Many people that enquire about a new building are business owners who are considering building a new premises for their business.
Some have been leasing a building and have now outgrown the space and need to move. Others have been leasing, and now that they have a bit more capital are looking to own their own space rather than paying someone else's rent.
Whereas, some have changed their business focus (starting to manufacture or keeping more stock, for example) and therefore need quite a different facility than what they have now.
Generally, all of them are considering whether to purchase an existing building or construct their own facility. There are times when the choice is clear, but there are often many factors to consider.
It takes time and effort to build a new commercial building. There are a lot of decisions to make and challenges do arise along the way. Therefore, there is no such thing as being completely hands-off in the process. You will still need to make the final decisions in a lot of areas and allocate time to work through the details.
If you are daunted by the prospect of building and have options to purchase a building that ticks a lot of boxes then this could be a wise option for you.
Well, the first question is - is there anything you can buy that will suit your needs?
Buying can be an easy option but it can be a challenge to find a building that suits your requirements. Sometimes the layout, size, and location of a building does not lend itself well to your business and can have a really large impact on your operation.
The first step is locating a suitable parcel of land. This can be difficult in some areas of NZ where there is limited industrial zoned land. We have outlined some recommendations on this in our guide to selecting commercial land. Once this part of the process is complete, there are various advantages to opting to build.
One advantage of building is you get the opportunity to design the building to suit your exact requirements. However, it is wise to be aware that you may have to compromise here - just like you may have to when you purchase a building outright.
For example:
If you do have a site that gives you options there are some real advantages to a custom build. For example, you can take a step back and completely review what your building requirements are. Often the process and storage methods of a business have evolved and developed around the constraints of the existing site. Now is a time to take a big step back and revise your processes from scratch. It is often advantageous to have a lean consultant or outside advisor come along to bring a fresh ‘unblinkered’ view of the business processes. It can be startling how small changes to efficiencies and storage methods can translate to large savings and a better workplace.
You are in business so you want to make sure that whatever move you make, makes good financial sense. Often if you are purchasing a building outright it can be hard to get it at a below-market rate as you are typically competing with other buyers. Getting a building at a below-market rate usually relies on luck and good timing - or a good network of property contacts.
However, with a build, you can often end up with a property that is worth considerably more than the cost it took to build. There are a few reasons for this:
The obvious way is to get a registered valuer or a real estate agent to look over your concepts and provide a valuation. Banks will typically require this for loan approval.
However, a simple ‘DIY’ way to get an estimate of the value of the building is to compare it to other similar buildings. This will help you to determine what their current value or recent sale value is. It is always important to bear in mind that the RV of a property can be quite different to its value if it was sold today. This can be difficult if you don't have a lot of close examples to compare to - for example, if you are building in a new industrial zoned area with few buildings complete.
Another way is to reverse engineer the rental yield of the property into a dollar value. This is because many investors look at the yield of the property, not the cost of construction. This means that you can determine the value of your property using a formula based on current market rental prices and the yield investors are looking for.
For example: If the rent of a warehouse is set at $100 per m², and an investor is looking for a 6% yield, we can work out what they might value the building at. For a 2,000m² warehouse this calculation could look like: 2000*$100 = $200,000 rent PA If the investor is looking for a 6% yield before outgoings, this would give a value of $3,333,333 for the property. Ratings for things like exterior hardstands and offices would need to be taken into account, along with your local rates. You can find your local rates by browsing buildings advertised for rent or checking out some market data from real estate agents. Colliers often publish regular market updates. |
There are also many other ways to look at the financial impacts of building a new premises such as:
Whether it is best to build or buy comes down to your specific circumstances. It is wise to get good advice from your accountant/board and other parties such as real estate agents and banks. If you’d like some advice from our team of experts, feel free to get in touch.