Five things to keep in mind when thinking about your first commercial property.
The rise of online shopping in the last few years has seen many people predicting the worst for the High Street. Many have pointed to the growing number of empty units and the growing rise in online spending. In stark contrast, earlier this year the International Business Times reported that Great Britain was set to spend £87 billion online in 2013.
However despite these increasing trends many online retailers are now changing tack and opening physical stores.
Whilst online shopping might offer convenience it does not offer consumers the opportunity to touch, feel and try on merchandise. Perhaps even more pervasively, consumers tend to trust brands that have a physical presence.
This trend is great news for both tenants and landlords. Even if the retailers are thinking short term initially, pop-up shops can help landlords fill unoccupied space whilst also giving retailers the opportunity to build their brand in a way that only the largest online marketing budgets can.
But if you are an online retailer what should you be thinking about when making those first tentative steps into bricks and mortar?
1. Assess your budget
Consider what impact rent and associated business rates will have on profit. Are they an appropriate percentage of your turnover? Will you be able to pay the rent on time?
2. Location, location, location and space
This will depend on the type of business you have but do you need a location with lots of footfall so as to attract new customers or does the company have a sufficient profile to be a ‘destination’ store which people will travel to?
How much space you need will be crucial. Can you take a smaller space and potentially reduce the rent you pay or do you need a larger space to allow for storage?
3. Lease structure
What is most important for you in a lease? Do you need a lower annual rent? Perhaps you would prefer to pay monthly rather than quarterly to help with cashflow? Would you prefer to have a rent-free period at the beginning of the lease while you are getting started and need to fund fit-out works? You will probably want to take on a shorter term lease or one with a tenant break in the early days to make sure that if it doesn’t work out, you can minimise any losses.
4. Know your worth
Make sure you do your research with your advisors to ensure that you get the best deal. This might seem obvious but a lot of times tenants will not fully know the worth or the context of the deal they are entering into. How long has the property you are looking at been unoccupied? How profitable is your business overall? What is your covenant strength (covenant strength means the financial worth of a tenant or potential tenant). This assessment is intended to determine the current and potential ability of a company to observe and perform its obligations. In other words what is the risk, to the landlord, of the tenant failing to perform its obligations, principally the obligation to pay the rent.
If a tenant can demonstrate an ability to pay the rent, perhaps by showing a good track record on an office building they have occupied for some time, then the landlord may be inclined to offer a lower rent on the basis of a stronger covenant.
5. Could you buy it?
This is probably a bit left-field for a first property but whilst the majority of companies may prefer to rent their first commercial properties some opportunistic companies may sense an opportunity to buy units. Clearly this will mean a much larger capital outlay initially, and will not be an option on every property, but this might interest some if they think they can get a good deal on property prices at the moment.
In the long term companies might have to pay less and even if they don’t want to occupy the unit themselves going forward they could consider leasing the units to other companies.
As with all business decisions make sure you run through all the options before taking the plunge.
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