The strategy is targeting up to €500 mln of equity at final closing planned by year end.
Nuveen, the investment management arm of financial services firm TIAA, is spreading its wings in the European self storage market with the acquisition of a four-property strong portfolio in the UK. The deal – which follows Nuveen’s purchase in 2021 of two major self storage platforms in Sweden – is in line with the company’s strategy to expand in the sector across Europe, says David Pearce, the head of Nuveen’s European value-add strategy.
‘We are exploring and looking at various opportunities across Europe because self storage is one of our key conviction themes in the value-add space. We are focusing on the most emergent markets in Europe where there are less than ten self storage stores per million people, including Spain, France and potentially Germany. This figure compares to 149 stores per million people in the US.’
The firm considers self-storage as one of the most attractive sectors given the significant under-supply of modern space, the resilience in times of volatility, and the scope to generate value through scale, adds Pearce. ‘Nuveen Real Estate as a house has always liked the self storage market, and has been investing in this space for over 20 years in the US, and currently manages a $3+ bn portfolio globally,’ he notes. ‘Europe remains significantly undersupplied versus the US, and it is dominated by small businesses which makes it difficult to grow quickly but at the same time means there is a premium in gaining scale.’
In the UK, the firm just bought four assets from Easistore and will partner with a major UK operator, Storage King, to manage the properties which comprise 240,000 ft2 of space across the south-east of England and namely Crawley, Edenbridge, Maidstone and Tunbridge Wells. The portfolio was put on the market during 2022 after the vendor received some initial off-market offers. ‘We saw property values fall 20% over the last six months of 2022 and we agreed on pricing of the portfolio at the end of the year,’ Pearce notes.
Nuveen plans to undertake a number of initiatives to enhance the portfolio, including extensions at Crawley and Maidstone and a reconfiguration opportunity at Edenbridge.
The partnership with Storage King has seen the parties enter into a joint venture, with Storage King taking a minority stake and contributing 10% of the equity capital. The operator forms part of Stor-Age, a highly specialised property fund focused on the fast growing self storage sector which develops, acquires and manages self-storage properties. ‘The operational side of the market is a challenge,’ Pearce admits, ‘and as we are looking to grow across Europe, we are discussing opportunities with different operators across the continent.’
Pearce is also planning to grow the UK portfolio together with the firm’s joint venture partner. ‘We hope to be able to carry out new acquisitions for our value add strategy, and potentially double the size of the portfolio over the next few years,’ he notes. ‘We can also go down the development route, because of a lack of existing stock.’
The transaction in the UK represents the first investment for Nuveen’s value add European strategy which in February carried out a second closing, having obtained €450 mln of dry powder. The vehicle is planning a third close during Q2 2023, with the final closing planned by the end of the year, adds Pearce. ‘We are aiming for €300-500 mln of equity which with leverage should give us spending power of over €750 mln,’ he comments. With a life term running from May 2022 to May 2030, the strategy will focus on identifying mispricing and repositioning opportunities in urban logistics, housing and alternatives particularly in the UK, France, Germany, Spain, Italy, the Netherlands and the Nordics.
Pearce: ‘We are targeting income producing assets and we can pick development to further enhance returns. On the one side, the strategy focuses on structural growth and invest in assets where underlying demand is supported by structural changes leading to stronger Net Operating Income growth. On the other side, we are looking to take advantage of the repricing currently unfolding in Europe.’ While the strategy hasn’t acquired any assets prior to April 2023, thus avoiding being exposed to the current repricing, it should prepare itself for the ‘best environment to invest in commercial real estate since the great financial crisis’. ‘We are beginning to see some repricing in Continental Europe but we still believe this repricing hasn’t really played out yet. There is a wait-and-see mentality among vendors; most investors appreciate that yields have moved out but by how much remains unclear pending more clarity and price discovery. While not every sector will get there at the same time, we believe that towards the end of 2023 and into the beginning of 2024, we will see the best environment to invest in commercial real estate since the GFC.’
WHY LIKE SELF STORAGE
Demand for self storage space is on the rise across Europe. The domestic use of self storage facilities is mostly fuelled by a shortage of living space as well as increasing prices in the housing sector. Business use of this space is mostly driven by structural changes including e-commerce, with many self storage business customers being local and independent retailers selling goods online. In fact, research shows that about 60% of businesses using self storage in the UK have less than 3 employees. ‘Self storage really provides a solution for this type of client to store inventory close to consumers, and on more flexible terms than the retail and industrial sector,’ Pearce points out.
Other sector strengths are the flexibility of rental contracts and the granularity of income. Pearce: ‘The short term contracts mean the sector is a good inflation-hedge and you have the ability to increase rents quite regularly. Also, the income mix is very diverse and this gives resilience, alongside the fact that the market has shown great stability during the GFC and the pandemic by being able to maintain high occupancy ratios throughout periods of economic stress.’
From an environmental point of view, investors point to the low carbon footprint of the assets. ‘Self storage facilities generally use little power and are easily suited for PV panels. This means it is relatively easy for these assets to achieve net zero carbon,’ Pearce concludes.
