“Would it be smarter to rent a
commercial property than purchasing it?” – it is a question everyone who
decides to open a business in Dubai asks themselves at some point.
As an international trading hub,
Dubai caters to all types of business ventures. Brimming with well-equipped
state-of-the-art office spaces, Dubai offers numerous choices for those
planning to expand their business activities in the Middle East.
When choosing the ideal commercial property to establish a business, the entrepreneurs should essentially consider the primary business activities of the enterprise. Dubai has multiple Free Trade Zones that help entrepreneurs establish and manage a business quite easily.
It should be noted that
commercial property in the UAE is divided into several types according to the
types of businesses. For instance, professional office space cannot be used for
a retail business.
Deciding whether to purchase or lease a commercial property should primarily depend on the business type and the financial conditions of the entrepreneurs. Before finalizing the documents, the entrepreneurs must ensure that all the required documents including proof of ownership, compliance of the commercial property with the current plans, the status of the premises, and the necessary permits to occupy the property are available. However, these requirements might change according to the specific businesses and the location of the commercial property in Dubai.
Below we outline some of the
fundamental aspects of leasing and owning commercial property as well as their
possible advantages and disadvantages. Read on to find out the pros and cons of
leasing and owning commercial property in Dubai.
PROS OF LEASING A COMMERCIAL
PROPERTY
Purchasing a Property Requires
Liquidity
Leasing requires a less amount of
cash when compared to purchasing a commercial property. Leasing a commercial
property rather than purchasing one leaves the investors with more capital to
invest in other business operating costs.
Leasing is Attractive for
Financing
Many small-scale or marginally
profitable firms may find traditional financing sources like purchasing a
commercial property rather expensive and difficult to attain. It is why leasing
can be seen as an attractive source of financing. The cost of leasing usually
falls below the cost of ownership and a landlord might be eager to sign a
simple lease than transferring ownership.
Leasing Offers Stable and
Predictable Costs
Unlike with ownership, leasing
costs are easier to forecast when preparing a budget. Although some leases may
end up costing several minor capital expenses to the buyer, most commercial
lease structures out there help the buyer sidestep these unpredictable expenses
like mechanical system replacement costs, structural repairs or random expenses
like replacing the roof of the parking lot.
Leasing Looks Good for the Tax
Benefits
The occupancy costs of leasing
are fully deductible from the insurance. The owner of the property is supposed
to depreciate the increase in the costs of the property. However, they cannot
depreciate the value of the land.
Leasing is Flexible
A lease agreement comes with an
expiration date where the buyers can re-evaluate their commercial property
requirements. A leasing agreement also lets a lessee decide whether they wish
to expand their business activities or relocate.
A Property at a Prime Location
Commercial property at prime
locations across Dubai may already have been purchased. On the other hand, the
available properties for purchase might be located away from the central
locations in Dubai. Leasing allows the buyer to establish their business in a
prime location in Dubai.
Focus on The Important Things
As with any other investment,
purchasing a commercial property comes with multiple risks. These could include
a decrease of the property value due to economic and market conditions,
financing risks and unforeseen expenses related to maintenance and repair.
Leasing a property allows the
tenants to focus on their primary business and not just its maintenance. Issues
with property management can set the owner’s business back by several months.
CONS OF LEASING A COMMERCIAL PROPERTY
Control of The Property
When leasing commercial property,
the bitter truth is that the tenants have little to none control of the
property that they are leasing. Due to the lack of control, these tenants may even
be affected by parking restrictions, operational hours, the compatibility and
the use of the commercial property.
On the other hand, securing the
ownership of a commercial property can allow its owner to make decisions
without a hassle or anyone’s interference.
No Appreciation of The Property
or Equity Accumulation
Those who choose to lease instead of purchasing a commercial property do not have the opportunity to yield profits of the property value appreciation. Additionally, tenants of the property are not given the chance to yield any type of equity accumulation by reducing the property’s underlying financing.
That being said, purchasing a
commercial property allows its owner to enjoy the profits of any asset value
appreciation. Also, under an amortizing loan, the owner can also accumulate
equity in the commercial property as the mortgage principal is paid off.
Leasing is more expensive than
you think!
At a glance, the instalments for
the leased property might look comparatively lesser compared to purchasing a
property. However, at the end of the lease period, it could end up costing the
tenants more than purchasing the commercial property.
Contractual Obligations of
Leasing
Even though the business based at
the leased commercial property faces losses, becomes less desirable or lacks
liquidation, the tenants are obligated to pay the rent for the property. These
contractual obligations come along with the leasing process and cannot be
evaded even if the tenant does not have the financial capability to pay the
rental obligations. In fact, the tenant will be charged with penalties if they
missed out on their payments for the commercial property.
The Decreasing Salvage Value of
The Property
When managing a commercial
property on lease, it is natural to expect repairs and modifications in the
business space. However, this also means that any modifications done to the
property will eventually be handed over to the owner of the property at the end
of the lease period. Alternatively, the owner of the commercial property might
require the tenant to remove all the modifications done during the leasing
period.
PROS OF PURCHASING A COMMERCIAL
PROPERTY
Enjoy the Appreciation of The
Property as an Owner
All in all, the real estate industry
in Dubai has been enjoying a steady boom. Even after the toughest of the
economic conditions, Dubai has been able to recover its real estate market to
its former prestige.
A tenant is not able to enjoy the
appreciation of the property value. The owner of the property will instead be
enjoyed by the owner of the commercial property. Although the value of the
property may fluctuate over the years, once the total value of the commercial
property improves and/or stabilizes, the owner can yield the added property
value by putting the property back on the market.
The Property Could Pay For
Itself!
Just because you own a commercial
property does not mean that you have to occupy it all by yourself. Commercial
property can be used as a mode of income to those who can afford to allocate
some space to a tenant for a leasing agreement. This will provide the owner with
an additional source of income which can be used to pay the mortgage, invest or
even distribute.
Property Ownership Attracts Tax
Benefits
Ownership of commercial property
comes with a range of benefits and depreciation deductions to shield the owner
of the property from income taxes. Additionally, once the property is put back
on the market, the owner is taxed at a lower marginal tax rate than his or her
usual income.
CONS OF PURCHASING A COMMERCIAL
PROPERTY
Purchasing a Commercial Property
in Dubai Takes Time!
As with any other expensive
investment, purchasing property in Dubai takes a considerable amount of time – especially
due to the substantial transactional costs involved in the acquisition and
deposition process of the property.
These costs can even out the long-term
benefits of owning a commercial property or nullify the benefits of
appreciation of the property for at least a short period.
The Initial Investment Can Be
Massive!
In the majority of the cases, the
commercial property requires an initial payment of at least 20% to 30% of the
total value of the property. Considering the real estate market in Dubai, this
value can be too much to bear for the investors. This money can rather be
invested in the owner’s other business activities.
A Commercial Property Can Be
Difficult to Manage
Issues regarding commercial
property management are usually complex in nature. These complications range
among legal, compliance, health and safety concerns. Managing contractors can
also be expensive and distracting. It is an additional burden for the owner of
the commercial property attempting to run a business.
Difficult Financing Covenants and
limitations
Commercial property purchasing loans
require personal as well as corporate guarantees. The long list of requirements
also involves some type of liquidity such as a minimum deposit balance with the
lender.
On the other hand, non-recourse
fixed-rate financing usually comes along with other demands, which includes
breakup fee or yield maintenance if the loan is retired prematurely.
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