Rent vs buy your industrial premises

Key takeaways

• Your decision to rent or buy industrial premises should align with your growth trajectory, capital structure, and risk appetite - not just current market conditions.
• Industrial vacancy rates in Australia remain tight in many east coast markets, placing upward pressure on rents and land values.
• Buying can stabilise occupancy costs and build equity, but it ties up capital and reduces flexibility.
• Leasing preserves liquidity and agility, especially in volatile sectors, but exposes you to rental escalations and landlord constraints.
• Tax, zoning, environmental compliance, and financing conditions in Australia materially affect the long term cost equation.
• For many businesses, a staged approach - lease first, buy later - reduces risk while preserving optionality.

Introduction: why this decision matters now

Across Australia, industrial property has shifted from a quiet asset class to one of the most contested segments of commercial real estate. The sustained growth of e-commerce, logistics, advanced manufacturing and infrastructure projects has driven strong demand for warehouses and industrial facilities.

According to the Australian Bureau of Statistics (ABS), total construction work done in the non-residential sector reached over $60 billion in 2023, with industrial and warehouse construction forming a significant share of activity. Meanwhile, the Reserve Bank of Australia (RBA) has maintained elevated interest rates through 2023 and 2024 to contain inflation, directly affecting borrowing costs for property purchases.

If you operate in transport, wholesale trade, construction supply, food production or light manufacturing, your premises are not just a cost line. They shape your distribution efficiency, workforce access, regulatory exposure and long term balance sheet strength. The rent-versus-buy decision therefore becomes strategic, not merely transactional.

Understanding your operational profile

Before comparing lease rates to mortgage repayments, you must define how your business actually uses space.

Assess your growth trajectory

The ABS reports that small and medium enterprises account for more than 97 percent of Australian businesses. Many of these firms experience uneven growth phases. If your turnover is scaling rapidly or fluctuates with project cycles, flexibility may outweigh ownership benefits.

Ask yourself:

• Will you need to double your footprint within five years?
• Are you entering new states or regions?
• Is your storage requirement volatile due to supply chain shifts?
  
  

If your growth path is uncertain, locking into a single owned facility may constrain you.

Consider operational specificity

Some industrial users require highly customised facilities:

• Temperature controlled food processing
• Heavy power loads for manufacturing
• High clearance warehousing with automation
• Dangerous goods storage
  
  

If you require substantial fit-out investment, ownership can protect that capital expenditure. Otherwise, you risk investing in improvements that ultimately benefit the landlord.

Market conditions in the Australian industrial sector

Understanding the macro environment helps you contextualise your decision.

Vacancy and rental pressure

Industrial vacancy rates across Sydney and Melbourne have been reported below 2 percent in recent years by major property research houses and industry bodies such as the Property Council of Australia. Tight supply translates to:

• Higher base rents
• Annual escalations typically between 3 to 4 percent or CPI linked
• Strong landlord negotiating positions
  
  

If you are leasing in a constrained market, your renewal risk increases.

Land values and construction costs

ABS building approvals data indicates that non-residential construction costs have risen significantly since 2021 due to material and labour pressures. Elevated build costs increase the entry price for owner-occupiers.

At the same time, industrial land in prime corridors such as Western Sydney, Melbourne’s west and south-east Queensland logistics hubs has appreciated sharply over the past decade.

You are therefore balancing two inflationary forces:

• Rising rents if you lease
• Rising acquisition costs if you buy
  
  

Timing matters, but long term alignment matters more.

Financial considerations: capital, cash flow and risk

Upfront capital requirements

Buying industrial property typically requires:

• A deposit of 20 to 30 percent
• Stamp duty, which in Victoria and New South Wales can exceed 5 percent of the purchase price
• Legal, valuation and due diligence costs
  
  

For a $5 million facility, you could be committing well over $1.5 million in upfront capital.

That capital could otherwise fund:

• Equipment upgrades
• Staff expansion
• Technology systems
• Working capital buffers
  
  

If your sector is capital intensive, preserving liquidity may be critical.

Debt servicing in a high rate environment

The RBA’s cash rate increases through 2022 and 2023 have pushed commercial lending rates significantly higher than the ultra low levels seen in 2020 and 2021. Higher borrowing costs mean:

• Greater monthly repayment obligations
• Stricter serviceability assessments by banks
• Reduced leverage capacity
  
  

If your revenue is cyclical, debt exposure can amplify stress during downturns.

Rental deductibility and tax implications

Lease payments are generally fully deductible operating expenses. Ownership introduces a different tax profile:

• Interest on loans is deductible
• Depreciation on building and plant may be claimable
• Capital gains tax applies on sale, subject to structure
  
  

Your decision should be modelled with your accountant, incorporating cash flow projections and tax treatment under Australian law.

Flexibility versus control

The flexibility advantage of leasing

Leasing offers:

• Shorter commitment periods, typically 3 to 5 years with options
• Ability to relocate closer to customers or infrastructure
• Reduced exposure to market value fluctuations
  
  

For example, a third party logistics provider in Melbourne’s west may initially lease 3,000 square metres. As volumes increase, it can negotiate expansion within the same estate or relocate to a larger facility without selling an owned asset.

This agility is particularly valuable in sectors exposed to trade policy changes or volatile import patterns.

The control advantage of ownership

Ownership provides:

• Freedom to modify the facility
• No risk of lease non-renewal
• Potential to sublease surplus space
  
  

A light manufacturer installing heavy machinery may prefer ownership to avoid landlord restrictions and ensure long term operational stability.

Control also extends to branding, security upgrades and sustainability retrofits such as rooftop solar systems.

Regulatory and compliance considerations

Industrial premises in Australia are subject to multiple regulatory layers.

Zoning and planning controls

Local councils regulate zoning. If you buy, you assume long term exposure to:

• Zoning changes
• Development overlays
• Infrastructure levies
  
  

Before purchasing, you must conduct planning due diligence. Leasing shifts some long term planning risk to the landlord, although you still need to ensure the use is permitted.

Environmental liabilities

Under state based environmental protection legislation, property owners can bear responsibility for contamination. If you acquire a site with legacy contamination, remediation costs can be substantial.

For businesses handling chemicals, fuels or hazardous materials, ownership magnifies your exposure. Thorough environmental site assessments are essential.

Workplace health and safety

Regardless of ownership, you remain responsible for workplace safety under state based WHS legislation. However, ownership increases responsibility for structural compliance, building maintenance and capital works.

Balance sheet strategy and long term wealth creation

Property as a balance sheet asset

For some business owners, industrial property functions as both operational infrastructure and long term wealth accumulation.

By owning your premises:

• You build equity over time
• You potentially benefit from capital appreciation
• You reduce exposure to rent inflation
  
  

This can be particularly attractive in tightly held markets like inner Sydney or established Melbourne corridors.

Opportunity cost of capital

However, you must compare expected property appreciation to potential returns from reinvesting capital into your core business.

If your business generates 20 percent return on invested capital, tying funds into a property yielding 5 to 7 percent effective return may not be optimal.

The correct answer depends on your sector margins, growth pipeline and risk tolerance.

Case study: a Melbourne food distributor

Consider a mid sized food distribution company operating in Melbourne’s south-east.

• Annual turnover: $18 million
• Rapid growth driven by hospitality clients
• Requires temperature controlled warehousing
  
  

The company currently leases 2,500 square metres. Rent escalates at 4 percent annually. The landlord signals potential redevelopment in five years.

The directors evaluate purchasing a similar facility for $6 million. After modelling:

• Deposit and costs total $2 million
• Loan repayments exceed current rent by 20 percent
• However, ownership eliminates relocation risk and secures specialised fit-out
  
  

After consulting advisors, the business opts for a hybrid strategy:

• Renegotiate a five year lease with options
• Build a property acquisition fund over that period
• Reassess purchase when growth stabilises
  
  

This phased approach reduces immediate capital strain while preserving strategic flexibility.

Emerging trends influencing the decision

E-commerce and last mile logistics

Australia’s online retail sector continues to expand, driving demand for infill industrial space close to urban centres. If your business depends on rapid delivery, location flexibility may outweigh ownership benefits.

Sustainability requirements

Large customers increasingly require ESG alignment. Owning allows you to:

• Install solar
• Upgrade insulation
• Improve energy efficiency
  
  

However, some landlords now offer green lease structures, sharing sustainability responsibilities.

Automation and warehouse design

Automation systems require clear heights, load bearing capacity and layout precision. Older owned facilities may become obsolete faster than expected. Leasing newer purpose built facilities can mitigate technological obsolescence risk.

A structured decision framework

To bring clarity, work through the following matrix:

1. Strategic horizon
   
   
• Short to medium term growth volatility suggests leasing
• Long term stable footprint supports buying
  
  
2. Capital allocation
   
   
• High return business reinvestment opportunities favour leasing
• Surplus capital and wealth diversification goals support buying
  
  
3. Risk tolerance
   
   
• Comfort with debt and property cycles supports ownership
• Preference for operational agility supports leasing
  
  
4. Regulatory exposure
   
   
• High environmental risk operations increase due diligence burden if buying
  
  
5. Market conditions
   
   
• Extremely tight rental markets may justify ownership if viable
  
  

Document your assumptions and stress test scenarios such as revenue contraction or interest rate increases.

Conclusion: align property strategy with business strategy

There is no universal answer to whether you should rent or buy your industrial premises in Australia. The correct decision depends on how your property strategy integrates with your growth model, capital structure and risk management framework.

Industrial property remains a strong performing sector, but it is capital intensive and influenced by macroeconomic forces including interest rates and construction costs. Leasing provides agility and preserves liquidity. Ownership offers control and potential long term wealth creation.

If you approach the decision systematically, model cash flows conservatively, and account for regulatory and market dynamics, you will position your business to use property as a strategic lever rather than a financial burden.

Ultimately, your premises should enable your operations, not constrain them.