One impact of the recent economic downturn is that large funds and commercial investors are withdrawing from the industrial property market.
Previously these investors snapped up premium industrial properties, forcing prices higher and making it difficult for owner-occupiers to buy in explains Mathew Tiller, Research Analyst, Colliers International.
“Under increased pressure to reduce debt institutional investors are no longer buying, and in many cases are off-loading premium properties,” Tiller says.
“This means that for buyers there is some quality property on the market and less competition when buying. Couple this with low interest rates and, on the face of it, it would seem a good time to buy your own premises.”
However, there is a flip side. Even though interest rates are low, credit is tight.
Financial institutions are looking carefully at intending borrowers and are being more conservative in what they will lend.
The typical loan to value ratio for industrial property is around 60-65 per cent for good quality property and around 50 per cent for lesser quality property, Tiller explains.
This is dependant of course on finding a lender willing to lend the money.
Christian Schilling, BIS Shrapnel’s senior project manager - property cautions that if you already have substantial borrowings for business operations, it may be difficult to find a lender willing to lend you more even for a land purchase. Be aware too of other costs involved.
Richard Korda, Director, Zenith Finance says stamp duty, loan and legal fees can add around 6 per cent to the purchase price.
“Consider too that you may need room in your budget for a fit out,” he adds. That said, the shortfall between purchase price and loan doesn’t have to be cash, as Jackie Mitchell, property investment specialist with Finlease Property Finance explains.
“This can be supported by additional security or by utilising available equity in other properties,” she says. “For commercial transactions mainstream lenders will usually request other securities such as cross guarantees, directors' guarantees, and corporate charges to further secure the banks’ position.”
According to Korda, banking products changing rapidly in the new economy.
“If you ’re planning to finance a property purchase you should know that the finance market has changed dramatically recently and you need to get your finance organised before you go looking for premises and make sure that the loan that you’ve been approved for will be honoured for the property that you plan to purchase,” he says.
Korda cautions that you can expect that financial institutions will not only check your application carefully but you may also see new loan conditions such as a requirement for periodical valuations to be made at your expense.
If the property value falls, you may be required to provide additional capital or increased security to redress the change in the loan to value ratio. When determining whether to rent or buy, flexibility is a consideration.
While there are benefits to being your own landlord it won't be so easy to move premises if your business circumstances change.
When buying, consider how you’d handle your business needing more or less warehouse space in future. Could you grow your business in the new space or could you divide it and lease the excess? If you needed to lease the premises would it be attractive to other businesses?
Interest rates, while low, are also a factor in any buying decisions. Korda points out that there are significant differences between variable and fixed rates with variable being more competitive.
Schilling cautions that often the actual rates you will be offered will be at a margin over the quoted rates. If your business opts for a variable rate, could it still afford the loan if rates increased by half or even doubled?
Any business considering purchasing premises should consider if the capital being committed to the purchase may be more effectively used if invested in business operations rather than being tied up in a non performing asset, explains Nicholas Crothers, Associate Director, Research at Jones Lang LaSalle.
For SMEs and smaller businesses one attraction of buying business premises is that it provides some security for the owner’s retirement.
If you rent property, Mark O'Donoghue Principal, Finlease maintains you’re effectively paying for someone else to purchase that property.
“Every 15 years the rent you pay on your premises represents the rough equivalent of what it would cost you to have bought it,” he says.
“Owning business premises can be a valuable asset to the business owners in retirement as either something that can be sold or leased out to provide retirement income.”
Another motivating factor for purchasing is where you acquire a facility with surplus undeveloped land.
As Jeff Pond, National Head, Industrial Services, Jones, Lang LaSalle explains, "in this situation, if the organisation expands it can readily extend its facility, as opposed to leasing another warehouse which may require additional personnel to run and maintain."
Pond suggests that whether or not to purchase your own warehouse premises is a business decision.
“Investment in industrial real estate is an excellent long term investment and any organisation that has the capacity should consider it and weigh up the pros and cons relative to their business model.”
When looking at your business’ options consider if the benefits of owning your own premises outweigh the benefits of renting- it might be that owning is a good choice and, if so, then market forces might be in your favour right now.