huhhuh123
HKU253
02/10/03
FREDERIK PRETORIUS
Real Estate and Capital Structure Decisions –
Lease-Versus-Buy Analysis
Jonathan Young, the CEO of Sunny Trading Company Limited (“STL”), faced a threat in
October 2002 when the lease on his Wanchai office in Hong Kong was up for renewal, and the rent was set to increase by 10 per cent. Jonathan had long believed that leasing office space was the most practical and affordable option for his business in Hong Kong. When negotiations for a lower rent failed, however, he began to consider whether his firm would be better off owning or leasing office space. STL was a toy trading company with 20 full-time staff, so the type of office required was quite simple and straightforward. The existing Grade
A office had a gross floor area of 250 m2, and was equipped with a conference room, a reception area, an open space with partitions for staff, a computer server room and a kitchen area.12 The current rental was HK$970,000 per annum. Office space with similar characteristics was widely available in the territory, although average rents varied from location to location. Central, Wanchai and Causeway Bay were the traditional homes of business on Hong Kong Island. In addition, a significant cluster of Grade A offices had been developed in North Point. For the same grade of office space, however, average rentals in
Central were relatively expensive [see Exhibit 1 for Hong Kong’s office market geography and Exhibits 2 to 4 for a comparison of office rents and prices in various business districts].
Jonathan was a little perplexed about the decision facing him. Obviously, accepting the rental increase would cut his firm’s profit margins. Jonathan could look for another office, but he did not want his firm to be subject to the vagaries of the real estate market whenever the lease
1
Office buildings in Hong Kong were categorised into three classes: Grade A, Grade B and Grade C.
Grade A: Modern with high-quality finishes,
02/10/03
FREDERIK PRETORIUS
Real Estate and Capital Structure Decisions –
Lease-Versus-Buy Analysis
Jonathan Young, the CEO of Sunny Trading Company Limited (“STL”), faced a threat in
October 2002 when the lease on his Wanchai office in Hong Kong was up for renewal, and the rent was set to increase by 10 per cent. Jonathan had long believed that leasing office space was the most practical and affordable option for his business in Hong Kong. When negotiations for a lower rent failed, however, he began to consider whether his firm would be better off owning or leasing office space. STL was a toy trading company with 20 full-time staff, so the type of office required was quite simple and straightforward. The existing Grade
A office had a gross floor area of 250 m2, and was equipped with a conference room, a reception area, an open space with partitions for staff, a computer server room and a kitchen area.12 The current rental was HK$970,000 per annum. Office space with similar characteristics was widely available in the territory, although average rents varied from location to location. Central, Wanchai and Causeway Bay were the traditional homes of business on Hong Kong Island. In addition, a significant cluster of Grade A offices had been developed in North Point. For the same grade of office space, however, average rentals in
Central were relatively expensive [see Exhibit 1 for Hong Kong’s office market geography and Exhibits 2 to 4 for a comparison of office rents and prices in various business districts].
Jonathan was a little perplexed about the decision facing him. Obviously, accepting the rental increase would cut his firm’s profit margins. Jonathan could look for another office, but he did not want his firm to be subject to the vagaries of the real estate market whenever the lease
1
Office buildings in Hong Kong were categorised into three classes: Grade A, Grade B and Grade C.
Grade A: Modern with high-quality finishes,