The purchase of a first property is a milestone moment on the timeline of any business. For one thing, it’s almost always a sign that the business is on the up (something that staff and customers alike will appreciate) — and it can also provide the added bonus of an additional nest-egg for you as the owner.
But getting that property purchase signed and sealed can sometimes be an uphill struggle. Not least, to find a lender who will consider mortgage applications from smaller, newer businesses, a helping hand can be invaluable. You will probably also find that the best business premises for sale do not tend to stay on the market for very long. This makes it extremely useful to have a short-term financial fix at your fingertips to enable you to seize the right opportunity when it arises.
Here are some pointers on when it makes financial sense to consider making the switch from renting to buying business property. We’ll also outline some of the pitfalls small business owners can encounter before and during the purchase process — and at how you can overcome them.
Buying a business property: when is the right time?
Especially when a business is still finding its feet, renting a space can make a lot of sense. Notably, other than having to pay the rental deposit, it enables you to move into a space with low upfront costs. You have the certainty of paying out the same amount for the property month-to-month — while major maintenance costs usually remain the responsibility of the landlord.
Over time though, the potential downside of commercial rentals can become more apparent. On the one hand, you have the flexibility of being able to give up the property at the end of the tenancy term (or on giving the required notice if it’s a rolling arrangement). But equally, come renewal time, the landlord could decide to hike the rent — and by making your business a success, you might even have helped increase the rental value of the property. Alternatively, the owner might have other plans for the premises, which means renewal isn’t an option.
Purchasing a property means no longer being faced with the uncertainty of rental increases and renewal issues. It can also be a valuable investment stepping stone for your business. In particular, once you have built up equity in the property, you may be able to use this as security on borrowing to fund further growth (by buying new equipment, for instance).
If you want greater security and control over the space you occupy, and if you are reasonably certain about the geographical location you want to be based in, purchasing a business property can make perfect sense.
The big financial challenges — and how to address them
Of course, there are a number of issues you can face when purchasing business property — so here are some of the most common ones encountered by small business owners:
You do not want to go through the purchase process only to outgrow the space within a matter of months — or else to discover that it is far too big for your needs. The purchase of business property should normally be seen as a medium to long-term financial strategy, otherwise there’s a risk of being saddled with a property that fails to meet your needs, and of repeat transaction costs eating into your profitability.
To avoid this, always refer closely to your longer term business goals when considering when and what to buy. What are your realistic sales projections? Where do you see your business heading in 3-5 years? How does this translate into the amount and type of space you will require?
Long term needs can be hard to predict. That said, don’t overlook the possibility of renting out part of the premises (a floor of office desks or workshop space, for instance) — at least in the short term. This can be a good way of putting spare space to work, and rental income from it can serve to offset the overall costs of purchase.
Securing mortgage funding
Many business owners say that securing finance is one of the biggest challenges they face — and it’s certainly the case that some lenders are better than others when it comes to meeting the needs of small business owners.
If you focus on lenders who understand the realities of running a smaller business (e.g. issues such as income volatility and cash flow), your chances of being able to borrow the right amount on the right terms are generally much improved.
Getting hold of funds at short notice
Suppose you are browsing an auction catalogue, and you spot a property that’s an exact match for your needs. But the auction is next week — and even if you were to make a successful bid, there is no possibility of getting the funds together to make the required deposit payment.
Or perhaps you’ve spotted an attractive premises for sale, and the asking price is just above your budget — but the owner has agreed on a time-constrained reduction.
Not many small business owners have a big pot of capital to draw from — and if you cannot get your resources together in time, it can mean missing out on the perfect property. For some people, a business loan from a traditional source (e.g. your bank) can be the answer. But as with mortgages, standard high-street lenders can sometimes be reluctant to approve such requests without lengthy enquiries — by which time, the opportunity might have passed.
You may be waiting for payment from a big contract to come through to fund your deposit, or as in the case of an auction purchase, you need access to funds quicker than it takes to get the mortgage finalised. A bridging loan is a short-term arrangement secured on property you intend to purchase, which you pay back as soon as your mortgage is in place or funds from another source are received. It can often be arranged within a matter of days, providing the ideal ‘stop gap’ to get the purchase through.
With a range of bridging loan options at your finger tips, it becomes so much easier to secure the ideal property for your business. If you’re interested in learning more about how to make the most out of your property opportunities, head over to our blog or speak to Vantage today.
This is for intermediary use only
In its recent ‘State of the Nation’ survey looking at the health of the UK property market, Q3 2018 RICS UK Commercial Property Market Survey, the B-word continues to cast a long shadow.
When posed the question: Have you seen any evidence of firms looking to relocate away from the UK in response to the Brexit vote? Around 25% of respondents said no. But when asked if they expect to see firms relocating away from the UK over the next two years, almost 50% said yes.
What effect might this have on the long-term health on the commercial mortgages market? Ever since that seismic vote in 2016 to take us out of the EU, RICS has asked its survey respondents each quarter if they have seen any evidence of firms looking to relocate at least a portion of their business as a result of the vote. The proportion seeing some activity has consistently hovered at around 15% to 18%. In the latest RICS results, this has leapt to a quarter of respondents. It’s hard to say whether this represents a firm statement of intent or mere mood music regarding the end game of the negotiation process.
Despite these indicators, commercial properties continue to be a good bet. Mortgage brokers and lenders are increasingly seeing investors moving away from traditional ‘vanilla’ properties and looking at more complex buy-to-let: rents on commercial lets tend to be higher, offering a better yield for landlords when margins get squeezed. Since 2000 the UK’s commercial property stock has grown on average by 3% year-on-year according to the Property Data Report.
With semi-commercial properties there are clear market benefits notwithstanding stamp duty exemptions even though these properties will have a residential and commercial element.
The UK commercial property market in 2016 was worth £833billion, representing 10% of the UK’s net wealth. Investors owned £486billion worth of non-residential property in the UK with overseas investors owning just under 30%.
Nonetheless, some areas are more buoyant than others. This is exemplified in the commercial sector’s Holy Trinity of industrial, office and retail space. The Q3 RICS Survey showed demand for industrial space, a steady run of uninterrupted growth stretching back to 2012. The demand for industrial space is benefitting from the shift towards online shopping. The demand for office space was unchanged, however, retail space demand from businesses saw another fall for the sixth successive quarter.
Nationally, the retail sector is displaying challenging rental projections across the UK with a projected downward trend for both prime (good transport links and close to amenities) and secondary (within walking distance to transport links and amenities) locations. The London market for secondary office space is expecting to see a slight fall in rents. The outlook for prime office rents in the capital is looking relatively flat but regionally the picture looks more positive. Prime industrial values are rising confidently throughout the UK. Secondary industrial prices appear strongest in the Midlands and the South of England. Prime industrial, secondary industrial and prime office remain strong performers, however, prime and secondary retail have a definite downward trend. It is hard to say what effect increased pressure Brexit will have on our high street.
The panel of chartered surveyors interviewed for the RICS survey provide a mixed picture. Some areas such as East Anglia are showing market resilience despite uncertainty over Brexit negotiations whereas in the North East and North West businesses are taking a more wait-and-see approach and Scotland experiencing a slowdown in the property market.
To sum up, commercial property is still looking like a good investment option with high yields with both prime and secondary industrial office space showing excellent growth potential. Commercial property has faced down economic and political uncertainty in the past so there’s nothing to suggest it won’t be able to maintain its competitive edge from March 2019 and beyond.