COVID-19 has driven record demand in the under-supplied self-storage sector. Martin Gilbert considers its diversification benefits

Martin Gilbert, DTZ Investors

Martin Gilbert is director at DTZ Investors UK

Having only become established in the early to mid-1990s, self-storage is a relatively immature market in the UK. 

According to statistics from Self Storage Association UK (SSA UK), the sector attracts traditional personal users and private businesses, accounting for 70% and 30% of the user base respectively, but only 50% of the population in the UK are aware of the self-storage business. There numerous firms providing stores, but the major operators in the UK are all listed companies: Big Yellow, Safestore, Shurgard and Lok’nStore. 

The UK has about 2,000 stores (of which about 600 are container based) with an average size of 25,000sqft, average annual net rental rate of £24/sqft (€28/sqft) and occupancy of about 82%. As in the US, the specialist self-storage REITs are the main driver of new development activity. 

Optimal occupancy for a mature self-storage facility located in a major metropolitan area is usually considered to be between 85-90%. It usually takes three to five years for a new facility to reach maturity. 

In 2020, almost 100 stores of various sizes opened in the UK despite delays in developments. Encouragingly, new self-storage facilities have increasingly embraced sustainable practices, including solar panels and green roofs. 

The three biggest costs for operators are staff (32%), rates and taxes (24%), and management (17%). Individual self-storage stores do not employ many people, with even the largest stores only having three full-time staff, on average.

The COVID effect
The self-storage industry had a particularly good 2020, with significantly increased occupancy and strong investor returns. 

Self-storage was deemed to be a part of the logistics chain, classed as an essential service and thus allowed to remain open during lockdowns. Some businesses have even been assisting the NHS in storing pandemic-related supplies. 

Personal-user occupancy of self-storage is driven by life events, and the COVID-19 pandemic brought these and other drivers in the sector into sharp focus. Some of the main reasons people use self-storage include:

• Significant spike in death rates: a death in the family is the most common life event that necessitates the use of a self-storage facility;
• Widespread requirement to work from home: a change in working environment is another typical driver, and many have needed storage to create space for a ‘home office’;
• Increased activity in the housing market: the stamp-duty holiday introduced shortly after the onset of the pandemic triggered a sharp uptick in house moves, which often require use of storage; 
• Growth in small and medium-sized online retailers: the boom in online retail has required increased stock holdings, and therefore storage;
• Higher divorce rate: divorcees are twice as likely to use storage facilities, and an unfortunate effect of the pandemic has pushed divorces to a 50-year high in the UK. 

As a result of lockdowns, customers stayed longer, and the churn rate was reduced. Interestingly, looking at the occupancy rate throughout 2020, there was an increase in occupancy when lockdowns were eased over the summer, rather than a reduction, indicating that there was no mass move out and that the use self-storage facilities is likely to stick. 

Allied to this, it looks increasingly likely that some form of flexible working is here to stay for office workers, making the need for working space at home permanent. With online retailing having tapped into new age groups during the pandemic as well, the need to store higher levels of online stock is unlikely to diminish. 

Long-term attractions
Moving away from the near-term impacts from the pandemic, the sector can also point to several inherent long-term attributes, including:

• Diversification: data shows that self-storage returns are weakly correlated with those of other property types, and looking back, the sector also delivered more robust returns during the 2008 global financial crisis.
• Inelastic demand: as highlighted above, demand for storage comes both from positive and negative life events, such as moving, employment, birth, death, marriage and divorce, all of which occur regardless of the state of the economy. Indeed, historically, self-storage has been known to be countercyclical, performing well in a downturn;
• Long-term demographic factors: societal changes, such as the increase in mobility of the workforce, urbanisation, immigration, and the increase in individuals and households remaining in multifamily housing for longer are all factors fuelling growth in the sector.

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• Robust demand from businesses: businesses account for close to 30% of all self-storage tenants in Europe. Self-storage offers a cost-effective option and space flexibility for businesses, especially for the rising e-commerce retail trade. Operators are now catering more for business customers offering free Wi-Fi, meeting rooms, mailboxes and courier services; 
• Technological improvements and management efficiencies: in-place technology, such as contactless rentals, auto pay and gate access integration improve efficiency and the introduction of improvements such as these were hastened by the pandemic. 
• Cost efficiency: land and build costs are typically modest, since stores are generally sited in more secondary locations and specification is standardised. Once completed, a store has large income potential with low overheads and relatively low ongoing management expenses. The break-even occupancy rate for a self-storage facility is 40-45%; 
• Dependable and predictable income and positive income growth: customer rent payments are collateralised by the goods in the storage units and leases are month to month, allowing operators to capture rental growth faster. 

Martin Gilbert is head of the indirect investment at DTZ Investors

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