Cheap borrowing opens way to owning property; The considerable unease across the financial sector is not preventing occupiers leasing or buying property, says Chris Pearson.

Byline: Chris Pearson 

DEALS are happening, albeit at a lower level, as one would expect with so much turmoil in the global financial markets that inevitably involves commercial property.

But recent deals at the Halegrove Court@Bowesfield office scheme in Stockton, where my firm Gavin Black & Partners is joint agent with Sanderson Weatherall, prompted me to re-examine the pros and cons of buying property rather than leasing.

New "own front door" office buildings of 1,283 and 1,500 sq ft are available on new 999-year leases at quoting prices of pounds 250,000 and pounds 300,000 with a ground rent of pounds 350 per annum. By contrast these could be leased at pounds 20,500 and pounds 24,000 per annum exclusive based on pounds 16psf.

So what route is best?

There are several advantages in owning commercial property.

For example, an asset will appreciate in value over the longer term rather than investing rent in someone else's property.

Mortgage payments are likely to be less than the rent payable and owners are not exposed to rent reviews over which they will have very little control.

Interest payments are a tax-deductible business expense and commercial property can be bought within tax-efficient structures such as Self-Invested Personal Pensions.

Despite my reference to the crisis in the global financial markets, for those with the appropriate credit rating, commercial mortgages are still available on a fixed rate basis to help mitigate risks from increasing interest rates.

David Widdowson, of Deneside Finance, who arranges commercial mortgages, said: "Financial issues need to be examined. The current bank base rate is 3%, following the reduction of 0.5% in October and the surprise cut of 1.5% in November. One of the positives to come out of the current financial turmoil is that borrowing has become much cheaper.

There is also a general consensus that rates will fall further, with predictions of 0.5% cuts in base rate for December and February, with a base rate of 2% prevailing during most of 2009."

The cost of fixed rated rate mortgages has reduced significantly in recent months.

Fixed rate mortgages are priced according to the prevailing long-term fixed swap rates available and, as an example, the five-year fixed rate funding cost has reduced from 6% at July 1 to 4.1% in mid-November.

Libor, the rate which some commercial lenders choose to use to price commercial mortgages, has also reduced sharply to 4.25% but remains stubbornly higher than base rate.

Funding a long term mortgage is generally cheaper than renting.

For example, renting an office unit of 1,283 sq ft would typically cost pounds 1,700 per month to rent.

Taking a 25-year mortgage of pounds 200,000 on the same unit would incur mortgage payments of pounds 1,300 per month on a capital and interest basis so that you will also be paying off the loan.

There is still a strong appetite among lenders to support good quality businesses.

There are at least 20 lenders still actively pursuing new business, including high street banks, building societies and specialist lenders.

Although lenders have tightened their credit criteria and increased the interest rate margins available, there are still many options available for commercial mortgages with loan to values still available up to 80% for the purchase of good quality properties such as those available at Halegrove Court@Bowesfield.

Chris Pearson is a partner at Gavin Black & PartnersThere are at least 20 lenders still pursuing new business, including high street banks, building societies and specialist lenders