The self-storage industry is benefitting from an increasingly diverse customer base, while investors have enjoyed stable income and low volatility. James McCulloch explains
From people moving house to downsizing businesses needing storage space, self-storage units are used for a wide range of purposes, including housing personal belongings, furniture and excess stock.
It is estimated that in the US, one family in 10 uses self-storage facilities. For as long as services such as Amazon Prime flourish, encouraging consumers to purchase ever-increasing amounts of material possessions, it is likely that this trend will continue.
Historically, domestic users were the main customers for self storage, but this is changing, with business customers now accounting for 40% of revenue. In part, this can be attributed to the eBay home business proliferation of independent traders having created an increased need for inventory space. Other services that self-storage firms can offer to business customers include secure document and office-relocation services.
According to Bloomberg Riskless Return Ranking, self-storage companies produced the best risk-adjusted return among 10 US real estate investment trust indices from 2002 to 2012. Storage firms had the highest total return and the third-lowest volatility.
Self-storage companies can typically be operated out of commercial properties. The most desirable areas for self-storage can often be in less desirable areas, such as beside busy roads, in locations that offer high visibility to passing customers.
“Storage business models not only provide superior returns in a growing economy, they have also been proven to be resilient through times of financial crisis”
Not only does this mean that self-storage companies can take advantage of land that other developers might shun, but the operating costs of self-storage are typically far less than the leisure and healthcare sectors combined. Self-storage typically offers high prices per square foot, with earnings before interest, taxes, depreciation, and amortization (EBITDA) margins in the region of 50-70%.
Self-storage income is referred to as ‘sticky’. Research by Deloitte Real Estate revealed that in 2013 the average length of stay for all self-storage customers was 38 weeks, representing a secure income stream for investors. The average length of stay for business customers is now more than 12 months.
Despite the long-term nature of storage, contracts are typically short-term and can be adjusted easily with demand. This means that when occupancy is high, prices can move in the same direction, driving investor returns. Although self-storage spaces are usually leased on short-term contracts, the reality is that a high percentage of customers will leave their belongings in storage in the long term, with many customers using the service for more than three years.
Storage business models not only provide superior returns in a growing economy, they have also been proven to be resilient through times of financial crisis, supported by customer diversity, stable cash flows and a low cost base.
Unlike commercial real estate, storage does not suffer from the ‘single large customer problem’. This leads to lower earnings volatility. UK self-storage companies have seen some of the highest yielding returns within the commercial property sector over the past decade and the sector continues to grow to meet demand.
In order to enhance returns and minimise risks it is important to, firstly, focus on affluent and populated demographics and, secondly, provide a more managed storage solution in order to differentiate the business from traditional competitors. This helps enhance the value and experience for the customer and also provides investors with additional tax benefits.
James McCulloch is investment director at Ducalian Capital