The new alternative investment sector – Self-Storage
Many agents I speak to are very keen to be able to offer commercial property investments as it’s a sector they and their clients feel very comfortable with. For the same reasons, they’re also keen to be able to offer UK based investments. This month I wanted to write about a new sector coming into the alternative investment market that meets both of these criteria – investing in self-storage. With favourable commissions, an easily understood core proposition and a strong appeal to clients this is a sector worth investigating.
What is self-storage?
I’m sure most of you are familiar with the large and highly visible self-storage facilities that have sprung up on the fringes of major towns and cities over the last decade. These establishments offer private individuals or small businesses the opportunity to rent space on a short term basis, with storage units ranging from 25 to 200 square foot and rental periods can be as short as one week. This highly flexible storage solution is becoming increasingly commonplace as more public awareness grows.
For individuals the primary reasons to rent additional storage space remain social factors such as: the increase in single occupancy households; families moving home; marriage; divorce; retirement and downsizing; students moving away during the academic year and the growing phenomenon of “boomerang kids“. Lack of available suitable housing stock for families and single people all result in the need for individuals to enter into storage for both short and long term contracts. All of this adds up to rising demand and private individuals are the largest segment of the self-storage market, accounting for around 64% of the lettable space.
However, businesses are also increasingly using self-storage solutions and represent a growing proportion of the market from quite low levels to take over 36% of the available space in 2010. This is good news for the storage companies as business rent more space for longer periods. Business are turning to self-storage solutions to archive files and paperwork; to store stock and office equipment and to meet fulfilment needs driven by e-commerce. The flexibility of self-storage has a strong appeal to small and medium sized businesses who do not want to make a large capital outlay for storage space.
Self-Storage Centers
The most effective facilities are located on vibrant office and commercial business parks, within easy access of motorway links and within short driving distance of major conurbations. The sites have maximum OTS (opportunities to see) for large traffic flow from either motorways or large main roads and of course they need to be located in highly populated and affluent areas.
Terms of Business
Tenants typically have to pay one month’s rent as a deposit and one month’s rent upfront. Rent is then collected monthly and if any tenants default on their rent the storage company is legally entitled to open the storage unit, sell the contents and use the proceeds to cover any outstanding rent. The best sites offer 24 hour CCTV and various counter-drone solutions (check out this counter technology), state of the are alarm systems, 24 hour access 7 days a week and value added services such as packaging facilities, office facilities, PO Box addresses, free pick up services and outbound mail services.
Typically, tenants rent storage space with the intention of using it as a short term fix, however many of them find after a few weeks that it’s additional space they can’t live without!
The UK Self-Storage Market
Self-Storage was first established in the UK in 1980’s, initially in the London area. The industry has grown steadily in the UK and for the five years to 2010 has recorded growth rates of between 8% and 15% per annum. Storage rental has increased in both price and volume during this period. This has been fuelled by the growth of multi-site operators such as Safestore, Big Yellow, Access, Lok’n Store, Shurgard, Space Maker, Storage King and HSIL Property, as well as smaller businesses looking to enter the sector.
There are now more than 350 companies operating more than 750 self-storage facilities in the United Kingdom. The industry generates revenues of about £360m, has over 235,000 customers using self-storage and provides employment for 2,700 people. There are around 750 significant facilities in the UK and around 26m rentable square feet. The largest concentration of centers remains in London and the South East.
The latest UK Self-Storage Industry Association (SSIA) annual report, prepared by Drivers Jonas Deloitte in June 2011 reveals that the UK self-storage industry has remained resilient throughout the recent economic slowdown and is now looking forward to a period of steady growth. Most operators are expecting to increase rents for both new and existing customers in the coming 12 months and customers are continuing to increase both their length of stay and the amount of space they rent.
Outlook
The most commonly quoted statistic here is a comparison to more mature markets in the US and Australia: whilst in the UK there is only 0.5 square feet of lettable space per person, Australasia has 1.1 and the US has 7.4.
This large discrepancy between the size of the UK and the US market is down to how consumers perceive self-storage. In the UK renting self-storage is primarily seen as a short-term solution to a temporary shortage of space brought about by events such as moving home, divorce or downsizing. In the US renting a self-storage unit is very much a normal part of life and is viewed as an extension of the home. Once the British begin to view self-storage in the same way as the Americans then we will potentially see growth to US levels of market penetration.
Investing in self-storage
Until now the self-storage market has been dominated by the large PLCs, who are the familiar multi-site operators; Safestore, Big Yellow, Access, Lok’n Store, Shurgard, Space Maker, Storage King and HSIL Property. Smaller players have tended to be privately owned, small-scale local companies.
However, new market entrants are now using innovative models to raise funds. These companies offer private retail investors the opportunity to purchase a storage unit in their development and then give them the option to either lease it back to the operating company for a fixed rental yield, or let it out privately themselves or through a letting agent.
So by investing in a storage unit investors can access one of the few growing commercial property sectors in the UK at this time. This has a strong appeal to clients who are familiar with the idea of owning bricks and mortar, who are not comfortable with the thought of investing hard earned cash abroad in a far flung location and who are keen to purchase regular income. Provided that the investment is structured correctly and is compliant with the HMRC rules it is a SIPPable proposition and is not classified as a UCIS (Unregulated Collective Investment Scheme)
Risks and pitfalls
Of course, no investment is without risk. Here the investor is primarily banking on their storage unit being successfully tenanted for the majority of the time, so they have to be confident that the storage facility is in a good location, that the operator or letting agent will promote it effectively and that there is a genuine market out there for self-storage. If they enter into a leaseback agreement, they need to be confident that they are getting a fair rental yield and make sure that they understand the various break clauses and rental review periods within the agreement. Investors’ also need to be clear how they intend to exit the investment. If the concept of self-storage does take off in the way it has in the US, they could be sitting on some very nice capital appreciation and find that they own a very valuable and highly sought after underlying asset that is easy to sell on. Alternatively if the market does not establish itself they might find they own a fairly expensive empty space – so investors need to understand this and take a view on the potential size of the secondary market.
Next steps
I suspect we will start to see and hear a lot about this topic and this investment in the coming months as new self-storage companies look to agents and IFA’s to help them raise money from private investors. If you are interested, take the product from a reputable distributor and carry out thorough due diligence to ensure you are not unwittingly selling a UCIS or putting your clients into a dud product that cannot perform.