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The Risks of a long-term office lease in Hong Kong

December 2015 | Wilma Wu

Hong Kong, being a global business hub, has all kinds of new enterprises emerging in every corner of the country. Once you have decided to start your business in Hong Kong, at some point, getting the right office solution for your needs will become necessary. For many companies that focus on the customer, taking the correct lease terms for an office space is a matter of success and failure. Many startups in Hong Kong sign a long-term lease agreement, and then find out that they are into a bad deal. Not only they pay a higher rent for the entire lease term, but the services they get are also compromised.

Not being satisfied with the office may translate into adverse effects on the business. Keeping that in mind, here is why a business must not get into a long-term lease arrangement in Hong Kong:

Less working capital:

While it is comparatively easy for a startup in Hong Kong to get the required investment, many of the businesses are seen exhausting their working capital in paying for an office that would be useful for them after at least a year. This loss of flexibility that comes with a long-term lease closes doors for several other investment opportunities. In addition, if the monthly rental is too high, there won't be any option to downgrade, which ultimately causes negative cash flow and liabilities.

Property may lose relevance for the business:

You may have taken an office in a prime location, but in due course of time, the location may not remain as important for your business as other things. Moreover, the location that was once strategic may lose its importance with time. If your business depends on factors like image and location, then opting long-term lease may force you to hold back your ambitions.

Limited financial benefits:

In case your business grows as per your expectations, you may find yourself in a position to buy your office in a short time and benefit from the appreciation in the value of land. In this case, lease payment becomes a burden as your expenses are locked for the period of the lease term.

Debt:

While the money spent on lease does not appear on the balance sheet of a company, investors still consider long-term lease as the debt and value the business accordingly. The objectives of wealth maximization cannot be achieved with a long-term lease.

Limited access to other loans:

As investors treat the long-term lease as a debt, it is often difficult for a business on a long-term lease to raise other forms of debt from the market.

Processing and documentation:

In most cases, to enter into a long-term lease agreement, it takes a lot of documentation processing and thorough examination of the leased asset. Remember, one single mistake in this process can cost you a significant amount of money.

Conclusion

Research suggests that a business can save as much as 78 percent taking a serviced office rather than hiring conventional office spaces in Hong Kong. With a serviced office, a business can do away with all the hidden charges and capital outlays that are inherent in a lease agreement.

For those looking for a workplace solution in Hong Kong, you cannot get a better deal than Servcorp. With high flexibility and cost effectiveness, the customized office solutions offered by Servcorp fit the needs of any business. Give us a call at +852 2251 1888 and have one of our representatives addressing your office needs in Hong Kong.

 

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