The attraction of self-storage facilities for investors is experiencing fresh impetus. Shrinking living spaces and rising populations had already boosted the industry enormously in the last several years. Now a combination of pandemic-driven economic and societal changes have also come into play and elevated the sector’s appeal as a prime investment vehicle to new heights.
Among factors forming a solid set of fundamentals for the sector is the unprecedented e-commerce boom and consequent need for logistics facilities. Large numbers of white-collar workers clearing space for home offices, the surge in home renovations and disrupted business owners forced to downsize during the economic downturn have further raised requirements to park everything from stock to equipment and personal belongings. Small and medium-sized companies are increasingly using self-storage for commercial operations or distribution facilities.
A compelling opportunity
While the industry is still maturing, CBRE Australia’s Head of Commercial Valuations Kyle Richardson said it was clear many investors were coming to view self-storage as “one of Australia’s most robust property classes for investment”. Even without the current boost from COVID’s economic ripple effect, the sector held “several compelling attributes” to warrant a place among top asset classes.
High among them were favourable yields of between 5.5% and 6.5%. Equally appealing was the simple fact incentives very seldom came into the leasing equation. Strata fees and maintenance costs tended to be lower than those involved with residential investment, and storage units also came with potentially far fewer problems from troublesome tenants. “This ensures investors obtain true effective rental cashflow,” Mr Richardson said. “This quality is also viewed favourably by lenders.”
Hitting the big time
The magnetism of self-storage is occurring internationally, drawing some of the world’s heaviest hitters and triggering a series of major transactions that speak volumes for the sector’s potential. In the US, one of the largest deals over the last 12 months took place in October when Bill Gates’ Cascade Investment partnered with Singapore’s sovereign fund GIC to buy a stake with other investors in StorageMart, the world’s largest privately owned self storage company. StorageMart owns, operates and builds facilities in the US, Canada and United Kingdom. Around the same time, private equity colossus Blackstone Real Estate Income Trust (BREIT) committed $1.2 billion to buying Simply Self Storage from a real estate fund owned by global asset manager and commercial real estate investor Brookfield Asset Management. The deal was completed in December. Publicly-traded REIT Global Self Storage (GSS) which focuses on building self-storage facilities in secondary and tertiary markets (markets with populations of under 500,000 and 100,000 respectively) is experiencing 85 per cent-plus occupancy in three new projects developed in the US last year. Furthermore, GSS’s net operating income for 2021 is double that of the previous year. Retail investors seeking yield make up the bulk of new investors in GSS stock, the company reported.
Likewise, investor demand in Australia jumped markedly in the 2020 financial year. Among most significant deals were the acquisition of 19 self- storage facilities by market leader National Storage REIT and 11 by the equally prominent Abacus. CBRE figures forecast industry revenue for Australia’s self-storage sector to grow 0.5% annually to $1.5 billion which includes a 1.6% spike in 2020 from the growth in e-commerce sparked by the pandemic. “Despite the impact of COVID-19 well over $300 million of self-storage facilities transacted in 2020,” Mr Richardson said.
The industry’s fragmented operating environment which comprises a generous mix of large-listed groups, chain operators and independent owner/operators is also working in its favour according to Mr Richardson. “This creates opportunities for major investors to acquire underperforming assets and then raise operational standards through leveraging their market expertise to boost value within a relatively short timeframe,” he said. “It’s a far simpler undertaking than doing the same with a shopping centre [for instance].”
More sophisticated, higher quality facilities with advanced management software were now appearing on the market. Such value-adding attractions included solar power, climate-controlled storage units and multi-functional spaces. “As the technology improves and is widely adopted more operators will be able to enhance the returns generated from these facilities,” Mr Richardson said. “Australia’s self-storage facilities are rapidly becoming more attractive and accessible through the introduction of 24/7 operations, enhanced security and bolt-on services such as mobile pick-up and drop-off.”
What’s more, should the desire for self-storage facilities among investors wane (which Mr Richardson said he felt was “highly unlikely’), the large proportion that are located in inner city areas will be well-placed for conversion into high-density residential.