Self-storage assets in Germany are yet to attract significant investment from institutional investors, but the drive to alternative sectors could see the market mature. Michael Gadzali explains
Imagine. The anchor tenant moves out, leaving your office tower suddenly half-empty. Re-letting is possible at severe discounts only and entire floors threaten to become vacant. Not at all an improbable scenario, as the financial crisis has shown. Tenants might go quickly and unexpectedly, and so may their rental payments.
Although office property used to be the asset of choice among German institutional investors for the longest time, this is about to change, or so the current trend barometer for insurance business by Ernst & Young Real Estate suggests. In 2011, a majority of institutional investors signalled, for the first time, a desire to dispose of their office assets. At the same time, they now manifest a growing interest in residential real estate and in segments that, until recently, used to be deemed niche markets, such as logistics properties and infrastructure investments.
The self-storage market in Germany has also moved into investors' focus. This interest is explained by a variety of factors. For one, self-storage facilities combine the advantages of office and residential real estate. Each self-storage centre has more than 1,000 boxes and thus more than 1,000 tenants, while the total lettable storage space averages 6,000sq.m. per facility. Not unlike residential properties, a diversified tenant structure lowers the risk of major rent losses. At the same time, rates of return actually exceed those of office real estate, for instance. On top of all this, the self-storage sector is a growth market - and in Germany more so than in other countries.
In the US, it has been an established market segment for more than 40 years. Demand for rented boxes for storing household effects, traded commodities, files, sporting equipment and similar goods has risen steadily among the American populace. According to a survey conducted by DEGI Research in 2009, more than 9,500 companies in nearly 45,000 stateside locations provided self-storage space, totalling roughly 195m sq.m. This translates into a ratio of one self-storage centre for every 6,800 residents, or an average 0.6sq.m. in storage space for every US citizen.
By contrast, Germany looks almost like a developing country - although the market has rapidly gained momentum in recent years. According the Association of German Self Storage Companies, the self-storage sector has increased by more than a factor of 10 during the last decade. Nor did the global financial crisis check this growth rate. Meanwhile, the market is growing at a rate of 20-25% annually, or so the association reports. While the DEGI survey counted around 55 self-storage facilities in 2009, the number has since gone up to 70. And the DEGI survey confirmed that the market continues to show plenty of catch-up potential.
This becomes especially clear when comparing Germany with other European countries. More than 800 self-storage centres are currently operated in the UK, for instance. This works out to about one facility for every 78,000 residents. In Germany, the figure still stands at 1.2m residents per facility. Market experts consider that the development of roughly another 200 self-storage centres over the next 10 years is a realistic projection for Germany. This would improve the density to about 100,000 residents per facility, at least in metropolitan areas.
The trend towards out-of-home storage is here to stay, as a growing number of private individuals, business people and companies need flexible storage space. Surveys show that one in three German urban households requires extra storage space outside the home even now. But the growing interest of institutional investors in the German self-storage market is explained not just by these market growth forecasts.
Another factor attracting commitments is the unusually high after-tax return of about 10% annually. These yield prospects are explained by the fact that the average sq.m. rent is approximately €22. In some cases, top rents of more than €50 have been reported. For the sake of comparison: Lessors in Frankfurt charged up to €30 per sq.m. in 2010, while the going rate for offices in Berlin was just €20 per sq.m., according to the commercial property price index compiled by the IVD German Real Estate Federation. Moreover, rents are paid not on a monthly, but a weekly basis. Compared with regular quarterly accounting, this extends the quarterly accounting period by one week, and implies 13 rather than the typical 12-monthly rents - while letting clients benefit, in turn, from flexible contract periods.
In terms of risk minimisation, client diversification is as advantageous for self-storage facilities as for any other type of real estate. About 70% of available spaces in Germany is let to private individuals, the remaining 30% to businesses. Such a mix helps to spread the rent default risk. Furthermore, each of the 1,000 or so storage boxes in a self-storage facility represent a separate rental unit - so the potential client spread at a given self-storage facility is significantly greater than it would be in regular-size residential property.
The same is true when you compare the facility with a shopping centre, where the number of tenants is unlikely to exceed 100, even if it is a large mall. If a vacancy or rents in arrears precipitate profit losses for individual boxes, the ramifications are far less severe than the default of a tenant would be at an apartment block or shopping centre.
Better yet, in contrast with these other types of use, greater client diversity does not necessarily entail increased management costs, since the storage is entirely organised by the clients themselves. The extra costs usually associated with facility management or maintenance measures are extremely low. To be sure, the technical installations require regular maintenance, while roofs and façade need to be inspected and, where necessary, fixed from time to time. But aside from that, wear and tear of the structures is close to zero. Another highlight for investors are the low construction costs for self-storage facilities. These run at less than €900 per let-able sq.m., with VAT already included.
Since a large self-storage facility has a total investment volume of approximately €9m, a feasible investment bracket for institutional investors would be five to 15 such properties to achieve a volume of between €45m and €135m.
One element to be factored in is the regional risk spread. So far, institutional players have steered clear of investments in self-storage centres in Germany, because there were no companies with the necessary operator competence to run this special type of real estate. Even so, the market will mature in proportion to the number of competent operators, and with it the willingness to buy on the investor side.
Michael Gadzali is head of corporate development at Secur Objektbau