The number of empty offices in Adelaide has marginally decreased over the last six months but remains higher than the national average, according to the latest Property Council Office Market Report released this month.

The pressure on maintaining retail and hospitality premises has been even greater as they face a series of challenges with restrictions and lockdowns.

“For those businesses that have the need for commercial tenancy, the ability to pay for your own asset via the trading business is quite attractive and current market conditions support this,” says Matt Laming, BDO National Leader, Business Services.

However, the decision of whether to continue to lease or buy a business premises can be a complex one – made even more so by the pandemic.

The Property Council study, which measures the percentage of unleased office space in Australia’s six most populous capital cities, shows Adelaide’s office vacancy rate has decreased from 16 per cent in January to 15.7 per cent in July.

Over the six-month period between the two reports, 3026 square metres of office space was leased in Adelaide while 1120 square metres was withdrawn.

A number of the hardest-hit industries, such as retail and hospitality, sit outside the scope of the Property Council data but face impacts from continued restrictions and lockdowns that have resulted in many vacancies.

The pandemic has also brought about a significant increase in working from home (WFH) and for many businesses, this will impact their decision on premises, whether renting or buying.

Laming notes that the mental health and wellbeing implications of WFH are also an important element of the decision process for many organisations.

“What we are seeing is businesses reassessing their needs, considering their required floor space and building in more flexible working spaces. In some cases we have seen a consolidation of offices into larger footprints and having one, central location rather than a number of locations,” says Laming.

The Property Council says no office space is due to come into the Adelaide market for the rest of the year, but 73,636 square metres is slated to come online in 2022.

Property Council SA executive director Daniel Gannon said the decrease in vacancy rates over the six-month reporting period showed the resilience of the South Australian office market and the comparative success of the state’s handling of the COVID-19 pandemic.

“South Australia is a commercial stamp duty free zone and we now boast a far more competitive land tax regime than we have historically, which packages quite a compelling proposition for investors,” he says.

“When you add this to historically low interest rates and a comparatively stable local economy,  we think that does spell opportunity for business owners looking to purchase their own business premise and stop renting.”

Things to consider first

In general, business owners considering the purchase of premises will ask:

• Is the business growing too big for its current space?
• Do we want to lock in a strategic location?
• Are we growing or looking to preserve wealth?
• Is it more financially viable to buy a property?

The answer to these questions depends on both the current business situation and the long-term goals of not only the business but of all the business owners.

Any acquisition of commercial property that ties back to the existing business shouldn’t be thought of as buying a ‘business asset’. Instead, this process should be approached the same way as making any ‘investment property’ acquisition, with the business simply being the tenant.

Like all property acquisitions, the following steps also need consideration

 Upfront costs

When purchasing a property, the upfront costs are significantly higher than the upfront costs of leasing a property. Ensuring you have the appropriate amount of capital available to invest in a property and run your business is key. You will need to budget for a deposit, appraisal costs and potential renovation/fit-out expenses depending on the needs of your business.

Cash flow

An investment property will have ongoing associated expenses, including (but not limited to) loan repayments, rates, strata, repairs, maintenance and property insurance. It’s important to note that most commercial leases have the ability to make the tenant (in this case the business) responsible for certain property expenses.

The right size

Finding the right property size for your business is vital. Thinking of your business as an independent third party, are you certain that the business will stay long-term or is it likely to outgrow the size of the premises? If likely to outgrow, this may not be the right property for your business needs.

 Commercial property loan

As a general guide, banks will only loan up to 60 per cent of the market value of the commercial property that you are looking to purchase. It is therefore important to consider the deposit required for your intended purchase plus on-costs, such as legal fees, and other considerations including personal guarantees or general security arrangements.

Commercial property still remains an attractive investment, with no stamp duty payable on purchase in South Australia, however, the key is finding the right property that suits the business need, or if you are buying for investment purposes, ensuring you can secure long term tenants.

This article is based on a BDO report on buying versus renting.