A small business guide to buying an office space

The pandemic has changed the nature of work. We’ve become familiar with messaging and meeting applications. It is now normal to go to the office once or twice a week, and spend the other days working from home.

This way of working will likely go beyond COVID-19. According to a recent study conducted by Lark which quizzed 1,000 individuals, 94% of PMETs in Singapore want flexible work arrangements to continue staying at home.

However, an office is still essential for any business, including SMEs that are finding their legs. Having a space where employees can gather, share ideas and drive broad business goals is invaluable.

So why buy instead of rent? Purchasing a space instead of renting will put money towards something that the SME can eventually call its own, and possibly even make a profit from tenants if there’s a need to in the future.

Should any SME buy a property though? Here are three considerations you can take before making your decision.

1. Know your financial and business thresholds

Buying an office is usually a big financial decision. Since financing a property loan can take decades, business owners usually make a down payment for the lot to reduce the amount they would need to loan. Ensuring that the down payment is a feasible amount of money is the first step.

However, in the case of a commercial property loan, both the down payment and monthly instalments cannot be taken out of the Central Provident Fund Ordinary Account.

This is where a bank loan for commercial property comes into play. For most SMEs, this would help to provide the extra monies needed to propel the business forward. However, caution should be paid for SMEs that are just starting out, or those that already have some level of debt. You should be somewhat confident that you can pay off the loan in the near future, so that it does not become a financial liability to your business.

The purchase should also ideally meet your financial and business needs. Use a loan calculator to find out if the monthly instalment is sufficient.

You should also factor in the growth in headcount and the needs of potential tenants, if applicable, when doing the sums to ensure you have enough to purchase a property.

2. Safeguard your investment with the right research and financing solutions

Turning a profit is never guaranteed for any business, and commercial mortgage rates typically fluctuate over the years. On top of these, there is also the location and value of the property (now and in the future) to consider.

A non-centrally located space would be more attuned to the budget of a small business. You may also be able to afford more space at a cheaper price, which would be easier for expansion plans.

In contrast, a centrally located space might cost more, but its value can hold up better in the long run. It would also be more convenient for your employees and clients.

The current figures are also supportive. Prices of office space fell by 10.7% in 2020, as compared to 0.6% a year earlier, according to data from the Urban Redevelopment Authority. In fact, prices of offices in the central region particularly are at the lowest they have been since the first quarter of 2018.

But before you make the plunge, determine if your business can take on such a large investment. One of biggest fears is not having enough cash flow and needing to pay high commercial property loan interest rates as a result.

Perhaps you could consider invoice financing (sales), an alternative avenue for business owners to manage their cashflow. With this form of financing, banks will provide an immediate cash advance to businesses to finance 70 to 80% of their unpaid invoices.

Even so, the immediate cash flow can give SMEs some security while servicing a commercial property loan.

3. Choose a loan with favourable payment terms

The third consideration is the loan itself. There are various types of business property loan packages, which comes with varying interest rates.

Banks, like OCBC, generally allow businesses to borrow up to 80% of their property’s purchase price or valuation. This means 20% of the property needs to be paid upfront.

To qualify for OCBC’s commercial property loan, businesses must be at least 30% owned by Singaporeans or Singapore Permanent Residents, among other conditions.

Some loans have shorter repayment periods. Others are pegged to benchmarks like the one-month compounded Singapore Overnight Rate Average (SORA) rate, which is published by the Monetary Authority of Singapore. There are also other loan packages available such as fixed rate packages (provides protection against rate fluctuations for a stated number of years) and floating rate packages (dependent on variable market rates but comes with lower initial rates).

Owners who understand their business needs most intricately will need to lay out their priorities to forge a way forward for their businesses. At every juncture, representatives from financial institutions like OCBC are ready to help.

Every SME is different, so make sure your office space — and commercial property loan — suits your needs the best.