“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.