Better to buy than lease

There are advantages to purchasing rather than leasing commercial real estate

By
Western Investor
May 1, 2018





buy lease

 

Commercial real estate in Metro Vancouver is a very active segment of the market. After working in the industry for more than 25 years, I have seen the advantages of investing in this particular market. Over the course of my tenure, I have observed market trends, assisted clients looking to invest in commercial real estate for the financial gains, as well as working with tenants looking to lease commercial office and retail spaces. 

For those investors with an end goal to mature their personal wealth, I have observed that it can be advantageous for business owners to invest in commercial real estate as opposed to leasing commercial space. 

With commercial real estate investments, not only do property owners maintain absolute control over their property, they are presented with an opportunity to build their financial capital. According to the Metro Vancouver Office Market Report Fourth Quarter 2017, release by Colliers Canada, the overall vacancy rate for Metro Vancouver edged down to 5.9 per cent in the last quarter of 2017. Observing the vacancy rate, in conjunction with a low supply of commercial space, market trends indicate that it could be advantageous for long-term investors to make an investment. Furthermore, market trends indicate prices will continue to rise, therefore investors purchasing now will be able to capitalize on further price increases. 

The long-term growth projected for a location significantly impacts an investor’s decision-making process when evaluating purchasing in a certain area. Burnaby, for example, is a rapidly developing area and shows significant promise due to its central location. The fact that it is the geographic centre of Metro Vancouver makes it an ideal location for investors in commercial real estate. It’s close proximity to rapid transit is appealing to professionals who enjoy the accessibility for business purposes as well as people who commute into work from different locations throughout Greater Vancouver. Given current escalating housing prices throughout Vancouver proper, homebuyers are moving further out of the city centre in an effort to be able to purchase a home. This often means businesses follow suit and move further afield, in an effort to serve populations growing across the region. 

The City of Burnaby’s Metrotown Downtown Plan speaks to this trend. The plan projects an additional 120,000 people are expected to move into the area by 2041, which is equivalent to 52 per cent population growth. These projected numbers could showcase to a potential investor in Burnaby, for example, that they have selected a sound location to make an investment. Proximity to transit also plays a large role in a location’s value. Nodding to Metrotown again, the city’s location on the SkyTrain line, as well as central location in Metro Vancouver, show investors that the area is easily accessible by members of the greater business community. 

Commercial real estate prices in Greater Vancouver are forecasted to continue to surge, which will allow purchasers to take advantage of the projected asset appreciation. Monthly mortgage payments assist owners to build equity, as a portion of those monthly payments go towards paying down the principle loan amount. When owners eventually decide to sell, or refinance their properties, they can extract the difference between the remaining loan amount and the current fair market value as equity for their business. With leases, payments go to the landlord and zero principle is paid down. 

 

Tax advantage

 

The final motive for investing in a commercial space are the tax benefits. The following can be deducted when calculating tax payments: interest fees, depreciation expenses, and non-mortgage related expenditures. In addition, the 20 per cent foreign buyers tax does not apply to commercial properties, which allows commercial properties to generate a higher rate of return. 

Metro Vancouver is experiencing remarkable growth in the commercial real estate industry. In addition to location being among the top factors for making a commercial real estate investment, the chief reason I have analyzed for investing over leasing is a purchaser’s desire to build their personal wealth. In addition to being in control of your commercial space, and not having to have tenancy parameters laid out by a landlord, owning commercial real estate allows an investor to capitalize on equity gains and contribute to their overall bottom line. 

 

Next: Invest like a pension fund
Previous: Investing in industrial 


Cecilia Tse is a senior vice-president, Asia Pacific, at Colliers International, Vancouver. Tse specializes in commercial real estate investments and project marketing.
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