For many modest-sized design consultancies the prospect of buying their own premises is very daunting, but nevertheless a move that many consider. Ownership of your office has appeal. Not only does it bring a sense of “having arrived”, graduated from the renting classes, but it can be a great investment for an owner that wants to to take a punt on the property market.
If all goes well, having your own building will provide security for your business. Unless you can pay entirely with cash, mortgage repayments will allow you the peace of mind of fixed, regular payments instead of facing rising rent costs. It can also be used as security against future borrowing. But there are a fair share of associated risks.
Those with long memories will remember how Fitch’s King’s Cross premises in London, that it bought at the pinnacle of the property cycle and on the cusp of the early 1990s recession, nearly closed the company. It is a fact which has left a lasting impression with Ticegroup chairman Ian Cochrane, then chairman of Fitch.
“As it transpired, we bought at the top of the property cycle. But nobody had predicted it at all. It brought us to our knees,” he recalls with trepidation.
“Personally, I am always nervous about advising to buy rather than rent an office. After all when is the right time to move? People are in the design business not the property business – you can get into big problems,” he says.
Of course, there are good enough reasons to consider buying if you are looking at a long- term business plan, both aesthetic and commercial.
Lumsden Design Partnership, for example, is set to sign on the dotted line for a new Islington office in north London in the next two weeks. Founder Callum Lumsden says it is something that he has always wanted.
“We are looking at a whole new way of working which is more flexible. It gives us the opportunity to open the office 24 hours a day, seven days a week, or work from home if we need to. We want to encourage people to use the building for more than just working – there will be a public area and space for recreation,” he says. “We are in the business of branded environments after all.”
Lumsden advises finding a good property agent to help, particularly in London, where office space is scarce. His agent found a building that was not even on the market and agreed the deal before the consultancy ever did. Lacking lots of spare cash, the business borrowed the money with a mortgage agreement.
“It is not an easy decision to make. It’s a very serious commitment,” says Lumsden. The new location was chosen for the recession-proof factor as much as anything else – trendy Clerkenwell was avoided for the same reason. “You need to think about the costs being more than just the price of the building. There are agents’ fees, refurbishment costs, tax and Stamp Duty,” Lumsden adds.
For consultancies such as Dew Gibbons, looking to renovate a building, there are also architect and quantity surveyor costs. The consultancy has bought a derelict warehouse in London’s Shoreditch, which it hopes to move to in November, from its existing premises in Euston.
“The problem we had was that our rent was going up by 50 per cent a year,” says Dew Gibbons founder Steve Gibbons. “Renting also stops you making improvements to your office… if you invest in the property it becomes more valuable. That, in turn, can push the rent up.”
He advises that those choosing the purchase route should be aware of the lengths of time involved. “It took us 18 months to find and we have spent the last year refurbishing the place. Luckily, we agreed on the price at the right time – I wouldn’t do it right now,” Gibbons adds.
Dew Gibbons was advised to buy by its accountant, as a way of investment. The plan is to buy the property separately from the main business through the company pension fund. The consultancy then “rents” the property from its other business, effectively diverting the funds once paid to the landlord into the fund controlled by the business.
David Rosen of property agent Pilcher Hershman explains: “If you buy a building as “the business”, then sell it, you pay Capital Gains Tax. It’s best for the owners to buy a building as individuals and then let it out to their business through a pension fund.”
Rosen is cautious about advising the “purchase route” to creative businesses and says that consultancies taking this course cannot take enough advice.
“It doesn’t give creative businesses the flexibility. If they grow and then have to move they can end up as landlords. Ad agencies never own their own building because it keeps them flexible. Those design groups that got hit by the property market in the recession which managed a comeback are renting now,” he says.
Another consideration is whether your money could be better spent. “If you have excess cash,” adds Cochrane, “it is worth taking a look at the options available. From a business point of view, there might be greater benefits in investing in technology and staff.”
Whether you take the flexibility view or the long-term investment stance, buying your premises is not something consultancies should take lightly. It is not so much location, location, location as advice, advice, advice.
Office buyer’s checklist
Make sure you are thinking long term about the business.
Don’t buy if you are likely to expand very quickly
If the business is looking at a trade sale, prospective owners may not be interested in paying for a building as well as a business.
Take financial advice, get an estate agent and a good quantity surveyor if you are altering a building.
Consider how personalising a building affects its saleability
Keep a close eye on building prices – you might soon be playing the property magnate.