Opening the doors to more options than you might think…
If you’re a business leader struggling to make this all-important decision with regards to your new premises, read on. We’ll weigh up the pros and cons – before revealing an ‘outside-the-box’ approach you’ve probably never considered.
If you’ve ever put down roots on a new business premises, you’ll no doubt be aware that three key options exist when making the initial decision for your new site: buy, lease, or build. All come with specific advantages, but – as with most major decisions in life – each one can inevitably also lead to risks, distractions, or at least a certain amount of compromise.
However, what if there was another way, which offered the best of all these solutions?
Before we explore this option, let’s first look at the more conventional routes regarding the acquisition of new business premises, and the pros and cons of each.
Buying or Leasing
If you’re in desperate need of, for example, a manufacturing facility within a certain timescale, buying or leasing a site that already exists may initially seem like a no-brainer. However, those who do this often find themselves taking a ‘that’ll do’ approach, whereby the specification, quality, sustainability credentials, and/or location are miles away from your ideal. Yes, you’ll get something sooner than if you built it yourself, but will it really tick all the boxes you require? Entering your new premises on the basis of at least one construction compromise can’t help but feel a little disappointing, and will most likely also compromise business performance.
If you’re going to make the commitment to purchase rather than lease, you have end-to-end control over the facility, which can be good news in terms of avoiding surprise bills for upkeep. You’re in charge of selecting the way the building is managed, providing greater control than a lease arrangement, and there’s also the possible benefit of speed to market. However, similar to leasing, you’re restricted by whatever is available on the market at a given time. As well as not being in the exact location you wanted, you may find yourself signing up to more – or less – space than you need, and probably also a facility that’s not aligned to your business needs or values. Another, often overlooked, impact is on the saleability of the business itself – the ownership of a building ties any potential business buyer to a location, which can be seen as a negative.
In terms of your finances, leasing is commonly considered a good way to get up and running with minimal capital expenditure. You can often negotiate with a landlord for a short- or long-term arrangement, depending on your circumstances/requirements, and the owner of the building is typically responsible for its maintenance and upkeep. It’s not all good news with regards to the purse strings, though – just as with rented accommodation, it’s obviously also worth bearing in mind that a landlord has the power to raise your rent or enforce you to pay for improvements, like re-roofing, re-rendering, and capital expenditure on facility upgrades and replacements, with a limited amount of notice. To make matters worse, all these changes, plus anything you invest in improving your space, can usually not be recovered, and you often have to restore the property to how it was at the start of the lease. In the worst-case (but not uncommon) scenario, you complete your works, the landlord doesn’t renew your lease agreement, and you have to repeat the laborious exercise all over again.
As a building owner, you can ride the waves of property prices – by reaping the benefits of increased re-sale value – or be part of the £billions wiped off the value of commercial property (as was the case in 2021). You’re also more likely to find yourself creeping into the red if you haven’t thoroughly done your homework before signing on the dotted line. As with all property purchases, getting a building thoroughly inspected before you buy is invaluable, and should hopefully avoid ‘hidden surprises’ in terms of costly problems. If you take it on regardless of any highlighted issues, you’ll need to ensure you scope typical quotes for the work and have the appropriate funds on standby. Ultimately, if you need to invest in extensive development, it stands to reason that it’s best to do it on a facility you own, rather than on an asset someone else owns.
Building your own premises
The vast majority of property builds are by developers who create the most generic, broad-appeal property possible – making it far from ideal for anyone with even slightly unconventional needs. But if you, rather than a property developer, choose to build a premises from the ground up, and have the capital to make it happen, you get the unique opportunity to define how that property aligns with your individual business needs. You also have unrestricted decision-making right the way along the process.
While this means you get exactly what you want – from the top down – this level of involvement can also invariably come with its disadvantages. For example, do you have the time to make all these very specific decisions, and could such involvement pull your attention away from the more important day-to-day running of your business? Take it from us: it’s incredibly easy to underestimate what a huge distraction property development can be.
If you have multiple business premises to manage, will those facilities be given less attention as a consequence of you running a development project? While hiring a developer could lessen this distraction, they might take a more generic ‘cookie-cutter’ approach to the build based on their previous experience. Their expertise is in building rather than, for example, manufacturing, so they’d be forgiven for not spending enough time deeply understanding the nature and needs of your business. Furthermore, if they’re on a fixed fee arrangement, there might be an unintended consequence of the developers being incentivised to prioritise their profits over your business outcomes, compromising the build to ensure their margin remains intact.
Even if you have an outstanding developer leading the project, they still need to engage an entire team of stakeholders within your business to ensure it meets your needs. This is one of the greatest failings of your average project.
On top of all this, is the biggest pair of issues: time and finance. The building process requires substantial capital expenditure, and clearly takes a lot more time – both in terms of workload and duration – than a purchase or lease.
An alternative approach
With so many advantages and disadvantages with each option, you could be forgiven for being unsure of which solution is the best for you and your business. But what if there was another option on the table?
We’d like to propose a fourth approach. A hybrid way, which enables you to ‘have your cake and eat it’, offering the certainty of ownership, the flexibility and control of a build/customisation, and the lessening of any financial concerns – including negating considerable initial financial outlay.
This approach allows companies like VERB to act as developers for your build, and maybe also the landlord of your eventual facility, engaging with your business from day one to explore your needs and how the facility will be used. The outcome is as individual as if you were to have the time and effort to build it to your exact specifications/requirements. The only difference is that the process, the risks and the financing are taken off your hands, allowing you to remain focused on the actual day-to-day running of your business.
A bespoke new headquarters, for a freight for forwarding company
To illustrate, we spoke with a business leader from VERB’s network who supplied first-hand knowledge of the challenges faced in making the right choice between the three options:
Following the acquisitions of two other businesses, a leading global freight forwarding company in the UK found itself operating with multiple facilities – a situation created by circumstance, rather than the needs of clients or the business.
After three years of trying to make this work, the negative impact of having multiple sites on operational productivity, communications and missed opportunities was clear.
Their landlord at the time offered an opportunity to break ground on a new facility. One that would eventually be leased, but where the tenant would be part of the planning process from the outset. The company seized the opportunity to unite all head office activities and personnel within one facility designed and configured to the needs of the business and its clients, but available as part of a leasing arrangement.
The output was a new headquarters for the business, with a host of features it could never have expected with a standard purchase or lease: carefully designed flow between office and warehouse areas, staging areas for the breakdown and build of airline pallets, improved racking configuration for the storage of over 1,000 pallets, substantial refrigerated storage, x-ray facilities, the inclusion of customs supervision, and factoring in additional renewable energy and safety initiatives aligned with the company’s values.
The business quickly saw improved turnaround times of collection and delivery, reduced emissions and improved safety. Despite restructuring activities forced upon the business by COVID-19, the company still applies the lessons learned here in the ongoing evolution of the business.
The financing question
The most compelling feature of this hybrid approach is the financing – it’s provided by a third party. Through our parent company, VERB finances the property right up until the site is officially up and running, removing the stress and headache of managing finances while the build is taking place. There’s no upfront payment; instead, no expenditure – whether capital or operational – is required until the business occupies the facility. Furthermore, the ongoing payments can be an operational expenditure – following a leasing model – rather than a capital expenditure.
In conclusion, rather than simply undertaking a development, we at VERB view a build as a reflection of ‘what do you want to achieve today and in ten years?’ rather than simply a response to the question ‘what do you want to build?’ In other words, your new site will be a product of a thorough investigation into what exactly your business/manufacturing process needs now, in one year, and in the long-term. Only when we’ve achieved this deep understanding do we start thinking about bricks and mortar (or timber frames), with our relationship continuing beyond the discovery and development phases through a long-term leasing partnership. We believe the VERB proposition is unique within the real estate sector.
Hopefully this information has helped you make the right choice for you and your business. If you’d like to discuss which approach is the right option for you, please contact us at VERB for a free, impartial chat - firstname.lastname@example.org
“Rather than simply undertaking a development, we at VERB view a build as a reflection of 'what do you want to achieve today and in ten years?”