By Fatma Khaled
For business investors, several factors both command and restrict the decisions they make, and oftentimes, selecting the right working space can be a make-or-break decision. Various elements figure into the question, and the decision as to whether to buy or rent office space is a major one, in terms of financials, investment prospects, and flexibility.
Prior investors’ experience, accommodation quality, taxes and other determinants also factor into the equation. Meanwhile, in Egypt, the variety of new developments and the ever-growing market has expanded the realm of choices available; whether they be old properties for sale in central areas, or newly-developed satellite compounds geared towards specific industries or professions.
In the frame of the current economic instability in Egypt, business owners now prefer renting an office space rather than buying one, claiming that it is cost efficient, suitable for starting small businesses, and more practical to deal with.
Both options, renting and buying, vary in advantages and disadvantages; whereby the benefits of buying an office for business include attaining equity that can be used as collateral for future expansion, Zeyneb Ilgaz, Co-Founder and President of Confirm Biosciences and Test Country, contended in an article in “The Entrepreneur” magazine.
Buying an office space is a long-term commitment that requires down-payments ranging from 20% to 25%, while renting is a short term commitment where an investor inputs a refundable deposit, as cash flow becomes working capital. However, funds funneled as monthly rent are of no future benefit to the business.
Buying: Pros and Cons
One of the main benefits of investing in purchasing office space is tax deductions on capital injected into the business, which can amount to substantial figures, as Egyptian tax laws stipulate that taxes on corporate profits for both foreign and local investors can reach a maximum marginal rate of 25%, according to a report by the US State Department on Egypt’s investment climate. Additionally, owners of office space will no longer be liable for rental increases.
One of the main benefits to investing in purchasing a property is the appreciating of the value of properties in Egypt; on its own, the decision to buy an office space is a profitable long-term investment.
On the other hand, while buying may be a better option for many long-term investors, the initial financial commitment is quite substantial, not to mention the additional incurred costs that will inevitably rise, such as monthly maintenance, insurance, property taxes, and building renovations, to name a few.
Renting: Pros and Cons
Renting a business space remains pragmatic to several investors as it offers advantages such as the option to relocate easily and little to no initial investment.
Some Egyptian investors prefer renting rather than buying office space, to avoid the high costs in the Egyptian market, such as Ahmad Abu Samra, Executive Manager and Owner of Integrity advertising agency.
Speaking to Invest-Gate about his business decision to rent a commercial property he said “I believe that buying office spaces requires a higher return on investment (ROI), because small to medium businesses like Integrity cannot invest a huge amount of money in buying office space, but we would rather invest in people and equipment, as our business type offers more intangible services.”
Renting office space has its disadvantages as well, whereby investors are susceptible to the annual rise of rental rates –if present in the lease; in addition to the loss of opportunity for equity build up. Moreover, investors may be forced to relocate at the end of the lease contract period.
Yet, irrespective of renting disadvantages, many investors in Egypt still prefer to rent an office space rather than buying one, including Mostafa Elaghil, Director and Owner of Kick Start Interactive (KSI), a company specialized in technology consultancy, web and systems, and mobile development, as well as online marketing. He told Invest-Gate that the type of business is a factor when searching for office space options, especially considering the limited budget he had back in 2012 when he started his business.
Locally there are two different types of lease contracts, ones that fall under the new rental law, applied on all properties erected in the last 30 years, and other properties that fall under the old rental law, which controls rent value at very low rates for extended periods of time, and is typically found in older areas in the city center.
There are several things an investor should take into consideration when deciding to buy or rent an office space, including the needed initial cash outlay, calculating the expected ROI, taking into account the current stage the company is at.
“In the last two to three years, the concept of co-working spaces has evolved in Egypt and the MENA region, thus investors and business starters can easily get a business started by just renting a desk in a shared environment. Therefore, as soon as you test your model in the first six months and decide to grow your team that is when you would want to start renting office,” added Elaghil.
Abu Samra, on the other hand, advises start-up investors to choose office investment options based on the nature of their products and services. “Investors have to decide if they need to spend more on solid assets like the office space, or spend more on people or equipment, and to know the nature of the services they need by searching the following key words: people processing, possession processing, mental stimulus, information processing. These are the four types of services they may offer,” added Abu Samra.
The prices of Egyptian properties also act as a factor to such decision. “As a business owner, rental prices are not increasing parallel to selling prices,” highlighted Abu Samra, adding that rental price is highly affected by the area’s class, decorations and finishing conditions.
Some foreign investors chose to expand their businesses in Egypt, regardless of its economic status. Especially for companies escaping the high prices of operating in Dubai.
“Egypt is a rich country for its resources, qualifications, and well-educated human resources, and therefore it is suitable for any start-up business in the MENA region,” said Elaghil, commenting on why foreign investors expand their offices in Egypt.
The instability of Egypt’s economic status not only affects local investors’ considerations of leading or buying, but affects foreign investors as well, as the US Department of State also highlighted the reforms promised following President Abdel Fattah Al-Sisi’s election, including introducing a value-added tax (VAT), as well as the new amendments to bankruptcy regulations, a new law for establishing companies, amendments to the capital markets law, a new insurance law, and a plan to manage lands.
“I believe that Egypt has a huge market suitable for all industries, but starting a new business in Egypt includes many monetary regulations in an unstable and unsafe climate for investors in Egypt,” stated Abu Samra.
Although pursuing a business in Egypt, whether through buying or renting office spaces, may seem challenging on the foreign and local level, Commercial Real Estate Services (CBRE) Group’s Middle East Managing Director, Nick Maclean, thinks that the office market is the most encouraging sector in the Egyptian real estate market. He further elaborated that there are about 960,000 high quality units available for office spaces in East and West Cairo.
Invest-Gate reached out to its readers asking them about their preference, 58% stated buying as their preference, while only 42% prefer to rent office space.
Office space often represents one of the larger pieces of the capital pie, rendering the decision to buy a property or simply rent a very influential factor on the level of investment required for a business. Such a make-or-break decision should be shaped through a closer examination of the business purpose, location, the image a company wants to present, flexibility, property market performance, fluctuation of rental levels, and long-term plans.