part of the cost when comes to renting will be the monthly rental you have to pay. Commercial property rental many times will include service fee. There will be stamp duty and possibly legal fee. This stamp duty and legal fee generally cost lower than if you buy commercial property.
To Buy – Upfront Cash Deposit
Nowadays, most purchasers of commercial properties will take loan. Usually, bank can loan up to 80% of the valuation of the properties if it is for own use. Therefore, you will need to pay a 20% cash deposit to the property you are purchasing. This cash deposit forms the share of the property which you paid and yours. This is your equity. If the commercial property market does well in the next many years, your 20% deposit will grow. But if it doesn’t, the 20% will go south in value. All these are just paper value until you sell the property to realize the gain or the lost. Again, this is something no one can guarantee. But the cash outlay will generally be much more as compare to renting for the same size in the same location commercial property.
To Buy – Costs
When buying property, most time, we will say the monthly mortgage repayment is the major cost. This is not exactly true. When we service the loan, the monthly repayment amount payable to the bank has 2 components, Principle and Interest. Principle is the money that is paid to bank to redeem the money borrow from bank to purchase the property, while the interest is the cost of borrowing the money from the bank. The ratio is usually 2/3 Principle, 1/3 Interest (depending on interest rate). This Interest, if compare with the monthly rental, may be significantly lower. But if you consider the whole amount (Principle and Interest) that has to pay every month to the bank, it may be higher than renting. Other costs involved will be the 3% Buyer’s Stamp Duty and legal fee. Some property price may subject to GST, which many companies are able to claim it back from IRAS. These costs, if compare with rental, can be significantly higher.
What are the figures?
Case Study: Company Ace has a 3000sqf office space requirement in the Central Business District. The company director is deciding to rent a Grade A office at Samsung Hub or to buy. If Company Ace decided to Rent Samsung Hub: – Samsung Hub average rental is around $8.50psf. – Lease term: 36 months – Monthly rent (before GST): $8.50 x 3000sqf = $25,500 – 3 Months Deposit: $25,500 x 3 = $76,500 – 36 Months rent: $25,500 x 36 = $918,000 – Stamp Duty: $3,672 – Legal Fee: $1,500 – Cash outlay (refundable): $76,500
Total Cash needed: $999,672
If Company Ace decided to Buy Samsung Hub: – Samsung hub transactions are around $3,300psf – Sales price: 3000sqf x $3,300psf = $9,900,000 – 20% deposit: $1,980,000 – Mortgage: 1.8% interest rate, 20 years – 36 months principal: $1,014,221 – 36 months interest: $401,303 – Buyer’s Stamp Duty: $291,600 – Legal Fee: $3,000 – Cash outlay (Equity): $2,994,221
Total Cash needed: $3,660,124
It is pretty clear that renting will incur almost 40% more cost than buying an office space. But the total cash needed to buy an office is more than 3 times as compare to renting an office! Although majority of the cash is not your cost and will return to you after you sell the property, but this significant cash amount is being “lock up” in your property. If this property have strong upside potential, it may be worth it putting your business money in it and hoping for the value to grow. If the value grow or after few years, you can still have the option of “unlocking” the cash in your property by taking a term loan on your office property.
Looking at the above, if your company has excess cash sitting in the bank, and the office property you intend to buy has strong upside potential, it may make sense to buy than to rent. But, if your company has limited cash flow, or you have expansion plans for your company that require cash to do it, renting an office space will be a better option.
Money is the main consideration when deciding to rent or to buy. However, there are other issues you may need to take note of.
If after a few years, your company may need to expand and require more office space. If you are renting from a Landlord who owns the entire office building, you have a good chance to expand your business fairly easily. If the Landlord has a bigger space, or your neighbor is not renewing the lease, all you need is to negotiate for a good terms and you are more or less set to go to take up bigger space and not worry about your existing space what to do with it. Likewise, if you decide to down size the company, the process may be the same. If you decide to relocate and not having an office in the district, you can negotiate a pre-termination or not renewing your lease. Quite simple and straight forward.
If you own the office space in a strata office building, it is going to be very tough to get yourself a bigger space in the same building. If you can find another space from another strata owner, and you manage to rent it, you probably want to rent out the office you own as you shift to the bigger office. This is still making sense, but you have more work to do to handle the leasing of the office you own. If you decide to downsize, you can consider renting our part of your office to collect rental. By doing so, you probably will need to do some subdivision work, subject to approval and will cost you some money. If you decide not to continue your business, you can either rent out the entire office to collect rental or sell it away and cash out your money. Either way, you are subject to the current market sentiment and condition and will take up time and effort to do so.
There is no right or wrong, rent or buy. You have to understand your current situation, do up your numbers and plan ahead. After which you should be able to have a clearer picture and know which option to take is best for you. You should also talk to experience realtor for advice and for a deeper understanding of the market condition before making any decision. Appoint a realtor to assist and guide you in any property transactions, so that you can focus on what you need to do.
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**The content and information provided is for general information only. It should not be treated as an invitation or recommendation to buy or sell any specific property or product. Each illustration in the presentation or article is based on current information as at the date of publication. Readers are to consider the content as one of the many factors in making investment decision and should seek specific investment advice. Readers should carry out their own due deligience or verification of such information. The author and publisher of the article are not liable for any losses. All right reserved.